**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, 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, 2007 |
|                                                |                                                                                         |
| 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 itscharter)

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

 

**1440 Davey Road**

**Woodridge, IL 60517**

(Address, including zip code of registrantsprincipal executive offices)

Registrant’s telephone number:**(630) 739-6744**

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Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes  x    No  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of  “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Largeaccelerated filer o     Accelerated filer  o     Non-accelerated filer  x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes o     No x

Asof  November 13, 2007, the registrant had28,301,677 shares of common stock, $0.01 par value per share, outstanding.

 

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC.**

**(ADEVELOPMENT STAGE ENTITY)**

**INDEX**

**Form 10-Q**
|               |   | **PART I — FINANCIAL INFORMATION (U****NAUDITED)**                                                                                                                                     |   |
|--------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.       |   | Condensed  Consolidated Financial Statements:                                                                                                                                                         |   |
|               |   | Condensed Consolidated Balance Sheets as of  September 30, 2007 and December 31, 2006                                                                                                            |   |
|               |   | Condensed Consolidated Statements of Operations for  the three and nine months ended September 30, 2007 and 2006 and for the  period from inception (January 1, 1999) through September 30, 2007 |   |
|               |   | Condensed Consolidated Statements of Stockholders’  Equity (Deficit) for period from inception (January 1, 1999) through September  30, 2007                                                     |   |
|               |   | Condensed Consolidated Statements of Cash Flows for  the nine months ended September 30, 2007 and 2006 and for the period from  inception (January 1, 1999) through September 30, 2007                |   |
|               |   | Notes to Condensed Consolidated Financial Statements                                                                                                                                                  |   |
| Item 2.       |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                           |   |
| Item 3.       |   | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                           |   |
| Item 4.       |   | Controls  and Procedures                                                                                                                                                                              |   |
|               |   |                                                                                                                                                                                                  |   |
|               |   | **PART II — OTHER INFORMATION**                                                                                                                                                        |   |
| Item 5.            |   | Other Information                                                                                                                                                                                     |   |
| Item 6.       |   | Exhibits                                                                                                                                                                                              |   |
| Signatures         |   |
| Exhibit Index |   |

 

 

1

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**PART I — FINANCIAL INFORMATION**

** **

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

**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY**

**(ADevelopment Stage Company)**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                         | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| ** **                                                                                                         | ** ** | ** **        | ** ** | ** **       | ** ** |
| **ASSETS**                                                                                                         | ** ** | ** **        | ** ** | ** **       | ** ** |
| ** **                                                                                                         | ** ** | ** **        | ** ** | ** **       | ** ** |
| CURRENT ASSETS:                                                                                                    |       |              |       |             |       |
| Cash and cash equivalents                                                                                          |       | $                 | 6,429,484  |             | $          | 27,054,947 |   |
| Prepaid insurance                                                                                                  |       | 357,219           |       | 380,083          |       |
| Prepaid clinical trial expenses                                                                                    |       | 2,160,667         |       | 2,364,512        |       |
| Other prepaid expenses and deposits                                                                                |       | 131,718           |       | 273,572          |       |
|                                                                                                               |       |              |       |             |       |
| Total current assets                                                                                               |       | 9,079,088         |       | 30,073,114       |       |
|                                                                                                               |       |              |       |             |       |
| PROPERTY AND EQUIPMENT:                                                                                            |       |              |       |             |       |
| Furniture and fixtures                                                                                             |       | 221,418           |       | 250,308          |       |
| Laboratory equipment                                                                                               |       | 159,186           |       | 142,928          |       |
| Computer software and equipment                                                                                    |       | 242,707           |       | 231,022          |       |
| Leasehold improvements                                                                                             |       | 177,253           |       | 182,839          |       |
|                                                                                                               |       |              |       |             |       |
| Total property and equipment—at cost                                                                          |       | 800,564           |       | 807,097          |       |
|  Less accumulated depreciation                                                                                |       | (492,350          | )          | (398,486         | )          |
|                                                                                                               |       |              |       |             |       |
| Property and equipment—net                                                                                    |       | 308,214           |       | 408,611          |       |
|                                                                                                               |       |              |       |             |       |
| OTHER LONG-TERM ASSETS:                                                                                            |       |              |       |             |       |
| Deferred financing costs                                                                                           |       | 6,626             |       | 26,502           |       |
| Other assets                                                                                                       |       | 1,452             |       | 1,452            |       |
|                                                                                                               |       |              |       |             |       |
| Total other long-term assets                                                                                       |       | 8,078             |       | 27,954           |       |
|                                                                                                               |       |              |       |             |       |
| TOTAL ASSETS                                                                                                       |       | $                 | 9,395,380  |             | $          | 30,509,679 |   |
|                                                                                                               |       |              |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                            | ** ** | ** **        | ** ** | ** **       | ** ** |
|                                                                                                               |       |              |       |             |       |
| CURRENT LIABILITIES:                                                                                               |       |              |       |             |       |
| Accounts payable                                                                                                   |       | $                 | 3,499,280  |             | $          | 1,011,396 |   |
| Accrued clinical trial expenses                                                                                    |       | 3,651,070         |       | 1,410,894        |       |
| Other accrued expenses                                                                                             |       | 639,014           |       | 226,881          |       |
| Accrued interest payable                                                                                           |       | 22,022            |       | 22,756           |       |
| Short-term lease payable                                                                                           |       | 8,024             |       | 19,437           |       |
| Short-term grant payable                                                                                           |       | 476,708           |       | 476,708          |       |
| Short-term notes payable - related party                                                                           |       | 2,000,000         |       | 2,000,000        |       |
| Short-term notes payable - net of $2,816 debt discount                                                             |       | 3,912,184         |       | —           |       |
|                                                                                                               |       |              |       |             |       |
| Total current liabilities                                                                                          |       | 14,208,302        |       | 5,168,072        |       |
|                                                                                                               |       |              |       |             |       |
| Long-term lease payable                                                                                            |       | 14,736            |       | 20,076           |       |
| Long-term grant payable                                                                                            |       | 23,292            |       | 23,292           |       |
| Notes payable - net of $11,266 debt discount                                                                       |       | —            |       | 3,903,734        |       |
|                                                                                                               |       |              |       |             |       |
| Total liabilities                                                                                                  |       | 14,246,330        |       | 9,115,174        |       |
|                                                                                                               |       |              |       |             |       |
| COMMITMENTS AND CONTINGENCIES:                                                                                     |       |              |       |             |       |
| Minority Interest                                                                                                  |       | —            |       | —           |       |
|                                                                                                               |       |              |       |             |       |
| STOCKHOLDERS’ EQUITY (DEFICIT):                                                                               |       |              |       |             |       |
| Common stock, $0.01 par value—60,000,000 shares authorized;                                                   |       |              |       |             |       |
| September 30, 2007 28,294,677 issued and outstanding; December 31,  2006 28,282,677 shares issued and outstanding; |       | 282,947           |       | 282,827          |       |
| Additional paid-in capital                                                                                         |       | 88,922,093        |       | 88,370,853       |       |
| Deficit accumulated during the development stage                                                                   |       | (94,055,990       | )          | (67,259,175      | )          |
|                                                                                                               |       |              |       |             |       |
| Total stockholders’ equity (deficit)                                                                          |       | (4,850,950        | )          | 21,394,505       |       |
|                                                                                                               |       |              |       |             |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                                                          |       | $                 | 9,395,380  |             | $          | 30,509,679 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

2

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**ADVANCED LIFESCIENCES HOLDINGS, INC. AND SUBSIDIARY**

**(ADevelopment Stage Company)**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                                  | ** ** | ** **              | ** ** | ** **             | ** ** | ** **        | ** ** | ** **  | ** **  | **Period From**       | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|-------------------|------------|-------------|-------------|-----------------------|------------|
| ** **                                                                  | ** ** | ** **              | ** ** | ** **             | ** ** | ** **        | ** ** | ** **  | ** **  | **Inception**         | ** ** |
| ** **                                                                  | ** ** | ** **              | ** ** | ** **             | ** ** | ** **        | ** ** | ** **  | ** **  | **(January 1, 1999)** | ** ** |
| ** **                                                                  | ** ** | **Three  months ended** | ** ** | **Nine  months ended** | ** ** | **Through**       | ** ** |
| ** **                                                                  | ** ** | **September  30,**      | ** ** | **September  30,**     | ** ** | **September 30,** | ** ** |
| ** **                                                                  | ** ** | **2007**                | ** ** | **2006**               | ** ** | **2007**          | ** ** | **2006**    | ** **  | **2007**              | ** ** |
| Revenue:                                                                    |       |                    |       |                   |       |              |       |        |        |                  |       |
| Management fees                                                             |       | $                       | —     |                   | $          | —            |       | $           | —      |                  | $          | — |   | $ | 1,161,180 |   |
| Grants                                                                      |       | —                  |       | —                 |       | —            |       | 35,127      |        | 1,035,571             |       |
| Royalty—related  party                                                 |       | —                  |       | —                 |       | —            |       | —      |        | 45,238                |       |
|                                                                        |       |                    |       |                   |       |              |       |        |        |                  |       |
| Total revenue                                                               |       | —                  |       | —                 |       | —            |       | 35,127      |        | 2,241,989             |       |
|                                                                        |       |                    |       |                   |       |              |       |        |        |                  |       |
| Expenses:                                                                   |       |                    |       |                   |       |              |       |        |        |                  |       |
| Research and  development                                                   |       | 3,838,184               |       | 5,730,269              |       | 21,722,174        |       | 11,569,685  |        | 70,857,523            |       |
| Contracted  research and development— related party                    |       | —                  |       | —                 |       | —            |       | —      |        | 7,980,299             |       |
| Selling, general  and administrative                                        |       | 2,004,357               |       | 1,489,502              |       | 5,362,769         |       | 3,977,514   |        | 18,455,282            |       |
|                                                                        |       |                    |       |                   |       |              |       |        |        |                  |       |
| Total expenses                                                              |       | 5,842,541               |       | 7,219,771              |       | 27,084,943        |       | 15,547,199  |        | 97,293,104            |       |
|                                                                        |       |                    |       |                   |       |              |       |        |        |                  |       |
| Loss from  operations                                                       |       | (5,842,541              | )          | (7,219,771             | )          | (27,084,943       | )          | (15,512,072 | )           | (95,051,115           | )          |
|                                                                        |       |                    |       |                   |       |              |       |        |        |                  |       |
| Other (income)  expense:                                                    |       |                    |       |                   |       |              |       |        |        |                  |       |
| Interest Income                                                             |       | (117,332                | )          | (466,475               | )          | (638,396          | )          | (1,267,433  | )           | (2,562,528            | )          |
| Interest expense                                                            |       | 116,998                 |       | 120,649                |       | 350,268           |       | 393,526     |        | 2,506,455             |       |
| Gain on sale of  interest in Sarawak Medichem Pharmaceuticals joint venture |       | —                  |       | —                 |       | —            |       | —      |        | (939,052              | )          |
|                                                                        |       |                    |       |                   |       |              |       |        |        |                  |       |
| Net other income                                                            |       | (334                    | )          | (345,826               | )          | (288,128          | )          | (873,907    | )           | (995,125              | )          |
|                                                                        |       |                    |       |                   |       |              |       |        |        |                  |       |
| Net loss                                                                    |       | (5,842,207              | )          | (6,873,945             | )          | (26,796,815       | )          | (14,638,165 | )           | (94,055,990           | )          |
|                                                                        |       |                    |       |                   |       |              |       |        |        |                  |       |
| Less accumulated  preferred dividends for the period                        |       | 43,750                  |       | 43,750                 |       | 131,250           |       | 131,250     |        | 1,451,042             |       |
|                                                                        |       |                    |       |                   |       |              |       |        |        |                  |       |
| Net loss  available to common shareholders                                  |       | $                       | (5,885,957 | )                      | $          | (6,917,695        | )          | $           | (26,928,065 | )                     | $          | (14,769,415 | ) | $ | (95,507,032 | ) |
|                                                                        |       |                    |       |                   |       |              |       |        |        |                  |       |
| Basic and diluted  net loss per share available to common shareholders      |       | $                       | (0.21      | )                      | $          | (0.24             | )          | $           | (0.95       | )                     | $          | (0.57 | ) |   |   |
| Weighted average  number common shares outstanding- basic and diluted       |       | 28,294,677              |       | 28,268,247             |       | 28,292,150        |       | 25,962,479  |        |                  |       |
|                                                                        |       |                    |       |                   |       |              |       |        |        |                  |       |
| See notes to unaudited condensed consolidated  financial statements.        |       |

 

3

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY**

**(ADevelopment Stage Company)**

 

**CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(DEFICIT)**

**FOR THEPERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH SEPTEMBER 30, 2007**

**(Unaudited)**

 
| ** **                                                                | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | **Deficit**     | ** ** | ** **  | ** **  |
|---------------------------------------------------------------------------|------------|-------------------|------------|-------------|------------|-----------------|------------|-----------------|------------|-------------|-------------|
| ** **                                                                | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | **Accumulated** | ** ** | ** **  | ** **  |
| ** **                                                                | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional**  | ** ** | **During  the** | ** ** | ** **  | ** **  |
| ** **                                                                | ** ** | **Common  Stock** | ** ** | **Paid-in** | ** ** | **Development** | ** ** | ** **      | ** ** |
| ** **                                                                | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Stage**       | ** ** | **Total**   | ** **  |
| BALANCE—January  1, 1999 (inception)                                 |       | —            |       | $           | —     |            | $          | —          |       | $           | —      |   | $ | — |   |
|                                                                      |       |              |       |        |       |            |       |            |       |        |        |
| Issuance of stock  (since inception)                                      |       | 1,588,000         |       | 250,000     |       |            |       |            |       | 250,000     |        |
| Compensation  expense related to stock options (since inception)          |       |              |       |        |       | 15,097          |       |            |       | 15,097      |        |
| Capital  contributions (since inception)                                  |       | —            |       | —      |       | 10,415,599      |       | —          |       | 10,415,599  |        |
| Net loss (since  inception)                                               |       | —            |       | —      |       | —          |       | (13,087,375     | )          | (13,087,375 | )           |
|                                                                      |       |              |       |        |       |            |       |            |       |        |        |
| BALANCE—December  31, 2003                                           |       | 1,588,000         |       | 250,000     |       | 10,430,696      |       | (13,087,375     | )          | (2,406,679  | )           |
|                                                                      |       |              |       |        |       |            |       |            |       |        |        |
| Issuance of  common stock at $0.157 per share                             |       | 41,685            |       | 6,563       |       | —          |       | —          |       | 6,563       |        |
| Compensation  expense related to stock options                            |       | —            |       | —      |       | 5,604           |       | —          |       | 5,604       |        |
| Exchange of  shares under recapitalization                                |       | (1,629,685        | )          | (256,563    | )          | —          |       | —          |       | (256,563    | )           |
| Issuance of  shares under recapitalization                                |       | 9,482,015         |       | 94,820      |       | 161,743         |       | —          |       | 256,563     |        |
| Capital  contributions                                                    |       | —            |       | —      |       | 2,295,731       |       | —          |       | 2,295,731   |        |
| Issuance of  14,887 warrants                                              |       | —            |       | —      |       | 11,898          |       | —          |       | 11,898      |        |
| Issuance of  common stock in exchange for licenses                        |       | 1,122,569         |       | 11,226      |       | 8,988,774       |       | —          |       | 9,000,000   |        |
| Net loss                                                                  |       | —            |       | —      |       | —          |       | (27,186,918     | )          | (27,186,918 | )           |
|                                                                      |       |              |       |        |       |            |       |            |       |        |        |
| BALANCE—December  31, 2004                                           |       | 10,604,584        |       | 106,046     |       | 21,894,446      |       | (40,274,293     | )          | (18,273,801 | )           |
|                                                                      |       |              |       |        |       |            |       |            |       |        |        |
| Issuance of  common stock, net of offering costs                          |       | 6,721,814         |       | 67,218      |       | 29,210,558      |       | —          |       | 29,277,776  |        |
| Issuance of stock  related to option exercises                            |       | 63,924            |       | 639         |       | 14,240          |       | —          |       | 14,879      |        |
| Compensation  expense related to stock options                            |       | —            |       | —      |       | 696,204         |       | —          |       | 696,204     |        |
| Issuance of  common stock in exchange for reduction of milestones payable |       | 600,000           |       | 6,000       |       | 3,000,000       |       | —          |       | 3,006,000   |        |
| Modification of  14,887 warrants                                          |       | —            |       | —      |       | 18,925          |       | —          |       | 18,925      |        |
|                                                                      |       |              |       |        |       |            |       |            |       |        |        |
| Net loss                                                                  |       | —            |       | —      |       | —          |       | (6,444,246      | )          | (6,444,246  | )           |
|                                                                      |       |              |       |        |       |            |       |            |       |        |        |
| BALANCE—December  31, 2005                                           |       | 17,990,322        |       | 179,903     |       | 54,834,373      |       | (46,718,539     | )          | 8,295,737   |        |
|                                                                      |       |              |       |        |       |            |       |            |       |        |        |
| Issuance of  common stock, net of offering costs                          |       | 10,233,464        |       | 102,335     |       | 33,266,653      |       | —          |       | 33,368,988  |        |
| Issuance of stock  related to option exercises                            |       | 58,891            |       | 589         |       | 8,656           |       | —          |       | 9,245       |        |
| Compensation  expense related to stock options                            |       | —            |       | —      |       | 261,171         |       | —          |       | 261,171     |        |
|                                                                      |       |              |       |        |       |            |       |            |       |        |        |
| Net loss                                                                  |       | —            |       | —      |       | —          |       | (20,540,636     | )          | (20,540,636 | )           |
|                                                                      |       |              |       |        |       |            |       |            |       |        |        |
| BALANCE—December  31, 2006                                           |       | 28,282,677        |       | $           | 282,827    |            | $          | 88,370,853      |       | $           | (67,259,175 | ) | $ | 21,394,505 |   |
|                                                                      |       |              |       |        |       |            |       |            |       |        |        |
| Issuance of stock  related to option exercises                            |       | 12,000            |       | 120         |       | 1,764           |       | —          |       | 1,884       |        |
| Compensation  expense related to stock options                            |       | —            |       | —      |       | 549,476         |       | —          |       | 549,476     |        |
|                                                                      |       |              |       |        |       |            |       |            |       |        |        |
| Net loss                                                                  |       | —            |       | —      |       | —          |       | (26,796,815     | )          | (26,796,815 | )           |
|                                                                      |       |              |       |        |       |            |       |            |       |        |        |
| BALANCE—September  30, 2007                                          |       | 28,294,677        |       | $           | 282,947    |            | $          | 88,922,093      |       | $           | (94,055,990 | ) | $ | (4,850,950 | ) |
|                                                                      |       |
| See notes to unaudited condensed consolidated  financial statements.      |       |

 

4

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY**

**(ADevelopment Stage Company)**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | ** **             | ** **  | ** **        | ** ** | **Inception**         | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|-------------|-------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | ** **             | ** **  | ** **        | ** ** | **(January 1, 1999)** | ** ** |
| ** **                                                                         | ** ** | **Nine  months ended** | ** **  | **Through**       | ** ** |
| ** **                                                                         | ** ** | **September  30,**     | ** **  | **September 30,** | ** ** |
| ** **                                                                         | ** ** | **2007**               | ** **  | **2006**          | ** ** | **2007**              | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                   |        |              |       |                  |       |
| Net loss                                                                           |       | $                      | (26,796,815 | )                 | $          |  (14,638,165     | )          | $ | (94,055,990 | ) |
| Adjustments to  reconcile net loss to net cash flows used in operating activities: |       |                   |        |              |       |                  |       |
| Depreciation and  amortization                                                     |       | 157,072                |        | 80,959            |       | 573,091               |       |
| Non-cash interest  expense                                                         |       | 28,326                 |        | 28,326            |       | 91,381                |       |
| Stock  compensation expense                                                        |       | 549,476                |        | 189,388           |       | 1,527,552             |       |
| Non-cash research  and development                                                 |       | —                 |        | —            |       | 24,466,667            |       |
| Non-cash  settlement of milestone payment                                          |       | —                 |        | —            |       | 6,000                 |       |
| Gain on sale of  interest in Sarawak Medichem Pharmaceuticals (SMP)                |       | —                 |        | —            |       | (939,052              | )          |
| Loss on disposal                                                                   |       | 1,761                  |        | —            |       | 13,294                |       |
| Changes in  operating assets and liabilities:                                      |       |                   |        |              |       |                  |       |
| Clinical supplies                                                                  |       | —                 |        | —            |       | 533,333               |       |
| Accounts  receivable, related party                                                |       | —                 |        | 6,160             |       | —                |       |
| Prepaid expenses                                                                   |       | 368,563                |        | (3,081,909        | )          | (2,649,604            | )          |
| Other assets                                                                       |       | —                 |        | 4,610             |       | (1,452                | )          |
| Accounts payable                                                                   |       | 2,487,884              |        | 277,110           |       | 3,499,280             |       |
| Accrued expenses                                                                   |       | 2,652,309              |        | 1,616,640         |       | 4,290,084             |       |
| Licenses payable                                                                   |       | —                 |        | —            |       | (11,000,000           | )          |
| Accrued interest  on debt                                                          |       | (734                   | )           | (770,848          | )          | 600,085               |       |
|                                                                               |       |                   |        |              |       |                  |       |
| Net cash flows  from operating activities                                          |       | (20,552,158            | )           | (16,287,729       | )          | (73,045,331           | )          |
|                                                                               |       |                   |        |              |       |                  |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                   |        |              |       |                  |       |
| Purchase of  property and equipment                                                |       | (58,436                | )           | (258,645          | )          | (730,348              | )          |
| Proceeds from the  sale of SMP                                                     |       | —                 |        | —            |       | 939,052               |       |
| Proceeds from the  sales of investments                                            |       | —                 |        | 14,807,158        |       | 31,557,158            |       |
| Purchase of  investments                                                           |       | —                 |        | (4,332,158        | )          | (31,557,158           | )          |
|                                                                               |       |                   |        |              |       |                  |       |
| Net cash flows  from investing activities                                          |       | (58,436                | )           | 10,216,355        |       | 208,704               |       |
|                                                                               |       |                   |        |              |       |                  |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                   |        |              |       |                  |       |
| Proceeds from  issuance of common stock and capital contributions                  |       | —                 |        | 33,368,988        |       | 69,856,339            |       |
| Proceeds from  issuance of notes payable                                           |       | —                 |        | 3,915,000         |       | 12,933,691            |       |
| Payments on notes  payable                                                         |       | —                 |        | (3,915,000        | )          | (3,915,000            | )          |
| Proceeds from  grants                                                              |       | —                 |        | —            |       | 500,000               |       |
| Proceeds from  stock options exercised                                             |       | 1,884                  |        | 7,082             |       | 32,571                |       |
| Payments on  capital leases                                                        |       | (16,753                | )           | (12,286           | )          | (141,490              | )          |
|                                                                               |       |                   |        |              |       |                  |       |
| Net cash flows  from financing activities                                          |       | (14,869                | )           | 33,363,784        |       | 79,266,111            |       |
|                                                                               |       |                   |        |              |       |                  |       |
| NET (DECREASE)  INCREASE IN CASH                                                   |       | (20,625,463            | )           | 27,292,410        |       | 6,429,484             |       |
|                                                                               |       |                   |        |              |       |                  |       |
| CASH—Beginning of  period                                                     |       | 27,054,947             |        | 4,749,932         |       | —                |       |
|                                                                               |       |                   |        |              |       |                  |       |
| CASH—End of  period                                                           |       | $                      | 6,429,484   |              | $          | 32,042,342            |       | $ | 6,429,484 |   |
|                                                                               |       |                   |        |              |       |                  |       |
| SUPPLEMENTAL  DISCLOSURE OF                                                        |       |                   |        |              |       |                  |       |
| CASH FLOW INFORMATION:                                                             |       |                   |        |              |       |                  |       |
| Cash paid during  the period for interest                                          |       | $                      | 310,077     |              | $          | 1,147,031             |       | $ | 1,806,300 |   |
|                                                                               |       |                   |        |              |       |                  |       |
| 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            |       | —                |       |
| Noncash financing  activity:                                                       |       |                   |        |              |       |                  |       |
| Issuance of  common shares for licenses                                            |       | —                 |        | —            |       | 9,000,000             |       |
| Issuance of  common shares for reduction of milestone payment                      |       | —                 |        | —            |       | 3,000,000             |       |
| Cost of proceeds                                                                   |       | —                 |        | —            |       | —                |       |
| Debt discount                                                                      |       | —                 |        | —            |       | 30,823                |       |
| Deferred  financing costs                                                          |       | $                      | —      |              | $          | —                |       | $ | 30,000 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

 

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

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007**

**(UNAUDITED)**

**1.****                  ****Summary of Significant AccountingPolicies**

** **

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

***           Basisof Presentation-***The accompanying unauditedcondensed consolidated financial statements of the Company have been preparedin accordance with accounting principles generally accepted in the UnitedStates 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 financialstatements.  However, in the opinion ofmanagement, all adjustments, consisting only of normal recurring adjustments,unless otherwise noted herein, necessary to present fairly the results ofoperations, financial position and cash flows have been made.  Therefore, these condensed consolidatedfinancial statements should be read in conjunction with the Company’s mostrecent audited financial statements for the year ended December 31, 2006 andnotes thereto. The condensed consolidated financial statements include theaccounts of the Advanced Life Sciences Holdings, Inc. and its wholly-ownedsubsidiary Advanced Life Sciences, Inc. (“ALS Inc.”)  All intercompany balances and transactionshave been eliminated.  The results ofoperations for any interim period are not necessarily indicative of the resultsof operations expected for the full year.

           The condensed consolidated financialstatements have been prepared on a going concern basis, which contemplatescontinuity of operations and the realization of assets and liquidation ofliabilities in the ordinary course of business. However, as a result of the Company’s continued losses and current cashand financing position, such realization of assets or liquidation ofliabilities, without substantial adjustments is uncertain.  Given this uncertainty, there is significantdoubt as to the Company’s ability to continue as a going concern.

***           Business andCredit Risks*****-**TheCompany is subject to risks and uncertainties common to drug discoverycompanies, including technological change, potential infringement onintellectual property of third parties, new product development, regulatoryapproval and market acceptance of its products, activities of competitors andits limited operating history.

           The Company has incurred losses sinceits incorporation in January 1999. The Company has funded its operations to date primarily from debtfinancings and capital contributions from its founder and Chief ExecutiveOfficer, proceeds from the initial public offering of its common stock and thesubsequent sale of its common stock in a private placement.  The Company will not be generating revenuesor realizing cash flows from operations in the near term, and will requireadditional equity or debt financing to meet working capital needs, to fundoperating losses associated with research and development and to fund clinicaltrials.  In order to address its workingcapital shortfall the Company intends to raise additional capital during 2007through the issuance of equity securities or through the receipt of milestonepayments which would be paid as a result of consummating a commercialpartnership for cethromycin, or a combination of both.  Although management believes the Companycould obtain such financing, there can be no assurances that such financingwill be available in the future at terms acceptable to the Company, if atall.  If the Company raises additionalcapital by issuing equity securities; its stockholders could experiencesubstantial dilution.  The accompanyingfinancial statements do not include any adjustments that might result from theoutcome of these uncertainties.

 

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**2.****                  ****Private Placement**

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

 

**3.****                  ****Related Party Transactions**

           The Company’s Chief ExecutiveOfficer, Michael T. Flavin Ph.D., loaned $2.0 million to the Company in 2001(see Note 4).  Interest expense of$116,000 and $136,000 was recorded for the nine months ended September 30, 2007and 2006, respectively, related to the note.

           The Company’s line of credit issecured by substantially all of the Company’s assets, except that the collateralspecifically excludes any rights that the Company has as a result of itslicense agreement with Abbott Laboratories for cethromycin, and is furthersecured by 2.5 million shares of the Company’s stock held by ALS Ventures, LLC(see Note 4), which is beneficially owned by the Company’s Chief ExecutiveOfficer.

           The Company leases facilities fromthe BioStart Property Group, LLC. (“BioStart”), a wholly-owned subsidiary ofFlavin Ventures, which is owned by the Company’s Chief Executive Officer.  Lease payments totaled approximately $206,000and $187,000 for the nine months ended September 30, 2007 and 2006,respectively.

**4.****                  ****Debt Obligations**

           In September 2001, the Companyincurred indebtedness under a $2.0 million promissory note with the ChiefExecutive Officer of the Company, which bears interest at 7.75%.  Accrued but unpaid interest is added to theoutstanding principal annually. Principal plus accrued interest is due in a lump sum on December 31,2007.  In May 2006, the Company’sBoard of Directors authorized the payment of accumulated interest on the loanwith the Chief Executive Officer, totaling $837,000. The authorization alsoprovides for monthly payments of accumulated interest until the loan matures onDecember 31, 2007.  As of September30, 2007 and December 31, 2006, the Company had $2.0 million outstanding underthe note.

           The Company has a $4.0 million lineof credit with a financial institution. Interest under the line is payable monthly at a fixed interest rate of6.75% per annum, and outstanding principal and interest are payable on January1, 2008.  The line of credit is securedby substantially all of the Company’s assets, except that the collateralspecifically excludes any rights that the Company has a result of its licenseagreement with Abbott Laboratories for cethromycin.  The line of credit is further secured by 2.5million shares of the Company’s common stock held by ALS Ventures, LLC.  As of September 30, 2007 and December 31,2006, the Company had $3.9 million outstanding under the note.  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 is immediatelyexercisable and will terminate, if not exercised, on December 21, 2009.The warrant was valued, using the Black-Scholes option pricing model, at$27,000. The amount was recorded as a discount to the related debt and is beingamortized to interest expense over the term of the debt.

 

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**5.****                      Commitments**

***           Vendor Contracts-***The Companyadministers its cethromycin development program largely under contracts withthird parties.  To date, contractstotaling $40.9 million have been executed related to the cethromycin program,which includes anthrax related studies. The remaining balance of $9.2 million is expected to be paid over thenext six months.  In addition, to datethe Company has executed $423,000 in contracts related to the ALS-357 program,of which the majority of the remaining balance of $202,000 is expected to bepaid in 2007.

 

***           Grant Payable-*** In April 2005,the Company was awarded a $500,000 grant from the State of Illinois to fundexpansion of its corporate headquarters in Woodridge, Illinois.  Under the terms of the grant, the Company isto utilize the funds for construction costs associated with expanding itscorporate headquarters and create 100 full-time jobs at the same locationbetween January 31, 2005 and June 30, 2007 (“grant period”).  During the second quarter of 2007 the periodin which construction costs could be expended was extended six months toDecember 31, 2007 and the period that the Company has to create 100 full timejobs was extended 3.5 years to December 31, 2010.  Funds that are not expended in a mannerconsistent with the grant award are to be repaid at the end of the grantperiod.  In addition, if the Company doesnot create the specified number of full-time jobs, it is required to repay thegrant proceeds on a pro-rata basis of actual jobs created compared to the totaldefined in the grant.  As of September30, 2007 the Company classified approximately $477,000 of the grant proceeds asa short term liability based upon the actual costs of the facility expansionincurred and the number of jobs created during the grant period.  The remaining $23,000 has been classified asa long-term liability as the Company must maintain the positions created duringthe grant period through December 31, 2010. If the Company does not maintain the positions created until December31, 2010, it will owe the State of Illinois grant proceeds equal to a pro-ratashare of the positions that were retained as compared to the total createdduring the grant period.

 

**6.****                     ****MinorityInterest**

 

           The Series A preferred stock (“Series APreferred Stock”) of the Company’s subsidiary, ALS, Inc., is held by deCODE Genetics (“deCODE”) as aresult of ALS Inc.’s spin-off from MediChem Life Sciences in January 1999,and MediChem’s subsequent acquisition by deCODE Genetics in March 2002.deCODE provides analytical services to the Company on an as needed basis.

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

**7.****                      StockOption Grants**

           For the nine monthsended September 30, 2007 and 2006, the Company granted stock options topurchase up to 739,300 and 300,790 shares of common stock, respectively, tocertain employees and scientific advisory board members and directors. Theexercise price of the options was the market price of the Company’s commonstock on the date of grant.  The Companyrecognized compensation expense totaling approximately $184,000 and $72,000 forthe three months ended September 30, 2007 and 2006, respectively and $549,000and $189,000 for the nine months ended September 30, 2007 and 2006,respectively, in accordance with SFAS No. 123 (R), *Share based Payment*.

**8.****                  ****NetLoss Per Share**

           Basic loss per share is computed bydividing net loss by the number of weighted average common shares outstandingduring the reporting period.  Dilutedloss per share is calculated to give effect to all potentially dilutive commonshares that were outstanding during the reporting period.  The computation of diluted shares outstandingfor the periods ended September 30, 2007 and 2006 excludes incremental sharesof 6,995,119 and 6,254,965, related to employee stock options andwarrants.  These shares are excluded dueto their anti-dilutive effect as a result of the Company’s losses for theperiods ended September 30, 2007 and 2006.

 

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**9.****                      IncomeTaxes**

**          **In 2006, theFinancial Accounting Standards Board issued Interpretation No. 48 *Accounting for Uncertainty in Income Taxes*(“FIN 48”)*.*  FIN 48 requiresreporting of taxes based on tax positions which meet a more likely than notstandard and which are measured at their more likely than not settlement.  Differences between financial and taxreporting which do not meet this threshold are required to be recorded asunrecognized tax benefits.  FIN 48 alsoprovides guidance on the presentation of tax matters and the recognition ofpotential IRS interest and penalties.

           The provisions of FIN 48 becameeffective on January 1, 2007, and had no effect on the Company’s financialposition, cash flows or results of operations upon adoption as the Company doesnot have any unrecognized tax benefits.  The Company also evaluated its tax positionsas of September 30, 2007 and reached the same conclusion.

           The Company classifies penalty andinterest expense related to income tax liabilities as an income tax expense.There are no interest and penalties recognized in the statement of operationsor accrued on the balance sheet.

           The Company files tax returns in theUS, and in the state of Illinois.  Thetax years 2003 through 2006 remain open to examination by the major taxingjurisdictions to which the Company is subject.

**10.****            RecentAccounting Pronouncements**

           In March 2007, the Emerging IssuesTask Force (“EITF”) issued a tentative conclusion on EITF 07-03, “ *Accounting for Advance Payments for Goods or Servicesto Be Used in Future Research and Development*“ and the FASBratified the tentative conclusion.  EITF07-03 addresses the diversity which exists with respect to the accounting forthe non-refundable portion of a payment made by a research and developmententity for future research and development activities. Under this conclusion,an entity would defer and capitalize non-refundable advance payments made forresearch and development activities until the related goods are delivered orthe related services are performed. EITF 07-03 is effective for interim orannual reporting periods in fiscal years beginning after December 15,2007. The Company does not expect the adoption of EITF 07-03 to have a materialimpact on its consolidated financial statements.

 

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

*You should read the following discussion of our financialcondition and results of operations in conjunction with our condensedconsolidated financial statements and the related notes included elsewhere inthis quarterly report. This discussion contains forward-looking statements thatinvolve risks and uncertainties. Our actual results may differ materially fromthose anticipated in these forward-looking statements.*

**Overview**

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

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

Sinceour inception we have incurred net losses each year.  Our net loss for the nine months endedSeptember 30, 2007 was $26.8 million.  Asof September 30, 2007, we had an accumulated deficit of $94.1 million.  Our operations to date have been fundedprincipally through proceeds from our initial public offering (“IPO”) in August2005, our private placement in March 2006, debt and capital contributions madeby our Chief Executive Officer and borrowings under our bank line ofcredit.  We currently do not havesufficient cash or other funding available to complete our anticipated businessactivities during 2007.  As a result,there is significant doubt about our ability to continue as a going concern.

 

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

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

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

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

 

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Even if our pivotal Phase III clinical trials ofcethromycin are successfully completed, we do not expect to receive FDAapproval for commercialization until 2009 at the earliest.  As of September 30, 2007, we estimate thatour cethromycin development program, excluding $40.0 million of milestonepayments due to Abbott, will incur an additional $6.8 million in research anddevelopment expenses which includes $4.5 million to complete the cethromycinclinical trials and $2.3 million for the preparation of the cethromycin NDA andother commercialization-related costs. We expect to incur expenses up to $69,000 to in connection with ournon-human primate studies which determined cethromycin’s efficacy for theprophylactic treatment of inhalation anthrax. Our $10.0 million and $30.0 million Abbott milestone payments aretriggered upon submitting 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,pulmonary medicine and infectious disease physicians.

**Resultsof Operations**

*Three months endedSeptember 30, 2007 compared to three months ended September 30, 2006*

*Revenue.**  *TheCompany had no revenue for the three months periods ended September 30, 2007and 2006.

*Research and development expense.*    Research and development expensesdecreased $1.9 million to $3.8 million for the three months ended September 30,2007 compared to $5.7 million for the three months ended September 30,2006.  We completed enrollment andreleased the results of the first of two pivotal Phase III trials during thesecond quarter of 2007. As a result, clinical trial expenses incurred duringthe third quarter of this year were $816,000 lower than the same quarter lastyear.  Concurrent to our clinical trials,in the second quarter of 2006, we initiated the bulk-scale manufacturing of thecethromycin Active Pharmaceutical Ingredient (“API”) as is required forinclusion in our cethromycin NDA.  Themanufacturing process was successfully completed during the third quarter ofthis year and, as a result, costs related to manufacturing decreased $1.2million as compared to the same period last year.  Expenses related to our study testingcethromycin’s efficacy in treating inhalation anthrax post-exposure forprophylaxis in non-human primates declined $66,000 during the third quarter asthe study was completed in the second quarter of 2007.  These declines were offset by increases of$149,000 in research and development salaries and related benefits resultingfrom additional clinical personnel,  and$64,000 of expenses related to ALS-357 development program.  We believe that the majority of the remainingclinical trial costs will be incurred during the fourth quarter of this yearwith the conclusion of our second trial. From that point forward our research and development expenses will shiftfrom clinical trial and manufacturing based to NDA compilation andmanufacturing of API to be used in our commercial launch. We estimate that theexpense to complete the trials including the expense to compile and submit theNDA, but excluding milestones payable to Abbott is $6.8 million, of which themajority is expected to be recognized over the remainder of this year.  Milestones payable to Abbott total $40 millionand are contingent upon the filing of the NDA, $10.0 million,  and approval of the NDA by the FDA, $30.0million, and are expected to be recognized in 2008 and 2009, respectively.

*Generaland administrative expense.**  *General and administrative expense increased$515,000 to $2.0 million for the three months ended September 30, 2007 ascompared to the three months ended September 30, 2006.  Approximately $238,000 of the total increasewas attributable to higher compensation costs of existing personnel as well ascompensation for new employees in the legal and accounting functions that willmanage the Company’s Sarbanes-Oxley compliance program.    Marketing expense related to the brandingof cethromycin compound increased $199,000. General corporate expenses increased $39,000.  Expenses related to our facilities increased$39,000 resulting from the expansion of our corporate offices to accommodateadditional personnel which occurred during the fourth quarter of 2006.

 

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*Interestincome.*   Interest income decreased $349,000 to $117,000 for the three months endedSeptember 30, 2007.  Interest income isderived through the investment of our IPO and private placement proceeds inmoney market funds, until they are used in operations.  The decrease in interest income reflectslower cash balances this quarter versus the same quarter the prior year.

*Interestexpense.*   Interest expense decreased $4,000 to $117,000 for the three months endedSeptember 30, 2007.

*Nine months ended September 30, 2007 compared tosix months ended September 30, 2006*

*Revenue.**  *TheCompany had no revenue for the nine months ended September 30, 2007 compared to$35,000 for the nine months ended September 30, 2006.  Revenue in 2006 resulted from a Phase I grantthat was awarded in the third quarter of 2005.

*Research and development expense.*    Research and development expensesincreased $10.1 million to $21.7 million for the nine months ended September30, 2007 compared to $11.6 million for the nine months ended September 30,2006.  Of the total increase in researchand development expenses of $10.1 million, $4.5 million of this increaseconsists of the costs to conduct or pivotal Phase III clinical trials of ourlead compound cethromycin, $4.1 million relates to the compilation of thecethromycin NDA and NDA directed studies, $1.0 million was incurred in ouranthrax and ALS-357 development programs and $479,000 was incurred for generalresearch and development expenses, including personnel costs.

*Generaland administrative expense.**  * General and administrative expense increased$1.4 million to $5.4 million for the nine months ended September 30, 2007 ascompared to the nine months ended September 30, 2006.   Approximately $820,000 of the total increasewas attributable to higher compensation costs of existing personnel as well ascompensation for new employees in the legal and accounting functions that willmanage the Company’s Sarbanes-Oxley compliance program.  Marketing expense related to the branding ofcethromycin increased $300,000.  Expensesrelated to our facilities increased $125,000 resulting from the expansion ofour corporate offices to accommodate additional personnel which occurred duringthe fourth quarter of 2006.  Generalcorporate expenses increased $138,000.

*Interestincome.*   Interest income decreased $629,000 to $638,000 for the nine months endedSeptember 30, 2007 due to lower cash balances in the current year.

*Interestexpense.*   Interestexpense decreased $44,000 to $350,000 for the nine months ended September 30,2007.  In May of 2006 we restructured ourline of credit from a variable rate based on Prime to a fixed rate of 6.75%.  As a result, the effective rate of intereston our line of credit decreased 1.8% which decreased our interest expense forthe first nine months of 2007 as compared to the first nine months of 2006, by$44,000.

 

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**Liquidity and Capital Resources**

We have devoted substantially all of our cashresources to research and development and general and administrativeexpenses.  To date, we have not generatedany revenues from the sale of products, and we do not expect to generate anysuch revenues for a number of years, if at all. As a result, we have incurred an accumulated deficit of$94.1 million as of September 30, 2007 and we expect to incur significantoperating losses for the foreseeable future.   Cash and cash equivalents was $6.4 million as of September 30,2007.  Since our inception in 1999 toAugust 2005, we financed our operations primarily through debt and capitalcontributions from our founder and controlling stockholder and borrowings underour bank line of credit.  In August 2005we completed our initial public offering in which we raised $28.7 million, netof underwriters discount and offering costs. In March 2006 we completed a private placement in which we raised $33.4million, net of underwriters discount and offering costs.  As of September 30, 2007 we had a workingcapital deficit of $5.1 million.

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

We have a $4.0 million line of credit with a localfinancial institution.  As of September30, 2007, the line of credit had an outstanding balance of $3.9 million bearinginterest of 6.75% per annum.  Interest ispayable monthly, and the line of credit matures on January 1, 2008.  The line of credit is secured bysubstantially all the assets of the Company, excluding any rights that we haveunder of our license agreement with Abbott Laboratories for cethromycin.  The line of credit is also secured by 2.5million shares of our common stock held by Flavin Ventures, LLC. (see Note 4 tothe unaudited condensed consolidated financial statements).

During the nine months ended September 30, 2007, cashused in operating activities totaled $20.6 million.  Approximately $15.3 million was used for thedevelopment of cethromycin, $941,000 for Anthrax trials, $419,000 for researchactivities related to our proprietary portfolio of compounds and $3.9 millionfor general operations net of $685,000 in interest income.

 

13

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*ContractualObligations*

As of September 30, 2007, the annual amounts of futureminimum payments under debt obligations, interest, lease obligations and otherlong term liabilities consisting of executed research, development and licenseagreements are as follows:

 
| ** **                     | ** ** | **Payments  Due by December 31,** | ** ** | ** ** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|------------|------------|
| ** **                     | ** ** | **2007**                          | ** ** | **2008**   | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Total** | ** ** |
| Notes payable                  |       | $                                 | 2,000,000  |       | $          | 3,915,000 |   | $ | — |   | $ | — |   | $ | — |   | $ | 5,915,000 |   |
| Interest                       |       | 140,626                           |       | 2,842      |       | 1,633 |   | 304 |   | — |   | 145,405 |   |
| Cethromycin  development costs |       | 3,542,000                         |       | 5,200,000  |       | — |   | — |   | — |   | 8,742,000 |   |
| Anthrax clinical  studies      |       | 210,000                           |       | 18,000     |       | — |   | — |   | — |   | 228,000 |   |
| ALS-357 clinical  supplies     |       | 77,000                            |       | 125,000    |       | — |   | — |   | — |   | 202,000 |   |
| Operating leases               |       | 60,243                            |       | 160,648    |       | — |   | — |   | — |   | 220,891 |   |
| Capital leases                 |       | 1,653                             |       | 7,259      |       | 8,468 |   | 4,350 |   | — |   | 21,730 |   |
|                           |       |                              |       |       |       |   |   |   |   |   |   |   |   |
| Total                          |       | $                                 | 6,031,522  |       | $          | 9,428,749 |   | $ | 10,101 |   | $ | 4,654 |   | $ | — |   | $ | 15,475,026 |   |

 

The above table does not include certain potentialproduct based milestones under our license agreement with Abbott.  We will owe Abbott $10.0 million if we submitan NDA for cethromycin and $30.0 million if and when the FDA approves the NDA,which we estimate will occur in 2008 and 2009, respectively.   Thereafter, we would owe Abbott anadditional $2.5 million upon reaching $200 million in aggregate net sales ofcethromycin and $5.0 million upon reaching $400 million in aggregate netsales.  The periods in which milestoneobligations become payable, if at all, are only estimates due to uncertaintiesassociated with the completion of the clinical studies and related regulatoryfilings.

Our commitments under operating leases shown aboveconsist of payments made to a related party relating to our facility lease inWoodridge, Illinois, which expires in September of 2008.

In the first nine months of 2007 we executed contractstotaling $4.1 million. Other contracts totaling $425,000 were executed afterSeptember 30, 2007, resulting in total contracts executed for 2007 of $4.5million.  Of the total contractsexecuted, $3.0 million related to the compilation of our cethromycin NDA andNDA directed studies and $1.5 million related to clinical trials.  We anticipate executing additional contractstotaling $2.2 million related to our clinical development of cethromycin.  Of this amount, $2.0 million represents thecosts we will incur to complete the pivotal Phase III pivotal clinical trials;$200,000 related to the compilation of our cethromycin NDA and NDA directedstudies.

Remaining payments due under all existing and anticipatedcethromycin development contracts, including anthrax studies, total $11.6million and are expected to be made over the next six months.  The majority of these payments are milestonebased.  The periods in which milestoneobligations become payable are only estimates due to uncertainties in clinicaltrial completion timelines.

                To fund these contracts and ourexisting development commitments, indebtedness and general operating expenseswe need to raise additional operating capital during 2007.  Such a capital raise could be achieved by thesale of additional common stock, the receipt of milestone payments which wouldbe paid to us as a result of entering into a commercial partnership forcethromycin, or a combination of both. Based upon current market conditions and discussions with potentialcommercial partners, we believe sufficient funds can be raised in 2007 tocontinue our development of cethromycin and fund our other research andcorporate expenditures through the expected approval of our cethromycinNDA.  Although we believe we can obtainsufficient financing, there can be no assurances that such financing will beavailable, or available at terms acceptable to us.  We currently do not have sufficient cash orother funding available to complete our anticipated business activities during2007 and are working with certain vendors and partners to extend payment termsand take other appropriate actions to conserve cash.  As a result, there is significant doubt aboutour ability to continue as a going concern.

 

14

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                Our future capital uses andrequirements depend on numerous forward-looking factors.  These factors include, but are not limitedto, 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;

•                                          our ability to raise additional capitalthrough the sale of common stock or the receipt of milestone payments thatwould be paid to us as a result of our entering into a commercial partnershipfor cethromycin, or a combination of both;

•                                          ourability to establish and maintain additional collaborative arrangements;

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

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

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

        If, at any time, our prospects forfinancing our clinical development programs are limited, we may decide toreduce research and development expenses by delaying or discontinuing certainprograms.

**Critical Accounting Policies and Estimates**

      Our discussion and analysis of our financial condition and results ofoperations are based on our financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities and expenses and related disclosureof contingent assets and liabilities.  Wereview our estimates on an ongoing basis. We base our estimates on historical experience and on various otherassumptions that we believe to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.  While our significant accounting policies aredescribed in more detail in the notes to our financial statements included inthis annual report, we believe the following accounting policies to be criticalto the judgments and estimates used in the preparation of our financialstatements.

*        In-ProcessResearch and Development*

        Werecognize in-process research and development in accordance with FASBInterpretation No. 4, *Applicability of FASBStatement No. 2 to Business Combinations 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 development activities, specifically,compounds that have yet to receive new drug approval from the FDA and wouldhave no alternative use should approval not be given, are immediately chargedto income when acquired.

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

 

15

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rely on estimates regarding the timing and amount of cashflows and discount rates that, if changed, could significantly affect theconclusions as to value.

*                Researchand Development*

                Research and developmentexpenses consist of internal research costs and fees paid for contract researchin conjunction with the research and development of our proprietary productportfolio.  All such costs are expensedas incurred.  Clinical trial costsincurred by third parties are expensed as the contracted work isperformed.  We estimate both the totalcost and time period of the trials and the percent completed as of thataccounting date.  We believe that theestimates made as of September 30, 2007 are reflective of the actual expensesincurred as of that date.

*                Stock-basedCompensation*

 

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

 

**Forward-Looking Statements and Risk Factors**

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

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

Our exposure to market riskis currently confined to our cash and cash equivalents.  We currently do not hedge interest rate exposure.We have not used derivative financial instruments for speculation or tradingpurposes.  Because of the short-termmaturities of our cash and cash equivalents, we do not believe that an increasein market rates would have a significant impact on their realized value.

Our most liquid assets arecash and cash equivalents.  Because oftheir liquidity, these assets are not directly affected by inflation.  We also believe that we have intangible assetsin the value of our intellectual property. In accordance with generally accepted accounting principles, we have notcapitalized the value of this intellectual property on our balance sheet.  Due to the nature of this intellectualproperty, we believe that these intangible assets are not affected by inflation.  Because we intend to retain and continue touse our equipment, furniture and fixtures and leasehold improvements, webelieve that the incremental inflation related to replacement costs of suchitems will not materially affect our operations.  However, the rate of inflation affects ourexpenses, such as those for employee compensation and contract services, whichcould increase our level of expenses and the rate at which we use ourresources.

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

Ourmanagement, under the supervision and with the participation of our ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluatedthe effectiveness of our disclosure controls and procedures as defined in SECRules 13a-15(e) and 15d-15(e) as of the end of the period covered by thisreport.  Based upon that evaluation,management has concluded that our disclosure controls and procedures areeffectively designed to ensure that information 

16

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we are required to disclosein reports that we file or submit under the Securities Exchange Act of 1934 isaccumulated and communicated to management, including the CEO and CFO, asappropriate to allow timely decisions regarding required disclosure and isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.

**Changesin Internal Control**

During the period covered bythis report, there have been no changes in our internal control over financialreporting that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

17

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**PART II —OTHER INFORMATION**

**Item 5*. Other Information***

**OnNovember 14, 2007 the company issued the following press release**:

Advanced Life Sciences Announces Third Quarter 2007Financial Results

**CHICAGO, IL, November 14,2007/PRNewswire/: —****Advanced Life SciencesHoldings, Inc. (Nasdaq: ADLS)**, a biopharmaceutical company engagedin the discovery, development and commercialization of novel drugs in thetherapeutic areas of infection, cancer and respiratory diseases, todayannounced its financial results for the third quarter ended September 30, 2007.

 

The net loss for the three months endedSeptember 30, 2007 was $5.8 million or a loss of $0.21 per share compared to$6.9 million or a loss of $0.24 per share for the three months ended September30, 2006.  The lower net loss reflectsdecreased development expenses associated with the closing of two pivotal phaseIII clinical trials for cethromycin, CL-05 and CL-06.

 

“We are excited to be completing the clinicalphase of development of cethromycin, said Michael T. Flavin, Ph.D., chairmanand chief executive officer of Advanced Life Sciences.  “We had a very productive third quarter,wrapping up Trial CL-05, continuing our work toward the NDA submission forcethromycin, and furthering our discussions with prospective partners.  We have also been working to advancecethromycin as a treatment for inhalation anthrax and preparing ALS-357, apotential topical treatment for metastatic melanoma, toward clinicaldevelopment.”

 

The company ended the third quarter of 2007with cash totaling $6.4 million.

 

**Operating Expense Analysis**

 

•                  Research and developmentexpenses for the three months ended September 30, 2007 totaled $3.8 millioncompared to $5.7 million for the comparable period ended September 30,2006.  This decrease was attributable tothe completion of Trial CL-06, the first of our two clinical trials, andrelated trial expenses, as well as a reduction in costs associated with themanufacture of drug product.

 

•                  Selling, general andadministrative expenses were $2.0 million in the third quarter compared to $1.5million for the same quarter of last year.  This increase was due primarily to higher compensation costs andincreased costs associated with Sarbanes-Oxley compliance.

 

**Third Quarter and Other RecentAchievements**

 

•                  Released positive top linedata from Trial CL-06, the first of two pivotal phase III clinical trials toassess the use of cethromycin as a treatment for community acquired pneumonia(CAP), in which cethromycin met all endpoints;

•                  Fielded and furtherdeveloped interest from potential new regional commercial development partners;

•                  Completed API manufacturingand initiated stability testing to support the CMC requirements for thepotential cethromycin NDA submission;

•                  Presented 11 posters oncethromycin at The American Societyfor Microbiology’s 47th AnnualInterscience Conference on Antimicrobial Agents and Chemotherapy (ICAAC) inChicago — September 17 - 20 and the 45th Annual Meeting of the InfectiousDisease Society of America (IDSA) in San Diego — October 4 - 7;

•                  Hosted satellite symposiumon current treatment options for drug-resistant CAP at the ICAAC Conference;

•                  Announced commencement ofcollaboration with the National Institute of Allergy and Infectious Diseases(NIAID), the lead governmental institute supporting biodefense research, toevaluate cethromycin as a treatment for anthrax and other high-prioritybiodefense agents.

•                  Granted Orphan Drug statusby the FDA for the use of ALS-357 for the topical treatment of metastaticmelanoma

•                  Advanced development ofALS-357 with clinical materials manufactured and placed on stability for thePhase I/II melanoma program; and

•                  Held two CethromycinNational Advisory Board meetings, consisting of 10 thought leaders in the areaof respiratory tract infections and antibiotic therapies.

 

**-MORE-**

 

 

18

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**Business Outlook for the FourthQuarter 2007**

 

•                  Release data from TrialCL-05, the second of two pivotal phase III clinical trials for the use ofcethromycin to treat CAP;

•                  Advance negotiations withpotential commercial partners for cethromycin;

•                  Conduct further NDAsubmission activities and pre-launch medical education programs relating tocethromycin as a treatment for CAP;

•                  Continue collaborations withNIAID and The U.S. Army Medical Research Institute for Infectious Diseases(USAMRIID) to explore cethromycin’s activity against high-priority bioterroragents; and

•                  Prepare to initiate thePhase I/II clinical trial of ALS-357 as a treatment for melanoma.

 

**Financial Guidance for the FourthQuarter of 2007**

 

Advanced Life Sciences expects its fourthquarter 2007 cash requirements to fall within the range of $5.5 million to $6.0million.  The Company will address itscapital needs through the issuance of equity securities and/or by the receiptof payments that may result from the consummation of a commercial partnershipfor cethromycin.  Although managementbelieves the Company could obtain such financing, there can be no assurancesthat such financing will be available in the future at terms acceptable to theCompany, if at all.

 

**Conference Call Details**

 

AdvancedLife Sciences will host a conference call and live webcast at 9:00 a.m. EasternTime on Thursday, November 15, 2007 to discuss the company’s third quarterfinancial results.

Theconference call will be webcast simultaneously over the Internet.  Pleasevisit the Investor Relations section of Advanced Life Sciences’ websitewww.advancedlifesciences.com.  Alternatively, callers may participate inthe conference call by dialing 866-510-0704 (domestic) or 617-597-5362(international).  The passcode for the conference call is 57071751. A telephone replay of the call will also be available for 48 hours. Callers may access the telephone replay by dialing (domestic) 888-286-8010 or617-801-6888 (international), passcode 51192916.

**AboutAdvanced Life Sciences**

AdvancedLife Sciences is a biopharmaceutical company engaged in the discovery,development and commercialization of novel drugs in the therapeutic areas ofinfection, cancer and inflammation.  Thecompany’s lead candidate, cethromycin, is a novel once-a-day antibiotic inlate-stage clinical development for the treatment of respiratory tractinfections.

**AboutCethromycin**

Advanced Life Sciences is developingcethromycin, a novel once-a-day antibiotic in response to the emergingbacterial resistance observed in the treatment of community acquired pneumonia(CAP).  Cethromycin has been tested inapproximately 5,500 human subjects during clinical trials.

 

The company is currently conducting pivotalPhase III clinical trials of cethromycin for the treatment of mild-to-moderateCAP.  Advanced Life Sciences believesthat cethromycin, if approved, would build upon the growing market opportunityin the antibiotic marketplace and address the critical need for antibioticsthat overcome bacterial resistance.

 

**-MORE-**

 

19

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**Forward-LookingStatements**

Any statements contained in this pressrelease that relate to future plans, events or performance are forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995.

 

Except for historical information, thestatements made in this press release are forward-looking statements aboutAdvanced Life Sciences Holdings, Inc., including statements regarding theclinical trials and regulatory pathway of cethromycin.  Forward-looking statements represent ourmanagement’s judgment regarding future events and are accurate at the time theyare made.  The Company does not undertakeany obligations to update any forward-looking statements whether as a result ofnew information, future events or otherwise. Our actual results could differ materially from those discussed hereindue to several factors including the success and timing of our clinical trialsand our ability to obtain and maintain regulatory approval and labeling of our product candidates; our plans todevelop and commercialize our product candidates; the loss of key scientific ormanagement personnel; the size and growth of potential markets for our productcandidates and our ability to serve those markets; regulatory developments inthe U.S. and foreign countries; the rate and degree of market acceptance of anyfuture products; the accuracy of our estimates regarding expenses, capitalrequirements, and our ability to access capital through partnerships, stock offeringsand future revenues; our ability to obtain and maintain intellectual propertyprotection for our product candidates; the successful development of our salesand marketing capabilities; the success of competing drugs that becomeavailable; and the performance of third party collaborators andmanufacturers.  These and additionalrisks and uncertainties are detailed in the Company’s filings with theSecurities and Exchange Commission.

 

###

 

 

20

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY**

**(ADevelopment Stage Company)**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                         | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| ** **                                                                                                         | ** ** | ** **        | ** ** | ** **       | ** ** |
| **ASSETS**                                                                                                         | ** ** | ** **        | ** ** | ** **       | ** ** |
| ** **                                                                                                         | ** ** | ** **        | ** ** | ** **       | ** ** |
| CURRENT ASSETS:                                                                                                    |       |              |       |             |       |
| Cash and cash equivalents                                                                                          |       | $                 | 6,429,484  |             | $          | 27,054,947 |   |
| Prepaid insurance                                                                                                  |       | 357,219           |       | 380,083          |       |
| Prepaid clinical trial expenses                                                                                    |       | 2,160,667         |       | 2,364,512        |       |
| Other prepaid expenses and deposits                                                                                |       | 131,718           |       | 273,572          |       |
|                                                                                                               |       |              |       |             |       |
| Total current assets                                                                                               |       | 9,079,088         |       | 30,073,114       |       |
|                                                                                                               |       |              |       |             |       |
| PROPERTY AND EQUIPMENT:                                                                                            |       |              |       |             |       |
| Furniture and fixtures                                                                                             |       | 221,418           |       | 250,308          |       |
| Laboratory equipment                                                                                               |       | 159,186           |       | 142,928          |       |
| Computer software and equipment                                                                                    |       | 242,707           |       | 231,022          |       |
| Leasehold improvements                                                                                             |       | 177,253           |       | 182,839          |       |
|                                                                                                               |       |              |       |             |       |
| Total property and equipment–at cost                                                                          |       | 800,564           |       | 807,097          |       |
| Less accumulated depreciation                                                                                      |       | (492,350          | )          | (398,486         | )          |
|                                                                                                               |       |              |       |             |       |
| Property and equipment–net                                                                                    |       | 308,214           |       | 408,611          |       |
|                                                                                                               |       |              |       |             |       |
| OTHER LONG-TERM ASSETS:                                                                                            |       |              |       |             |       |
| Deferred financing costs                                                                                           |       | 6,626             |       | 26,502           |       |
| Other assets                                                                                                       |       | 1,452             |       | 1,452            |       |
|                                                                                                               |       |              |       |             |       |
| Total other long-term assets                                                                                       |       | 8,078             |       | 27,954           |       |
|                                                                                                               |       |              |       |             |       |
| TOTAL ASSETS                                                                                                       |       | $                 | 9,395,380  |             | $          | 30,509,679 |   |
|                                                                                                               |       |              |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)**                                                           | ** ** | ** **        | ** ** | ** **       | ** ** |
|                                                                                                               |       |              |       |             |       |
| CURRENT LIABILITIES:                                                                                               |       |              |       |             |       |
| Accounts payable                                                                                                   |       | $                 | 3,499,280  |             | $          | 1,011,396 |   |
| Accrued clinical trial expenses                                                                                    |       | 3,651,070         |       | 1,410,894        |       |
| Other accrued expenses                                                                                             |       | 639,014           |       | 226,881          |       |
| Accrued interest payable                                                                                           |       | 22,022            |       | 22,756           |       |
| Short-term lease payable                                                                                           |       | 8,024             |       | 19,437           |       |
| Short-term grant payable                                                                                           |       | 476,708           |       | 476,708          |       |
| Short-term notes payable - related party                                                                           |       | 2,000,000         |       | 2,000,000        |       |
| Short-term notes payable - net of $2,816  debt discount                                                            |       | 3,912,184         |       | —           |       |
|                                                                                                               |       |              |       |             |       |
| Total current liabilities                                                                                          |       | 14,208,302        |       | 5,168,072        |       |
|                                                                                                               |       |              |       |             |       |
| Long-term lease payable                                                                                            |       | 14,736            |       | 20,076           |       |
| Long-term grant payable                                                                                            |       | 23,292            |       | 23,292           |       |
| Notes payable - net of $11,266 debt  discount                                                                      |       | —            |       | 3,903,734        |       |
|                                                                                                               |       |              |       |             |       |
| Total liabilities                                                                                                  |       | 14,246,330        |       | 9,115,174        |       |
|                                                                                                               |       |              |       |             |       |
| COMMITMENTS AND CONTINGENCIES:                                                                                     |       |              |       |             |       |
| Minority Interest                                                                                                  |       | —            |       | —           |       |
|                                                                                                               |       |              |       |             |       |
| STOCKHOLDERS’ EQUITY (DEFICIT):                                                                               |       |              |       |             |       |
| Common stock, $0.01 par value–60,000,000  shares authorized;                                                  |       |              |       |             |       |
| September 30, 2007 28,294,677 issued and outstanding; December 31,  2006 28,282,677 shares issued and outstanding; |       | 282,947           |       | 282,827          |       |
| Additional paid-in capital                                                                                         |       | 88,922,093        |       | 88,370,853       |       |
| Deficit accumulated during the development  stage                                                                  |       | (94,055,990       | )          | (67,259,175      | )          |
|                                                                                                               |       |              |       |             |       |
| Total stockholders’ equity (deficit)                                                                          |       | (4,850,950        | )          | 21,394,505       |       |
|                                                                                                               |       |              |       |             |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)                                                         |       | $                 | 9,395,380  |             | $          | 30,509,679 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY**

**(ADevelopment Stage Company)**

** **

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** **  | ** ** | ** **  | ** **  | **Period From**       | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|-------------|------------|-------------|-------------|-----------------------|------------|
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** **  | ** ** | ** **  | ** **  | **Inception**         | ** ** |
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** **  | ** ** | ** **  | ** **  | **(January 1, 1999)** | ** ** |
| ** **                                                                  | ** ** | **Three  months ended September 30,** | ** ** | **Nine  months ended September 30,** | ** ** | **Through** | ** ** |
| ** **                                                                  | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007**    | ** ** | **2006**    | ** **  | **September 30,2007** | ** ** |
| Revenue:                                                                    |       |                                  |       |                                 |       |        |       |        |        |                  |       |
| Management fees                                                             |       | $                                     | —     |                                 | $          | —      |       | $           | —      |                  | $          | — |   | $ | 1,161,180 |   |
| Grants                                                                      |       | —                                |       | —                               |       | —      |       | 35,127      |        | 1,035,571             |       |
| Royalty–related  party                                                 |       | —                                |       | —                               |       | —      |       | —      |        | 45,238                |       |
|                                                                        |       |                                  |       |                                 |       |        |       |        |        |                  |       |
| Total revenue                                                               |       | —                                |       | —                               |       | —      |       | 35,127      |        | 2,241,989             |       |
|                                                                        |       |                                  |       |                                 |       |        |       |        |        |                  |       |
| Expenses:                                                                   |       |                                  |       |                                 |       |        |       |        |        |                  |       |
| Research and  development                                                   |       | 3,838,184                             |       | 5,730,269                            |       | 21,722,174  |       | 11,569,685  |        | 70,857,523            |       |
| Contracted  research and development– related party                    |       | —                                |       | —                               |       | —      |       | —      |        | 7,980,299             |       |
| Selling, general  and administrative                                        |       | 2,004,357                             |       | 1,489,502                            |       | 5,362,769   |       | 3,977,514   |        | 18,455,282            |       |
|                                                                        |       |                                  |       |                                 |       |        |       |        |        |                  |       |
| Total expenses                                                              |       | 5,842,541                             |       | 7,219,771                            |       | 27,084,943  |       | 15,547,199  |        | 97,293,104            |       |
|                                                                        |       |                                  |       |                                 |       |        |       |        |        |                  |       |
| Loss from  operations                                                       |       | (5,842,541                            | )          | (7,219,771                           | )          | (27,084,943 | )          | (15,512,072 | )           | (95,051,115           | )          |
|                                                                        |       |                                  |       |                                 |       |        |       |        |        |                  |       |
| Other (income)  expense:                                                    |       |                                  |       |                                 |       |        |       |        |        |                  |       |
| Interest Income                                                             |       | (117,332                              | )          | (466,475                             | )          | (638,396    | )          | (1,267,433  | )           | (2,562,528            | )          |
| Interest expense                                                            |       | 116,998                               |       | 120,649                              |       | 350,268     |       | 393,526     |        | 2,506,455             |       |
| Gain on sale of  interest in Sarawak Medichem Pharmaceuticals joint venture |       | —                                |       | —                               |       | —      |       | —      |        | (939,052              | )          |
|                                                                        |       |                                  |       |                                 |       |        |       |        |        |                  |       |
| Net other income                                                            |       | (334                                  | )          | (345,826                             | )          | (288,128    | )          | (873,907    | )           | (995,125              | )          |
|                                                                        |       |                                  |       |                                 |       |        |       |        |        |                  |       |
| Net loss                                                                    |       | (5,842,207                            | )          | (6,873,945                           | )          | (26,796,815 | )          | (14,638,165 | )           | (94,055,990           | )          |
|                                                                        |       |                                  |       |                                 |       |        |       |        |        |                  |       |
| Less accumulated  preferred dividends for the period                        |       | 43,750                                |       | 43,750                               |       | 131,250     |       | 131,250     |        | 1,451,042             |       |
|                                                                        |       |                                  |       |                                 |       |        |       |        |        |                  |       |
| Net loss  available to common shareholders                                  |       | $                                     | (5,885,957 | )                                    | $          | (6,917,695  | )          | $           | (26,928,065 | )                     | $          | (14,769,415 | ) | $ | (95,507,032 | ) |
|                                                                        |       |                                  |       |                                 |       |        |       |        |        |                  |       |
| Basic and diluted  net loss per share available to common shareholders      |       | $                                     | (0.21      | )                                    | $          | (0.24       | )          | $           | (0.95       | )                     | $          | (0.57 | ) |   |   |
|                                                                        |       |                                  |       |                                 |       |        |       |        |        |                  |       |
| Weighted average  number common shares outstanding- basic and diluted       |       | 28,294,677                            |       | 28,268,247                           |       | 28,292,150  |       | 25,962,479  |        |                  |       |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

22

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**Item 6. *Exhibits***

 

The following is a list of exhibits filed as part ofthis Form 10-Q:

 
| **Number** | ** ** | **Description**                                                                                                                                      |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                 |
| 10.1       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and Michael T. Flavin, Ph.D.                |
|       |       |                                                                                                                                                 |
| 10.2       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and John L. Flavin.                         |
|       |       |                                                                                                                                                 |
| 10.3       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and R. Richard Wieland, II.                 |
|       |       |                                                                                                                                                 |
| 10.4       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and Suseelan Pookote, Ph.D.                 |
|       |       |                                                                                                                                                 |
| 10.5       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and Ze-Qi Xu, Ph.D.                         |
|       |       |                                                                                                                                                 |
| 10.6       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and Patrick W. Flavin.                      |
|       |       |                                                                                                                                                 |
| 10.7       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and David Eiznhamer, Ph.D.                  |
|       |       |                                                                                                                                                 |
| 10.8       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and Michael J. Cogan.                       |
|       |       |                                                                                                                                                 |
| 10.9       |       | Fourth  Amendment to License Agreement dated November 13, 2007 by and between Abbott  Laboratories and Advanced Life Sciences Holdings, Inc.         |
|       |       |                                                                                                                                                 |
| 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. |

 

23

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,The Registrant has duly caused this report to be signed on its behalf by theundersigned 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 14, 2007

 

24

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**EXHIBIT INDEX**

 
| **Number** | ** ** | **Description**                                                                                                                                      |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                 |
| 10.1       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and Michael T. Flavin, Ph.D.                |
|       |       |                                                                                                                                                 |
| 10.2       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and John L. Flavin.                         |
|       |       |                                                                                                                                                 |
| 10.3       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and R. Richard Wieland, II.                 |
|       |       |                                                                                                                                                 |
| 10.4       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and Suseelan Pookote, Ph.D.                 |
|       |       |                                                                                                                                                 |
| 10.5       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and Ze-Qi Xu, Ph.D.                         |
|       |       |                                                                                                                                                 |
| 10.6       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and Patrick W. Flavin.                      |
|       |       |                                                                                                                                                 |
| 10.7       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and David Eiznhamer, Ph.D.                  |
|       |       |                                                                                                                                                 |
| 10.8       |       | Amended and  Restated Employment Agreement dated November 13, 2007 between Advanced Life  Sciences, Inc. and Michael J. Cogan.                       |
|       |       |                                                                                                                                                 |
| 10.9       |       | Fourth Amendment  to License Agreement dated November 13, 2007 by and between Abbott  Laboratories and Advanced Life Sciences Holdings, Inc.         |
|       |       |                                                                                                                                                 |
| 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. |

 

25

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