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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549



FORM 10-K



ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934For the Fiscal Period Ended: December 31, 2010o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission File No: 000-51436

ADVANCED LIFE SCIENCES HOLDINGS, INC.(Exact name of registrant as specified in its charter)



DELAWARE(State or other jurisdiction of
incorporation or organization)

30-0296543(I.R.S. Employer
Identification no.)


1440 Davey Road
Woodridge, IL 60517(Address of principal executive offices) (Zip code)

Registrant's
telephone number:(630) 739-6744



Securities
registered pursuant to Section 12 (b) of the Act

Title of each Class

Name of exchange on which registeredNone

None


Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. o Yes    ý No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. o Yes    ý No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. ý Yes    o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). o Yes    o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o Do not check if a
smaller reporting company

Smaller reporting company ý


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

The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2010 was approximately
$5.4 million (based upon the closing price of $0.06 per common share as quoted on the OTC Bulletin Board). The registrant has no outstanding non-voting stock. For purposes of this
computation, it is assumed that the shares of voting stock held by directors and officers would be deemed to be stock held by affiliates. Non-affiliated common stock outstanding at
June 30, 2010 was 90,616,003 shares.

Total
common stock outstanding as of March 23, 2011 was 323,627,533 shares.

Documents incorporated by reference

Certain
sections of the Registrant's Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders for the year ended December 31, 2010 (the
"2011 Proxy Statement") are to be filed with the Securities and Exchange Commission within 120 days after the registrant's fiscal year ended December 31, 2010 and are incorporated by
reference into Part III of this Report.



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ADVANCED LIFE SCIENCES HOLDINGS, INC  INDEX  Form 10-K



PART IItem 1.

Business


1Item 1A.

Risk Factors


16Item 1B.

Unresolved Staff Comments


31Item 2.

Properties


31Item 3.

Legal Proceedings


31Item 4.

Reserved


31PART IIItem 5.

Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities


32Item 6.

Selected Financial Data


33Item 7.

Management's Discussion and Analysis of Financial Condition and Results of
Operations


34Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


45Item 8.

Financial Statements and Supplementary Data


46Consolidated Balance Sheets as of December 31, 2010 and December 31, 2009


47Consolidated Statements of Operations for the years ended December 31, 2010, 2009, 2008 and period from inception (January 1, 1999)
through December 31, 2010


48Consolidated Statements of Total Equity (Deficit) for the years ended December 31, 2010, 2009, 2008 and period from inception
(January 1, 1999) through December 31, 2010


49Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009, 2008 and period from inception (January 1, 1999)
through December 31, 2010


50Notes to Consolidated Financial Statements


51Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure


70Item 9A.

Controls and Procedures


70Item 9B.

Other Information


71PART IIIItem 10.

Directors and Executive Officers of the Registrant


71Item 11.

Executive Compensation


71Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters


71Item 13.

Certain Relationships and Related Transactions


71Item 14.

Principal Accountant Fees and Services


71PART IVItem 15.

Exhibits


72


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PART I

Item 1.Business.

This annual report on Form 10-K contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of Advanced Life Sciences Holdings, Inc. to differ materially from those
expressed or implied by such forward-looking statements. All statements other than statements of historical fact could be deemed forward-looking statements, including any projections of revenue,
expenses, earnings or losses from operations, or other financial items; any statements of the plans, strategies and objectives of management for future operations and future financing (including debt,
equity or capital financing transactions); any statements concerning product research, development and commercialization timelines; any statements of expectation or belief; and any statements of
assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include risks that are described in Item 1A "Risk
Factors" in this annual report and that are otherwise described from time to time in our Securities and Exchange Commission reports filed after this report.

The forward-looking statements included in this annual report represent our estimates as of the date of this annual report. We specifically disclaim any
obligation to update these forward-looking statements in the future. These forward-looking statements should not be relied upon as representing our estimates or views as of any date subsequent to the
date of this annual report. In this annual report on Form 10-K, "we", "our" and "us" refer to Advanced Life Sciences Holdings, Inc. and its subsidiary, Advanced Life
Sciences, Inc., included in the consolidated financial statements, except as otherwise indicated or as the context otherwise requires.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel drugs in the areas of
infectious disease, oncology and respiratory disease. Using our internal discovery capabilities and our network of pharmaceutical and academic partners, we have assembled a promising pipeline of
clinical and preclinical product candidates. The following is a summary of each of our primary programs:



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In
addition to the compounds summarized above, we have additional product candidates in preclinical development coming from our natural products-based chemistry platform. We have not
received FDA approval for any of our product candidates. Our revenues to date have consisted solely of management fees, one-time or limited payments associated with our collaborations and
government grant awards. Our cumulative net loss was $140.9 million as of December 31, 2010, and we do not anticipate generating any revenue from the sale of cethromycin in the near
term. If we secure commercial partnerships, milestones received as a result of any of our commercial partnership agreements could be recognized as revenue depending on the underlying nature of the
milestones. Since our inception in 1999, we have financed our operations primarily through public and private equity offerings, loans from our founder, borrowings under our bank line of credit, and
proceeds from sales of our common stock under Standby Equity Distribution Agreements. We will continue to do so until we are able to generate revenues from our product candidates, if ever.

At
present, our liabilities are significantly greater than our assets, and we are in default of our line of credit agreement. Due to the default on our line of credit arrangement, it is
possible, depending on the nature of any actions our lender would take, that we may need to file for bankruptcy. As a result of our current financial situation and the uncertainty in our ability to
obtain needed financing through
equity offerings, commercial partnerships and grant awards or other means, there is substantial doubt about our ability to continue as a going concern. In further recognition of our current financial
situation, in January 2011, we publicly announced that with the oversight of our Board of Directors we intend to evaluate strategic alternatives, including a possible sale of the Company.

On
March 17, 2011, our Board of Directors authorized and approved a 1-for-30 reverse stock split. Our shares are not yet trading on a
post-split basis and the expected effective date of the reverse stock split is March 28, 2011, subsequent to the issuance of our 2010 financial statements. Pro forma weighted
average shares outstanding and earnings per share calculations have been included on the face of our consolidated statements of operations reflecting the post-split effect of the pending
reverse stock split. All other share information including shares issued and outstanding has been presented on a pre-split basis.

Our Background

In June 1999, MediChem Life Sciences ("MediChem"), our former parent, exchanged its investment in 100% of the outstanding common stock
of Advanced Life Sciences, Inc. ("ALS Inc.") for nonvoting preferred stock issued by ALS Inc. affecting a spin-off of ALS Inc. Prior to the
spin-off, Dr. Michael Flavin, the sole stockholder, owned 100% of MediChem and ALS Inc., then a wholly-owned subsidiary of MediChem. As a result of the spin-off,
Dr. Flavin became the sole common stockholder of ALS Inc. MediChem holds 100% of the preferred stock of our subsidiary, ALS Inc., which was issued in exchange for common stock
held at the June 1999 spin-off. In 2004, Advanced Life Sciences Holdings, Inc. ("ADLS") was created as part of a recapitalization, and ALS, Inc. became a subsidiary of ADLS.
ADLS has no preferred shares outstanding as of December 31, 2010.

In
August 2005, we completed the initial public offering of common stock in which we sold 6,400,000 shares of common stock to the public at $5.00 per share, resulting in gross proceeds
of $32.0 million. We also completed a concurrent offering of 600,000 shares to Abbott in exchange for a $3.0 million reduction of a milestone payment obligation under our license
agreement with Abbott. In September 2005, our underwriters exercised their option to purchase 100,000 shares to cover over-allotments resulting in additional gross proceeds of $500,000. In
connection with these offerings, we paid approximately $2.3 million in underwriting discounts and incurred other offering expenses of approximately $1.5 million. The net cash proceeds
from the offerings were approximately $28.7 million.

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In
March 2006, we raised approximately $33.4 million, net of underwriting discounts and offering expenses, in connection with the issuance of 10,233,464 shares of our common stock
and warrants to purchase an additional 5,116,732 shares of its common stock at an exercise price of $3.81 per share.

In
December 2006, we completed the sale of ALS Inc's 50% equity interest in Sarawak MediChem Pharmaceuticals ("SMP") to the Sarawak Government for $1.0 million. Upon the closing
of the Stock Purchase Agreement, the Sarawak Government became the sole owner of SMP and its HIV-therapeutic candidate, Calanolide A. The net cash proceeds from the sale were approximately
$940,000. In connection with the sale, we made customary representations and warranties and provided indemnification for losses not to exceed the purchase price of $1.0 million. The parties
mutually agreed to waive any future legal claims otherwise arising out of the SMP joint venture.

In
December 2007, we raised approximately $17.9 million, net of underwriting discounts and offering expenses, in connection with the issuance of 10,191,083 shares of our common
stock and warrants to purchase an additional 5,095,542 shares of our common stock at an exercise price of $2.15 per share.

In
September 2008, in connection with our entry into a development and commercialization agreement, we entered into a stock purchase agreement with Wyeth (Wyeth was subsequently acquired
by Pfizer and as a result will be referred to as "Pfizer" throughout this report). Under the terms of agreement, Pfizer made an up-front investment in ADLS by purchasing 1,888,606 shares
of its common stock at a price of $0.908 per share for approximately $1.7 million, net of offering expenses, representing approximately 4.9% of our total then outstanding shares. In August 2010
the development and commercialization agreement was terminated by mutual agreement among the parties.

In
September 2008, we entered into a Standby Equity Distribution Agreement (the "2008 SEDA") with YA Global Investments, L.P. ("YA Global"), an affiliate of Yorkville Advisors,
for the sale of up to $15.0 million of shares of our common stock over a two-year commitment period. For the period of January 2009 through the end of the 2008 SEDA, we issued
9,883,994 shares to YA Global and received approximately $3.9 million. In addition, in September 2008, we paid YA Global a commitment fee of $300,000 by issuing 393,339 shares of our common
stock. The Company and YA Global agreed to terminate the 2008 SEDA in June 2009.

In
June 2009, after terminating the 2008 SEDA, we entered into a new Standby Equity Distribution Agreement (the "2009 SEDA") with YA Global Master SPV Ltd. ("YA Master"), also an
affiliate of Yorkville Advisors, for the sale of up to $15.0 million of shares of our common stock over a two-year commitment period. For the period from June 2009 through
March 10, 2010, we issued 49,549,200 shares to YA Master and received proceeds of approximately $11.7 million. Shares of common stock sold under the 2009 SEDA in excess of
$9.0 million were sold with the consent of our lender under our credit facility. In March 2010, the Company and YA Master agreed to terminate the 2009 SEDA.

In
July 2010, we closed a registered public offering of units. As part of the closing, we issued 379,188 units at a public offering price of $4.20 per unit, raising approximately
$1.6 million in gross offering proceeds and approximately $1.0 million in net proceeds after deducting placement agent fees and offering expenses payable by us. Each unit sold in the
offering consisted of (i) 100 shares of our common stock, (ii) 100 stock warrants to purchase shares of common stock at an exercise price of $0.042 per share and (iii) one warrant
to purchase an additional unit, consisting of 100 shares of common stock and 100 stock warrants, at an exercise price of $4.20 per additional unit. The stock warrants may be exercised at any time
during the period commencing six months after the closing date and ending on the fifth anniversary of the closing date. The exercise period for the unit warrants has expired. Prior to expiration, we
issued 36,196,800 shares of common stock and 36,196,800 additional stock warrants through the exercise of unit warrants and received an additional $1.5 million in gross proceeds as a result of
these exercises. Dawson James Securities, Inc. ("Dawson James") acted as the

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placement
agent for the offering. In addition to cash placement agent fees, we issued to Dawson James a compensation warrant to purchase 1,516,752 shares of common stock at an exercise price of
$0.0672 per share.

In
July 2010, acting through the independent audit committee of our Board of Directors, we entered into an agreement with Dr. Flavin, our Chief Executive Officer, providing that
our $2.0 million promissory note with Dr. Flavin would be exchanged for 47,619,047 shares of our common stock. The price of $0.042 per share used in the exchange was the same price per
share used in our July 2010 public equity offering. As a result of the exchange, the promissory note was cancelled and retired.

In
September 2010, we entered into a new Standby Equity Distribution Agreement (the "2010 SEDA") with YA Master for the sale of up to $10.0 million of shares of our common stock
over a two-year commitment period. Under the terms of the 2010 SEDA, between October 2010 and January 2011, we sold 52,133,074 shares of our common stock to YA Master at a discount to the
current market price of 5% and received proceeds of approximately $1.1 million. Additionally, we paid to YA Master a commitment fee of $100,000 by issuing 1,984,127 shares of our common stock.
In January 2011, the Company and YA Master agreed to terminate the 2010 SEDA.

In
January 2011, we entered into an Investment Agreement with Dutchess Opportunity Fund, II, LP. ("Dutchess") for the sale of up to $5.0 million of shares of our
common stock over a period of two years. Under the terms of the Investment Agreement, we may sell from time to time, in our discretion, newly-issued shares of our common stock to Dutchess at a
discount to the current market price of 5%. Additionally, we paid to Dutchess a commitment fee of $50,000 by issuing 2,475,248 shares of our common stock. We also have an effective registration
statement on file with the Securities and Exchange Commission ("SEC") for the purchase and sale of up to 72,162,601 shares, with respect to common stock issuable under the agreement with Dutchess.
Through March 23, 2011 we have issued 47,403,618 shares to Dutchess, including the shares issued as a commitment fee, and received proceeds of approximately $0.7 million. Based on the last reported
share price of our common stock on March 21, 2011, we would be able to raise approximately an additional $0.3 million through the use of the Dutchess Agreement.

Our Strategy

Our objective is to become a fully integrated pharmaceutical company that discovers and develops small molecule therapeutics to treat
life-threatening diseases in the areas of infectious disease, oncology and respiratory disease, and then market these products directly to healthcare providers including, but not limited
to, physicians and hospitals. We plan to sustain our drug development pipeline through our internal drug discovery capabilities and by opportunistically in-licensing promising compounds
that fit into our areas of focus. Specific key aspects of our strategy include the following:



We currently intend to focus a significant portion of our business efforts on the regulatory approval and commercialization of
cethromycin for the treatment of CABP. This includes a plan to evaluate strategic alternatives, including a possible sale of the Company, with the goal of maximizing shareholder value. Human clinical
trials have been performed to determine the safety and efficacy of cethromycin in approximately 5,600 human subjects. In November 2007, we completed our pivotal Phase III clinical trials for
the treatment of mild-to-moderate CABP using a 300 mg once-daily dosing regimen. In September 2008 we submitted an NDA for the use of cethromycin in
mild-to-moderate CABP. In June 2009, the FDA AIDAC reviewed the cethromycin NDA. The AIDAC voted that cethromycin demonstrated safety for the outpatient treatment of adults
with mild-to-moderate CABP, but voted that cethromycin did not demonstrate efficacy in the treatment of CABP. The committee's negative vote on the drug candidate's efficacy
followed a discussion that the cethromycin NDA included data on patients with mild-to-moderate disease and that the new draft guidance for developing

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treatments
for CABP, released in March 2009, requires the enrollment of more severe CABP patients for approval in the outpatient CABP indication. Our pivotal Phase III program included in the
NDA was designed and conducted under prior FDA guidance and before the new draft guidance was released. In July 2009, we received a complete response letter from the FDA regarding cethromycin NDA for
the outpatient treatment of adults with CABP. In its letter, the FDA indicated that they cannot approve the application for cethromycin in its current form and that, to gain approval, additional
clinical data is required to demonstrate efficacy with defined statistical methodology. In March 2010, we met with officials from the FDA's Anti-Infectives Division to gain clarity on the
registration pathway for cethromycin and in the meeting, the FDA guided that, to assess the approvability for cethromycin to treat CABP, we should establish a SPA using a superiority clinical trial
design comparing cethromycin to a marketed macrolide antibiotic in two clinical trials. In light of this
guidance, we worked with the FDA to finalize a SPA using a superiority design for the outpatient CABP indication and in August 2010 we reached an agreement with the FDA, under the SPA process, on the
design of our planned Phase III study of cethromycin to treat CABP. The trial is the first prospectively designed superiority study to be conducted in CABP.



Along with our clinical work in the treatment of CABP, we are collaborating with several groups within the U.S. Government to evaluate
cethromycin's potential in preventing inhalation anthrax and other high-priority bioterror agents. In March 2010, we announced that we received notice from the BARDA of the U.S. Department
of Health and Human Services that it has completed its initial technical evaluation of our funding proposal for advanced development of cethromycin as a biodefense countermeasure and identified it as
a scientifically and technically sound proposal important to program goals and objectives that may require further development and may be recommended for acceptance subject to funds availability. We
were invited to submit additional information to allow BARDA to make a final determination on the appropriateness of the proposal to enter into contract negotiations. We are engaged in ongoing
discussions with BARDA in light of recent amendments to the Broad Agency Announcement that would fund the development of cethromycin, if awarded. Related to this development, we also gained clarity
from the FDA on the biodefense regulatory package required for submission in light of recent AIDAC meetings discussing the use of the FDA's Animal Rule for approval of biodefense therapeutics. As
anticipated, the FDA recommended that, in parallel with pivotal animal studies demonstrating efficacy under FDA's Animal Rule, we should complete the CABP clinical program and gain market approval to
the CABP NDA prior to submitting an amended NDA for the biodefense indications. In November 2010, we announced that we submitted a full proposal to NIAID. The proposal requests $38 million over
5 years for the development of an IV formulation of our novel antibiotic, cethromycin to therapeutically treat anthrax, tularemia and plague. In addition, the proposal includes
pre-clinical development as well as funding for four Phase 1 clinical trials and a Phase 2 clinical trial to evaluate the safety and efficacy of IV cethromycin in patients
hospitalized with moderate-to-severe CABP.



While the development of cethromycin remains our highest priority, we intend to leverage our existing clinical trial experience to
advance product candidates in our oncology and respiratory disease programs through clinical trials. For instance, to develop ALS-357 for the treatment of malignant melanoma, we initiated
a Phase I/II clinical trial with a topical formulation to test safety and provide preliminary data regarding efficacy. We also plan to develop a systemic formulation of ALS-357 and
initiate related clinical trials. To advance ALS-886 for the treatment of inflammation-related tissue damage, we plan to
conduct Phase I clinical trials that test safety and provide preliminary data regarding efficacy in preventing lung tissue damage in ARDS patients.

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We intend to expand our product portfolio by exploiting and enhancing our internal drug discovery and development capabilities using
our integrated chemistry and biology skills. We plan to continue utilizing our integrated chemistry and biology drug discovery platform to design, optimize and evaluate high-potential
product candidates.



We plan to continue developing relationships with key pharmaceutical and biotechnology companies, governmental institutions and
academic laboratories in order to in-license promising compounds that are not core to their strategy but fit closely with our corporate strengths. We also intend to identify
co-development partners for the out-licensing of certain product candidates. Further, we may choose to establish collaborative partnerships through which certain of our
clinical candidates can be marketed and commercialized.



For situations in which a large sales force is required to access the market, and for markets outside the United States, we generally
plan to commercialize our product candidates through a variety of collaboration arrangements with leading pharmaceutical companies and contract sales organizations. We will consider retaining U.S.
marketing and sales rights or co-promotion rights for certain of our products that we believe can be marketed through a focused sales force targeting specialists and high patient volume
physicians.

Our Lead Program

In December 2004, Abbott Laboratories granted us an exclusive worldwide license, except in Japan, to commercialize cethromycin, our
most advanced product candidate. Cethromycin is a second generation once-a-day oral antibiotic from the ketolide-class used in the treatment of respiratory tract infections.
Over the last decade, the rapid rise in severe and fatal infections caused by antibiotic-resistant bacteria has posed a serious threat to public health. There is a need to discover new antibiotics
that are effective against resistant bacteria. As a new class of antibiotics, ketolides have shown activity against penicillin- and macrolide-resistant Gram-positive pathogens. Cethromycin
has demonstrated activity toward drug-resistantStreptococcus pneumoniaeandHaemophilus
influenzae,two of the pathogens commonly found in CABP, when compared to the published data on antibiotics currently on the market. Cethromycin has also shown in vitroevidence
of an extended post-antibiotic effect, meaning that the suppression of bacterial growth persists in the absence of
measurable antibiotic concentration.

In
December 2005, we initiated our pivotal Phase III clinical program for the treatment of mild-to-moderate CABP, which enrolled a total of 1,106 patients
and were successfully completed in 2007. Cethromycin reported per protocol clinical cure rates of 94.0% in trial CL05-001 (comparator, Biaxin, was 93.8%) and 91.5% in trial
CL06-001 (comparator, Biaxin, was 95.9%). In February 2008, we announced that both the therapeutic and supratherapeutic doses of cethromycin showed no signal of any electrocardiographic
effects and hence supported its favorable cardiac safety profile, the results from a thorough QT study of cethromycin (trial CL07-001). In September 2008, we submitted a NDA for the use of
cethromycin in outpatient CABP. In June 2009, the FDA AIDAC reviewed the cethromycin NDA and voted that cethromycin demonstrated safety for the outpatient treatment of adults with
mild-to-moderate CABP but did not demonstrate efficacy in the treatment of CABP due to release of the new FDA draft guidance for developing treatments for CABP in March 2009,
which requires the enrollment of more severe CABP patients for approval in the outpatient CABP indication. In July 2009, we received a complete response letter from the FDA, stating that cethromycin
NDA cannot be approved in its current form and that, to gain approval, additional clinical data is required to demonstrate efficacy. In August 2010 we reached an agreement with the FDA, under the SPA
process, on the design of our planned Phase III study of cethromycin to treat CABP. The trial, if and when initiated, will be the first prospectively designed superiority study to be conducted
in CABP.

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

Antibiotic
resistance is widely considered a significant threat to public health, and the problem continues to worsen. The Centers for Disease Control continues to report on new strains
of bacteria that are resistant to one or more antibiotics currently on the market. The increasing prevalence of drug-resistant bacteria has led to prolonged illnesses and hospitalizations,
increased healthcare costs and significantly higher mortality rates. As a result, there is a strong demand for new treatments that are more effective against resistant strains and do not show
potential for inducing the rapid development of additional resistant strains. We do not believe that this demand for new antibiotic
therapies is being met by large pharmaceutical companies because of a shift in research and development focus in these companies toward chronic conditions that require sustained medication over long
periods of time.

Respiratory
tract infections arise when bacterial infections develop in the inhalation passageway, including the nose, throat, sinuses and lungs. The four main types of respiratory tract
infections are pneumonia, bronchitis, pharyngitis and sinusitis. Many of these bacterial infections can be life threatening if not treated quickly. Bacterial pneumonia, which involves an infection of
the lung itself, is the most severe of the common respiratory tract infections. Pneumonia is often classified as CABP or hospital acquired pneumonia, depending upon the setting in which contraction of
the bacterial infection occurred. The Textbook of Primary and Acute Care Medicine estimates that, in the United States alone, there are approximately 5-6 million cases of
mild-to-moderate CABP each year.



Until recently, there have been three main classes of antibiotics prescribed for respiratory tract infections such as CABP. These are
semi-synthetic penicillins (also known as beta-lactams), such as Augmentin® (amoxicillin and clavulanate potassium) sold by GlaxoSmithKline; macrolides, such as
erythromycin or Zithromax® (azithromycin) sold by Pfizer; and fluoroquinolones, such as Cipro® (ciprofloxacin) sold by Bayer. Penicillins, macrolides and fluoroquinolones have
all been shown to have certain shortcomings with respect to the treatment of respiratory tract infections. Studies have shown that, in the United States, approximately 26% of Streptococcus pneumoniaeisolates, the most common pathogens that cause respiratory tract infections such as CABP, are resistant to macrolides. In
addition, numerous reports in the medical literature have noted the emergence of penicillin-resistant pneumococci. The wide use of fluoroquinolones increases the potential for development of bacterial
resistance, cross-resistance to the same or other classes of antibiotics as well as promotesClostridium difficileassociated disease ("CDAD"). Further,
in July 2008, the FDA requested manufacturers of fluoroquinolones to include a black box warning for tendon damage. In March 2009, Tygacil® (tigecycline), a tetracycline derivative sold by
Pfizer, was approved by the FDA for the in-patient treatment of community-acquired bacterial pneumonia. In addition, Zyvox® (linezolid), an oxazolidinone analogue sold by
Pfizer, is marked to treat nosocomial pneumonia.

Increased
bacterial resistance to many of the currently available antibiotics has been caused by certain common medical practices and sociological factors. By necessity, a wide variety
of antibiotics are often administered before the specific disease-causing pathogen has been identified. Bacterial resistance

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is
fostered through the erroneous prescription of antibiotics for non-bacterial infections. The lack of full patient compliance with prescribed courses of therapies has further contributed
to bacterial resistance against currently marketed antibiotics. Patients will frequently discontinue a prescribed dosing regimen after symptoms subside, but bacteria that are not entirely eradicated
may re-emerge in resistant forms.

ALS Solution

We are developing cethromycin, a second generation once-a-day oral antibiotic from the ketolide class, in
response to the emerging antibiotic resistance observed in the treatment of CABP. Prior to the initiation of our clinical trials, cethromycin had been tested by Abbott in approximately 4,400 human
subjects during clinical trials. As of November 2007, we successfully completed two pivotal Phase III clinical trials of cethromycin for the treatment of
mild-to-moderate CABP. We also intend to evaluate opportunities for cethromycin in the treatment of other types of bacterial infections.

Based
on publicly available data regarding current antibiotic compounds, we believe that there is a potential opportunity for further development of cethromycin in the treatment of
respiratory tract infections for a number of reasons:



We
believe that cethromycin, if approved, would address a growing need in the marketplace to overcome bacterial resistance.

Abbott Laboratories Collaboration

In December 2004, we entered into an agreement with Abbott Laboratories under which we acquired from Abbott a license to certain patent
applications, patents and proprietary technology

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relating
to cethromycin. The term of the agreement commenced on December 13, 2004 and continues until the expiration of the last patent licensed under the agreement, unless the agreement is
otherwise terminated. The primary patent licensed under the agreement, used by us in connection with cethromycin, expires in the U.S. on September 4, 2016, and in most foreign countries or
jurisdictions on September 2, 2017, all subject to any term restoration that may be granted for the time necessary for regulatory approval in each respective jurisdiction. Upon the expiration
of the license agreement, we maintain a non-exclusive, perpetual and irrevocable license to use Abbott's proprietary technology and other types of information directly related or used in
connection with cethromycin and its manufacture into pharmaceutical products without any further payment obligations to Abbott, except for those payment obligations accruing prior to such expiration.
The agreement may be terminated by either party on 30 days notice if the other party ceases its business operations or if the other party passes a resolution or a court of competent
jurisdiction makes an order for winding up its business. Either party may also terminate the agreement for material breach if not cured within 90 days of notice or if not cured within
30 days of notice if the breach relates to a payment provision. Finally, we have the right to sublicense our rights under the agreement at our discretion. Under the terms of the agreement we
paid $23.0 million to date in license fees and milestones and issued 1,722,569 shares of our common stock to Abbott.

As
previously disclosed in a Form 8-K filed with the SEC on March 30, 2009, we alleged in a notice of dispute delivered to Abbott Laboratories that Abbott had
breached its obligations under the license agreement for cethromycin entered into between ADLS and Abbott on December 13, 2004. Subsequent to delivering the notice of dispute, we initiated
arbitration proceedings against Abbott under the alternative dispute resolution provisions of the license agreement. On September 30, 2009, prior to the completion of arbitration proceedings,
ADLS and Abbott entered into a binding term sheet in settlement of the dispute. The binding term sheet provides for certain amendments to the license agreement. The license agreement was amended to
restructure the $30.0 million lump sum milestone payment due from ADLS to Abbott upon U.S. regulatory approval of cethromycin, such that $20.0 million is payable within twenty days of
U.S. regulatory approval, $5.0 million is payable within 6 months of U.S. regulatory approval and $5.0 million is payable within 12 months of U.S. regulatory approval. In
addition, the license agreement was amended to reduce the royalty due from ADLS to Abbott by two percentage points per tier such that we will owe Abbott royalty payments of 17% on the first
$100.0 million of aggregate net sales of cethromycin, 16% on net sales once aggregate net sales exceed $100.0 million but are less than $200.0 million, and 15% on all net sales
once aggregate net sales exceed $200.0 million. Finally, the terms to pay to Abbott $2.5 million upon cethromycin reaching $200.0 million in aggregate net sales and
$5.0 million upon the drug reaching $400.0 million in aggregate net sales was unchanged.

Other Collaborations and License Agreements

In addition to our collaborations with Abbott Laboratories, we have entered into a number of license agreements for intellectual
property and other rights needed to develop our products.

University of Illinois at Chicago ("UIC").In 1999, we acquired an exclusive worldwide license, under patent rights and know-how
controlled by UIC, to develop, make, use and sell ALS-357 and related compounds to treat melanoma and other forms of cancer. In consideration for this license, we paid an upfront license
fee of $15,000 upon the execution of the agreement. We are also obligated to make up to $135,000 in aggregate milestone payments upon the achievement of various development and commercialization
milestones for each of ALS-357 and any other compound developed by us under the licensed technology. To date, we have paid $10,000 in milestone payments which resulted from an IND for
ALS-357 filed with the FDA in December 2004. Under the terms of the agreement, we are obligated to reimburse UIC for past patent preparation, filing and prosecution expenses, and have
agreed to reimburse UIC for similar expenses related to foreign patents throughout the term of the

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agreement.
To date we have paid UIC approximately $538,000 for patent reimbursement. In addition, we agreed to pay royalties equal to 6% of net sales to UIC based on sales of licensed products by us,
our affiliates and sublicensees, as well as a percentage of all other income we receive from sublicensees, but in any event, a minimum royalty of $5,000 annually once commercial sales commence.

Baxter International.As part of our spin-off from MediChem Life Sciences in 1999, we obtained the entire right, title and interest to
certain patented inventions relating to ALS-886 that were assigned by Baxter International, Inc. to Dr. Michael T. Flavin. We have assumed the obligation of Dr. Flavin
to pay Baxter, as a payment for the assignment, 3% of net sales of ALS-886. Further, we are also obliged to share with Baxter 50% of the sublicensing fees we collect, other than royalties.
In addition, if we sell the ongoing business of making, using or selling ALS-886, we are obligated to pay Baxter 50% of the fair market value of the right or license to manufacture, use or
sell ALS-886 that is conveyed as part of the sale.

Intellectual Property



We have assembled a broad intellectual property ("IP") portfolio encompassing the use, methods of preparation and methods of
manufacture for our product candidates in the areas of infectious disease, oncology and respiratory disease. We currently have exclusive access to 42 issued U.S. and international patents. In
addition, 10 U.S. and international patent applications have been filed and are in various stages of processing.

Key U.S. Patents and Expiration Dates

Drug Candidate

U.S. Patent Number

Expiration DateCethromycin


5866549


9/4/2016ALS-357


5658947


8/19/2014ALS-886


5504111


4/2/2013


The
patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary position for our
technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We do not know whether any of our patent applications or those patent applications that we
license will result in the issuance of any patents. Our issued patents and those that we may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, which could
limit our ability to stop competitors from marketing related products or the length of term of patent protection that we may have for our products. In addition, there can be no assurance that this
patent coverage will be broad enough to prevent third parties from developing or commercializing similar or identical technologies and thus the rights granted under any issued patents may not provide
us with any meaningful competitive advantages against our competitors. Furthermore, because of the extensive time required for development, testing and regulatory review of a potential product, it is
possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of
the patent. There can also be no assurance that our technologies will not be deemed to infringe the IP rights of third parties or that we will be able to acquire licenses to the IP rights of third
parties under satisfactory terms or at all.

Competition

The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong
emphasis on proprietary products. We face competition from many different sources, including commercial pharmaceutical and biotechnology enterprises,

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academic
institutions, government agencies and private and public research institutions. We believe that our most significant competitors are Aventis, Pfizer, GlaxoSmithKline and Johnson &
Johnson.

Many
of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, clinical trials, regulatory
approvals and marketing approved products than we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and
established companies. Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects or are
less expensive than any products that we may develop. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites
and patient registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our programs or advantageous to our business.

We
rely upon our collaborators for support in advancing certain of our product candidates and intend to rely on our collaborators for the commercialization of these products. Our
collaborators may be conducting multiple product development efforts within the same disease areas that are the subjects of their agreements with us. Generally, our agreements with our collaborators
do not preclude them from pursuing development efforts using a different approach from that which is the subject of our agreement with them. Therefore, any of our product candidates may be subject to
competition with a product candidate under development by a collaborator.

There
are also a number of companies working to develop new drugs and other therapies for these diseases that are undergoing clinical trials. The key competitive factors affecting the
success of all of our product candidates are likely to be their efficacy, safety, price and convenience. See "Risk FactorsWe will face significant competition from other biotechnology and
pharmaceutical companies, and our operating results will suffer if we fail to compete effectively."

Government Regulation

Government authorities in the United States, at the federal, state and local level, and other countries extensively regulate, among
other things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution, marketing and export and import of pharmaceutical products such as those we are
developing. The process of obtaining regulatory approvals and the subsequent substantial compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure
of substantial time and financial resources.



In the United States, the FDA regulates and approves drugs under the Federal Food, Drug, and Cosmetic Act. If we fail to comply with
the applicable United States requirements at any time during the product development process, approval process or after approval, we may become subject to administrative or judicial sanctions. These
sanctions could include the FDA's refusal to approve pending applications, withdrawal of an approval, clinical holds, warning letters, product recalls, product seizures, total or partial suspension of
production or distribution, injunctions, fines, civil penalties or criminal prosecution. Any agency enforcement action could have a material adverse effect on us.

The
steps required before a drug may be marketed in the United States include:



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Preclinical
tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the preclinical
tests, together with manufacturing information and analytical data, to the FDA as part of the IND. The IND must become effective before human clinical trials may begin. An IND will automatically
become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions about issues such as the conduct of the trials as outlined in the IND. In that
case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. If these issues are unresolved, the FDA may not allow the clinical trials
to commence.

Clinical
trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators. Clinical trials are conducted under
protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the IND.

Clinical
trials typically are conducted in three sequential phases, but the phases may overlap or be combined. Each trial must be reviewed and approved by an independent Institutional
Review Board before it can begin. Phase I clinical trials usually involve the initial introduction of the investigational drug into humans to evaluate the product's safety, dosage tolerance and
pharmacodynamics and, if possible, to gain an early indication of its effectiveness.

Phase II
clinical trials usually involve controlled trials in a limited patient population to:



Phase III
clinical trials usually further evaluate clinical efficacy and test further for safety in an expanded patient population. Phase I, Phase II and
Phase III clinical trials may not be completed successfully within any specified period, if at all. Furthermore, the FDA or we may suspend or terminate clinical trials at any time on various
grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

Assuming
successful completion of the required clinical testing, the results of the preclinical studies and of the clinical studies, together with other detailed information, including
information on the manufacture and composition of the product, are submitted to the FDA in the form of an NDA requesting approval to market the product for one or more indications. The FDA reviews an
NDA to determine, among other things, whether a product is safe and effective for its intended use and has a favorable risk/benefit profile. In addition, FDA inspects selected clinical trial sites for
good clinical practice (GCP) compliance to ensure the clinical trial data quality and integrity.

Under
the Pediatric Research Equity Act of 2003 NDAs or supplements to NDAs must contain data to assess the safety and effectiveness of the drug for the claimed indications in all
relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which
the drug is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. In most cases, the NDA must be accompanied by a substantial user fee.

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Before
approving an application, the FDA will inspect the facility or the facilities where the product is manufactured. The FDA will not approve the product unless cGMP compliance is
considered satisfactory. The FDA will issue an approval letter if it determines that the application, manufacturing process and manufacturing facilities are acceptable. If the FDA determines the
application, manufacturing process or manufacturing facilities are not acceptable; it will outline the deficiencies in the submission and often will request additional testing or information.
Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

The
testing and approval process requires substantial time, effort and financial resources, and each may take several years to complete. The FDA may not grant approval on a timely basis,
or at all. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which could delay or preclude us from marketing our products. The FDA may
limit the indications for use or place other conditions on any approvals that could restrict the commercial application of the products. After approval, some types of changes to the approved product,
such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval.

After
regulatory approval of a product is obtained, we are required to comply with a number of post-approval requirements. For example, as a condition of approval of an
application, the FDA may require post-marketing testing and surveillance to monitor the product's safety or efficacy. In addition, holders of an approved NDA are required to report certain
adverse reactions and production problems to the FDA, to provide updated safety and efficacy information and to comply with requirements concerning advertising and promotional labeling for their
products. Also, quality control and manufacturing procedures must continue to conform to cGMP after approval. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP,
which imposes numerous procedural and documentation requirements. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain
compliance with cGMP and other regulations.

We
rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our product candidates. Future FDA inspections may identify
compliance issues at our facilities or at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct. In addition, discovery
of problems with a product, or the failure to comply with requirements, may result in restrictions on a product, manufacturer or holder of an approved NDA, including withdrawal or recall of the
product from the market or other voluntary or
FDA-initiated action that could delay further marketing. Newly discovered or developed safety or efficacy data may require changes to a product's approved labeling, including the addition
of new warnings and contraindications. Also, new government requirements may be established that could delay or prevent regulatory approval of our products under development.



The FDA's "Animal Efficacy Rule" allows for approval of new drug products based on animal data when adequate and
well-controlled efficacy studies in humans cannot be ethically conducted because the studies would involve administering a potentially lethal or permanently disabling toxic substance or
organism to healthy human volunteers. Approval of a drug under the "Animal Efficacy Rule" is subject to certain post-approval commitments, including the submission of a plan for conducting
post-marketing studies, post-marketing restrictions to ensure safe use (if deemed necessary), and product labeling information intended for patient advising that, among other
things, indicates the product's approval was based on efficacy studies conducted in animals alone.

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In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and
commercial sale and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign
countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that
required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

Under
European Union regulatory systems, we may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure, which is
compulsory for medicines produced by biotechnology and optional for those which are highly innovative, provides for the grant of a single marketing authorization that is valid for all European Union
member states. The decentralized procedure provides for mutual recognition of national approval decisions. Under this
procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each
member state must decide whether to recognize approval. If a member state does not recognize the marketing authorization, the disputed points are eventually referred to the European Commission, whose
decision is binding on all member states.

Pharmaceutical Pricing and Reimbursement

In both domestic and foreign markets, sales of any products for which we receive regulatory approval for commercial sale will depend in
part on the availability of reimbursement from third party payors. Third party payors include government health administrative authorities, managed care providers, private health insurers and other
organizations. These third party payors are increasingly challenging the price and examining the cost-effectiveness of medical products and services. In addition, significant uncertainty
exists as to the reimbursement status of newly approved healthcare product candidates. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the
cost-effectiveness of our products. Our product candidates may not be considered cost-effective. Adequate third party reimbursement may not be available to enable us to
maintain price levels sufficient to realize an appropriate return on our investment in product development.

Political,
economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental changes. There have been, and we expect there will continue to
be, a number of legislative and regulatory proposals and enactments to change the healthcare system in ways that could significantly affect our business, such as the Patient Protection and Affordable
Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 signed into law in March 2010. We anticipate that Congress, state legislatures and the private sector will continue to
consider and may adopt healthcare policies intended to curb rising healthcare costs. These cost containment measures include:



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We are unable to predict what additional legislation, regulations or policies, if any, relating to the healthcare industry or third-party coverage and reimbursement may be
enacted in the future or what effect such legislation, regulations or policies would have on our business. Any cost containment measures, including those listed above, or other healthcare system
reforms that are adopted could have a material adverse effect on our ability to operate profitably.

Employees

We currently employ 16 people of which there are 5 in research and 11 in administration. Our employees are not represented by any
collective bargaining agreements and we believe our employee relations are good.

On
February 25, 2011, we announced that our Chief Executive Officer informed its employees that as a measure to help address its liquidity issues, it had implemented a
company-wide compensation reduction plan that would reduce salaries of impacted employees by 30%-50%. Included in this reduction were all of our officers with whom we have
entered into employment agreements. In connection with this cost-savings plan, we also announced the departure of Dr. David Eiznhamer, Executive Vice President of Clinical Affairs.
We are
not aware of any disagreement between us and Dr. Eiznhamer relating to our operations, policies or practices.

Available Information

Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 are available free of charge through
our website (www.advancedlifesciences.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington DC 20549.

Item 1A.Risk Factors.

Our business, financial condition, operating results and cash flows may be impacted by a number of factors. In
addition to the factors affecting specific business operations identified in connection with the description of these operations and the financial results of these operations elsewhere in this Report,
the most significant factors affecting our operations include the following:

Risks Related to Our Industry and Business

We may not be able to continue as a going concern or fund our existing capital needs.

Our independent registered public accounting firm included an explanatory paragraph in the report on our 2010 financial statements
related to the uncertainty in our ability to continue as a going concern. The paragraph stated that we are in default on our line of credit, do not have sufficient cash on-hand or other
funding available to meet our obligations and sustain our operations, which raises substantial doubt about our ability to continue as a
going concern. We will not be generating any product-based revenues or realizing cash flows from operations in the near term, if at all. We may not have sufficient cash or other funding available to
complete our anticipated business activities for the remainder of 2011. In further recognition of our current financial situation, on January 3, 2011, we publicly announced that with the
oversight of our Board of Directors we intend to evaluate strategic alternatives, including a possible sale of the company. In order to address our working capital shortfall we intend to raise
additional capital by accessing the capital markets. There can be no assurances that we will be successful in accessing the capital markets on terms acceptable to us, if at all.

In
order to provide access to needed capital, we executed an Investment Agreement that allows us to sell shares of our common stock to an accredited investor, Dutchess, subject to
certain terms and conditions. Any shares of our common stock that we sell pursuant to the Investment Agreement will

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have
a dilutive impact on our stockholders. The Investment Agreement terms do not restrict Dutchess's ability to re-sell the shares we issue to them, and such re-sales could
cause the market price of our common stock to decline significantly with advances under the Investment Agreement. To the extent of any such decline, any subsequent advances would require us to issue a
greater number of shares of common stock to Dutchess in exchange for each dollar of the advance. Under these circumstances our existing stockholders would experience greater dilution. The sale of our
common stock under the Investment Agreement could encourage short sales by third parties, which could contribute to the further decline of our stock price. Through March 23, 2011 we have issued
47,403,618 shares to Dutchess, including 2,475,248 shares as a commitment fee, and received proceeds of approximately $0.7 million. Based on the last reported share price of our common stock on
March 21, 2011, we would be able to raise approximately an additional $0.3 million through the use of the Dutchess Agreement.

There
can be no assurance that we will be able to obtain adequate capital funding in the future, under the Investment Agreement or otherwise, to continue operations and implement our
strategy. As a result of these uncertainties, there is significant doubt about our ability to continue as a going concern.

We are a development stage company and may never attain product sales.

We have not received approval for any of our product candidates from the FDA. Any compounds that we discover or in-license
will require extensive and costly development, preclinical testing and/or clinical trials prior to seeking regulatory approval for commercial sales. Our most advanced product candidate, cethromycin,
and any other compounds we discover, develop or in-license, may never be approved for commercial sale. The time required to attain product sales and profitability is lengthy and highly
uncertain, and we cannot assure you that we will be able to achieve or maintain product sales. We expect our net operating losses to continue for at least several years, and we are unable to predict
the extent of future losses or when we will become profitable, if ever.

We
have incurred significant net losses since our formation in 1999. For the fiscal years ended December 31, 2009 and December 31, 2010, our net losses were
$9.2 million and $9.3 million, respectively, our total accumulated deficits were $131.6 million and $140.9 million, respectively, and our cash flows from operating
activities were $(6.4 million) and $(11.9 million), respectively. Our net losses are due in large part to the significant research and development costs required to identify, validate
and license potential product candidates, conduct preclinical studies and conduct clinical trials of our more advanced product candidates. To date, we have generated only limited revenues, consisting
of management fees, one-time or limited payments associated with our collaborations and government grant awards, and we do not anticipate generating any significant revenues in the near
term, if ever. Our operating expenses may increase over the next several years if we:



As
a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with our
research and product development efforts, we are unable to predict the extent of any future losses or when we will become profitable, if ever. Even if we do achieve profitability, we may not be able
to sustain or increase profitability on an ongoing basis.

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We will require additional funding to satisfy our future capital needs, and future financing strategies may further dilute or otherwise adversely affect holders of our
common stock.

Our operations will require significant additional funding due to the absence of any meaningful revenues in the near future. We do not
know whether additional financing will be available to us on favorable terms or at all. At our 2010 annual meeting of stockholders, our stockholders approved a significant increase in the number of
shares of common stock that we may issue under our certificate of incorporation. Since the time of this increase in our authorized shares of common stock, we have issued approximately
175.6 million shares of common stock in connection with a registered offering and under prior arrangements similar to the Investment Agreement, principally to fund working capital. To the
extent we are successful in raising additional capital by issuing equity securities, including through the issuance of common stock under the Investment Agreement, our stockholders are likely to
experience substantial further dilution. Any additional equity securities we issue may have rights, preferences or privileges senior to those of existing holders of stock. To the extent that we raise
additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not
favorable to us. There can be no assurance that we will be able to obtain adequate capital funding in the future to continue operations and implement our strategy. In further recognition of our
current financial situation, on January 3, 2011, we publicly announced that with the oversight of our Board of Directors we intend to evaluate strategic alternatives, including a possible sale
of the company. As a result of these uncertainties, there is substantial doubt about our ability to continue as a going concern.

We will not be able to commercialize our drug candidates if our clinical trials do not demonstrate safety and efficacy.

Before obtaining regulatory approval for the sale of our drug candidates, we must conduct extensive development and clinical trials to
demonstrate the safety and efficacy of our drug candidates and clinical or animal trials to demonstrate the efficacy of our drug candidates. Clinical testing is expensive, difficult to design and
implement, can take many years to complete and is uncertain as to outcome.

A
failure of one or more of our clinical trials or animal efficacy studies can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of
clinical trials or animal efficacy studies that could delay or prevent our ability to receive regulatory approval or commercialize our drug candidates, including:



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Our business would be materially harmed if we fail to obtain FDA approval of a new drug application for cethromycin.

Our ability to generate any significant product revenues in the near future will depend solely on the successful development and
commercialization of cethromycin, our most advanced product candidate. The FDA may not approve in a timely manner, or at all, any NDA that we submit. If any NDA we submit is not approved by the FDA,
we will be unable to commercialize that product in the United States and our business will be materially harmed. In June 2010, as part of the testimony for a hearing of the U.S. Congress Committee on
Energy and Commerce, Subcommittee on Health, our Chief Executive Officer commented on the challenges that we and other innovator companies have faced in the clinical development and regulatory
approval of new antibiotics to improve public health. The FDA can and does reject NDAs, and often requires additional clinical trials, even when product candidates performed well or achieved favorable
results in large-scale Phase III clinical trials. The FDA imposes substantial requirements on the introduction of pharmaceutical products through lengthy and detailed laboratory and clinical
testing procedures, sampling activities and other costly and time-consuming procedures. Satisfaction of these requirements typically takes several years and may vary substantially based
upon the type and complexity of the pharmaceutical product. A number of our product candidates are novel compounds, which may further increase the period of time required for satisfactory testing
procedures.

In
July 2009, we received a complete response letter from the FDA regarding the NDA for cethromycin for the outpatient treatment of adults with CABP. In its letter, the FDA indicated
that they cannot approve the application for cethromycin in its current form and that, to gain approval, additional clinical data is required to demonstrate efficacy. In August 2010, we reached an
agreement with the FDA, under the SPA process, on the design of our planned Phase III study of cethromycin to treat CABP. The cost to complete the SPA is significant. In order to advance the
CABP program, we are seeking a commercial partner to assist in the funding of the program.

Because we are heavily dependent on our license agreement with Abbott Laboratories and our collaborations with other third parties, our product development programs may be
delayed or terminated by factors beyond our control.

In December 2004, we entered into a license agreement with Abbott Laboratories for certain patent applications, patents and proprietary
technology relating to cethromycin. We have also entered into a number of license agreements for intellectual property and other rights needed to develop our product candidates that are in earlier
stages of development. Our primary collaborators other than Abbott Laboratories include the University of Illinois at Chicago and Baxter International. A description of our agreements with
collaborators can be found under the headings "BusinessAbbott Laboratories Collaboration" and "BusinessOther Collaborations and License Agreements." Our collaborations
generally present additional risks to our business, such as the risk that our collaborators encounter conflicts of interest to their arrangements with us, inadequately defend our intellectual property
rights or develop other products that compete with us. Our ability to generate any significant product revenues in the near future will depend solely on the successful commercialization of
cethromycin. If for any reason we are unable to realize the expected benefits of our license agreement with Abbott Laboratories, or under any of our other collaborations, then our business and
financial condition may be materially harmed.

Our collaborators and third party manufacturers may not be able to manufacture our product candidates, which would prevent us from commercializing our product candidates.

To date, each of our product candidates has been manufactured by our collaborators and third party manufacturers for preclinical and
clinical trials. If any of our product candidates is approved by the FDA or other regulatory agencies for commercial sale, we will need third parties to manufacture the product in larger quantities.
Due to factors beyond our control, our collaborators and third party

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manufacturers
may not be able to increase their manufacturing capacity for any of our product candidates in a timely or economic manner, or at all. Significant scale-up of manufacturing
may require additional validation studies, which the FDA must review and approve. If we are unable to increase the manufacturing capacity for a product candidate successfully, the regulatory approval
or commercial launch of that product candidate may be delayed or there may be a shortage in the supply of the product candidate. Our product candidates require precise, high-quality
manufacturing. The failure of our collaborators and third party manufacturers to achieve and maintain these high manufacturing standards, including the incidence of manufacturing errors, could result
in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously harm our business.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market any products we may develop, we may be unable
to generate revenues.

We do not currently have product sales and marketing capabilities. If we receive regulatory approval to commence commercial sales of
any of our product candidates, we will have to establish a sales and marketing organization with appropriate technical expertise and distribution capabilities or make arrangements with third parties
to perform these services in other jurisdictions. If we receive approval to commercialize cethromycin for the treatment of CABP, we intend to engage additional pharmaceutical or health care companies
with existing distribution systems and direct sales organizations to assist us in North America and abroad. We may not be able to negotiate favorable distribution partnering arrangements, if at all,
and to the extent we enter co-promotion or other licensing arrangements, any revenues we receive will depend on the efforts of third parties and will not be under our control. If we are
unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, our ability to generate product revenues, and become profitable, would be
severely limited.

Our
ability to generate any significant revenues in the near-term is dependent entirely on the successful commercialization and market acceptance of cethromycin. Factors that
may inhibit our efforts to commercialize cethromycin or other product candidates without strategic partners or licensees include:



Our most advanced product candidate, cethromycin, will face significant competition in the marketplace if it receives marketing approval from the FDA.

Our pivotal Phase III clinical trials for cethromycin were limited to the treatment of mild-to-moderate
CABP. We also intend to pursue opportunities for cethromycin in the treatment of other types of bacterial infections. There are several classes of antibiotics that are primary competitors for the
treatment of one or more of these indications, including:



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Cethromycin
may show evidence of side effects that could diminish its prospects for commercialization and wide market acceptance. If cethromycin is approved by the FDA, it will not be
the first ketolide antibiotic introduced to the marketplace. Ketek® has been available for sale in Europe since 2002 and in the United States since August 2004. There are additional
ketolide product candidates in preclinical development or in clinical development. If ultimately approved by the FDA, these product candidates may have improved efficacy, ease of administration or
more favorable side effect profiles when compared to cethromycin. The availability of additional ketolide antibiotics may have an adverse affect on our ability to generate product revenues and achieve
profitability.

Our inability to expand cethromycin into other indications would harm our ability to generate additional revenues in the future.

Abbott Laboratories conducted four pivotal Phase III comparator trials for cethromycin in treating bronchitis and pharyngitis at
a dosing level of 150 mg once-daily. Each of these trials failed to establish non-inferiority against comparator antibiotics. While we believe that the negative outcomes of the
Abbott Laboratories comparator trials were related to dosing levels, we may be incorrect. The failure to meet primary endpoints in the Abbott Laboratories trials may not have been dose related, but
rather a result of the compound's lack of sufficient clinical efficacy. Clinical trials using a 300 mg once-daily regimen are also likely to increase the occurrence of adverse side
effects. Even if we receive FDA approval to market cethromycin for the treatment of CABP, our failure to expand cethromycin into other indications would harm our ability to generate additional
revenues in the future.

The availability of generic equivalents may adversely affect our ability to generate product revenues from cethromycin.

Many generic antibiotics are currently prescribed to treat respiratory tract infections. As competitive products lose patent
protection, makers of generic drugs will likely begin to market additional competing products. Companies that produce generic equivalents are generally able to offer their products at lower prices.
Ketek® may lose patent protection as early as 2015, which would enable generic drug manufacturers to sell generic ketolide antibiotics at a lower cost than cethromycin. Generic equivalents
of Biaxin® and Zithromax®, two
macrolide antibiotic products, are currently available. Cethromycin, if approved for commercial sale, may be at a competitive disadvantage because of its higher cost relative to generic products. This
may have an adverse effect on our ability to generate product revenues from cethromycin.

Even if we successfully develop and obtain approval for cethromycin or any of our other product candidates, our business will not be profitable if those products do not
achieve and maintain market acceptance.

Even if any of our product candidates are approved for commercial sale by the FDA or other regulatory authorities, the degree of market
acceptance of any approved product candidate by physicians, healthcare professionals, patients and third-party payors, and our resulting profitability and growth, will depend on a number of factors,
including:



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If
any of our product candidates achieve market acceptance, we may not be able to maintain that market acceptance over time if new products or technologies are introduced that are
received more favorably or are more cost effective. Complications may also arise, such as antibiotic or viral resistance, that render our products obsolete. We rely on the favorable resistance profile
of cethromycin observed to be a potential competitive distinction from currently marketed compounds. Even if we receive FDA approval to market cethromycin, resistance may emerge that will
substantially harm our ability to generate revenues from its sale.

We
are initially seeking FDA approval for cethromycin as a seven-day treatment regimen. There are currently a number of antibiotic products that are marketed as
five-day therapies. In the event that the marketplace considers this to be a significant competitive distinction, it is uncertain whether we will be able to make cethromycin available for
a lower dosing period. In addition, we expect that cethromycin, if approved for sale, would be used primarily in the outpatient setting.

Because the results of preclinical studies for our preclinical product candidates are not necessarily predictive of future results, our product candidates may not have
favorable results in later clinical trials or ultimately receive regulatory approval.

Only one product candidate in our development pipeline, cethromycin, has been tested in clinical trials. Our other product candidates
have only been through preclinical studies. Positive results from preclinical studies, particularly in vitro studies, are no assurance that later clinical trials will succeed. Preclinical trials are
not designed to establish the clinical efficacy of our preclinical product candidates. We will be required to demonstrate through clinical trials that these product candidates are safe and effective
for use before we can seek regulatory approvals for their commercial sale. There is typically an extremely high rate of failure as product candidates proceed through clinical trials. If our product
candidates fail to demonstrate sufficient safety and efficacy in any clinical trial, we would experience potentially significant delays in, or be required to abandon, development of that product
candidate. This would adversely affect our ability to generate revenues and may damage our reputation in the industry and in the investment community.

The future clinical testing of our product candidates could be delayed, resulting in increased costs to us and a delay in our ability to generate revenues.

Our product candidates will require preclinical testing and extensive clinical trials prior to submitting a regulatory application for
commercial sales. We do not know whether clinical trials will begin on time, if at all. Delays in the commencement of clinical testing could significantly increase our product development costs and
delay product commercialization. In addition, many of the factors that may cause, or lead to, a delay in the commencement of clinical trials may also ultimately lead to denial of regulatory approval
of a product candidate. Each of these results would adversely affect our ability to generate revenues.

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



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In
addition, the commencement of clinical trials may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population,
the nature of the protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease, and the eligibility criteria for the clinical trial. If we
are unable to enroll a sufficient number of microbiologically evaluable patients, the clinical trials for our product candidates could be delayed until sufficient numbers are achieved.

If we fail to obtain regulatory approvals in other countries for our product candidates under development, we will not be able to generate revenues in such countries.

In order to market our products outside of the United States, we must comply with numerous and varying regulatory requirements of other
countries. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries
might differ from that required to obtain FDA approval in the United States. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining
regulatory approval in one country may negatively impact the regulatory process in others. The risks involved in the non-U.S. regulatory approval process, as well as the consequences for
failing to comply with applicable regulatory requirements, generally include the same considerations as in the United States. A description of U.S. regulatory considerations can be found under the
section entitled "Our business would be materially harmed if we fail to obtain FDA approval of a new drug application for cethromycin."

We will face significant competition from other biotechnology and pharmaceutical companies, and our operating results will suffer if we fail to compete effectively.

We are a development stage company with 16 employees. Most of our competitors, such as Pfizer, GlaxoSmithKline and Bayer, are large
pharmaceutical companies with substantially greater financial, technical and human resources than we have. The biotechnology and pharmaceutical industries are intensely competitive and subject to
rapid and significant technological change. Many of the drugs that we are attempting to discover or develop will compete with existing therapies if we receive marketing approval. Because of their
significant resources, our competitors may be able to use discovery technologies and techniques, or partnerships with collaborators, in order to develop competing products that are more effective or
less costly than the product candidates we develop. This may render our technology or product candidates obsolete and noncompetitive. Academic institutions, government agencies, and other public and
private research organizations may seek patent protection with respect to potentially competitive products or technologies and may establish exclusive collaborative or licensing relationships with our
competitors.

As
a company, our only experience in conducting Phase III clinical trials is for our cethromycin development program. Our competitors may succeed in obtaining FDA or other
regulatory approvals for product candidates more rapidly than us. Companies that complete clinical trials, obtain required regulatory agency approvals and commence commercial sale of their drugs
before we do may achieve a significant competitive advantage, including certain FDA marketing exclusivity rights that would delay or prevent our ability to market certain products. Any approved drugs
resulting from our research and development efforts, or from our joint efforts with our existing or future collaborative partners, might not be able to compete successfully with our competitors'
existing or future products.

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Off-label promotion of our products could result in substantial penalties.

If any of our product candidates receive marketing approval, we will only be permitted to promote the product for the uses indicated on
the label cleared by the FDA. Our pivotal Phase III clinical trials of cethromycin are for the treatment of CABP, although we believe that cethromycin may have other applications in bronchitis,
pharyngitis, sinusitis, inhalation anthrax, plague and tularemia, and skin and skin structure infections. If we request additional label indications for cethromycin or our other product candidates,
the FDA may deny those requests outright, require extensive clinical data to support any additional indications or impose limitations on the intended use of any approved products as a condition of
approval. U.S. Attorneys' offices and other regulators, in addition to the FDA, have recently focused substantial attention on off-label promotional activities and have initiated civil and
criminal investigations related to such practices. If it is determined by these or other regulators that we have promoted our products for off-label use, we could be subject to fines,
legal proceedings, injunctions or other penalties.

If our efforts to obtain rights to new products or product candidates from third parties are not successful, we may not generate product revenues or achieve profitability.

Our long-term ability to earn product revenues depends on our ability to identify, through internal research programs,
potential product candidates that may be developed into new pharmaceutical products and/or obtain new products or product candidates through licenses from third parties. If our internal research
programs do not generate sufficient product candidates, we will need to obtain rights to new products or product candidates from third parties. We may be unable to obtain suitable products or product
candidates from third parties for a number of reasons, including:



If we are unable to obtain rights to new products or product candidates from third parties, our ability to generate product revenues and achieve profitability may suffer.

Because our product candidates and development and collaboration efforts depend on our intellectual property rights, adverse events
affecting our intellectual property rights will harm our ability to commercialize products.

Our
success will depend to a large degree on our own, our licensees' and our licensors' ability to obtain and defend patents for each party's respective technologies and the compounds
and other products, if any, resulting from the application of such technologies. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal
and factual questions. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date. Accordingly, we cannot predict the breadth of claims that will be
allowed or maintained, after challenge, in our or other companies' patents.

The
degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:



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We
are a party to certain in-license agreements that are important to our business, and we generally do not control the prosecution of in-licensed technology.
Accordingly, we are unable to exercise the same degree of control over this intellectual property as we exercise over our internally developed technology. Moreover, some of our academic institution
licensors, research collaborators and scientific advisors have rights to publish data and information in which we have rights. If we cannot maintain the confidentiality of our technology and other
confidential information in connection with our collaborations, then our ability to receive patent protection or protect our proprietary information will be impaired. In addition, some of the
technology we have licensed relies on patented inventions developed using U.S. government resources. Under applicable law, the U.S. government has the right to require us to grant a nonexclusive,
partially exclusive or exclusive license for such technology to a responsible applicant or applicants, upon terms that are reasonable under the circumstances, if the government determines that such
action is necessary.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information and may not adequately protect
our intellectual property.

We rely on trade secrets to protect our technology, particularly when we do not believe patent protection is appropriate or obtainable.
However, trade secrets are difficult to protect. In order to protect our proprietary technology and processes, we rely in part on confidentiality and intellectual property assignment agreements with
our corporate partners, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential
information nor result in the effective assignment to us of intellectual property, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information or other
breaches of the agreements. In addition, others may independently discover our trade secrets and proprietary information, and in such case we could not assert any trade secret rights against such
party. Enforcing a claim that a party illegally obtained and is using our trade secrets is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the
United States may be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary rights,
and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Market acceptance and sales of our product candidates will be severely limited if we cannot arrange for favorable reimbursement policies.

Our ability to commercialize any product candidates successfully will depend in part on the extent to which governmental authorities,
private health insurers and other organizations establish reimbursement levels for the cost of our products and related treatments. Third-party payors are increasingly challenging the prices charged
for medical products and services. Also, the trend toward managed healthcare in the United States, as well as legislative proposals to reform healthcare, control pharmaceutical prices or reduce
government insurance programs, may also result in exclusion of our

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product
candidates from reimbursement programs. Because many generic antibiotics are available for the treatment of respiratory tract infections, our ability to list cethromycin on insurance company
formularies will depend on its effectiveness compared to lower-cost products. The cost containment measures that health care payors and providers are instituting, and the effect of any
health care reform, could materially and adversely affect our ability to earn revenues from the sales of cethromycin and our other product candidates.

Healthcare law and policy changes, based on recently enacted legislation, may have an adverse effect on us.

Healthcare costs have risen significantly over the past decade. In March 2010, President Obama signed the Patient Protection and
Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or, collectively, the Healthcare Reform Act. This law substantially changes the way health care is financed by both
governmental and private insurers, and significantly impacts the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions that are expected to impact our business and
operations, including provisions governing enrollment in federal healthcare programs, reimbursement and discount programs and fraud and abuse prevention and control, which will impact existing
government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and
feedback program. We anticipate that if we obtain approval for our product candidates, some of our revenue and the revenue from our collaborators may be derived from U.S. government healthcare
programs, including Medicare. Additionally, in 2009, the Department of Defense implemented a program pursuant to the National Defense Authorization Act for Fiscal Year 2008 that requires rebates,
based on Federal statutory pricing, from manufacturers of innovator drugs and biologics. Furthermore, beginning in 2011, the Healthcare Reform Act imposes a non-deductible fee treated as
an excise tax on pharmaceutical manufacturers or importers who sell "branded prescription drugs," which includes innovator drugs and biologics (excluding certain orphan drugs, generics and
over-the-counter drugs) to U.S. government programs. We expect that the Healthcare Reform Act and other healthcare reform measures that may be adopted in the future could have
an adverse effect on our industry generally and our ability to successfully commercialize our
product candidates or could limit or eliminate our spending on development projects. In addition to this legislation, there will continue to be proposals by legislators at both the federal and state
levels, regulators and third-party payors to keep these costs down while expanding individual healthcare benefits. Certain of these changes could impose limitations on the prices we will be able to
charge for any product candidates that are approved or the amounts of reimbursement available for these products from governmental agencies or third-party payors, or may increase the tax obligations
on life sciences companies such as ours. While it is too early to predict specifically what effect the Health Reform Act and its implementation or any future legislation or policies will have on our
business, we believe that healthcare reform may have an adverse effect on our business and financial condition.

We will need to increase the size of our organization, and we may encounter difficulties managing our growth, which could adversely affect our results of operations.

We are currently a development stage company with 16 employees. We will need to expand and effectively manage our managerial,
operational, financial and other resources in order to successfully pursue our research, development and commercialization effort. To manage any growth, we will be required to continue to improve our
operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. We may be unable to successfully manage the
expansion of our operations or operate on a larger scale and, accordingly, may not achieve our research, development and commercialization goals.

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If we are unable to attract and retain qualified scientific, technical and key management personnel, or if any of our key executives, Michael T. Flavin, Ph.D.,
Ze-Qi Xu, Ph.D., or John L. Flavin, discontinues their employment with us, it may delay our research and development efforts.

We are highly dependent upon the efforts of our senior management team and scientific staff. The loss of the services of one or more
members of the senior management team might impede the achievement of our development objectives. In particular, we are highly dependent upon and our business would be significantly harmed if we lost
the services of Michael T. Flavin, Ph.D., our founder and Chairman and Chief Executive Officer, Ze-Qi Xu, Ph.D., our Executive Vice President and Chief Scientific Officer, or John L.
Flavin, our President and Chief Financial Officer. We do not currently have any key man life insurance policies. We have entered into employment agreements with members of our senior management team,
but this does not ensure that we will retain their services for any period of time in the future. Our research and drug discovery programs also depend on our ability to attract and retain highly
skilled chemists, biologists and preclinical and clinical personnel. We may not be able to attract or retain qualified scientific personnel in the future due to intense competition among biotechnology
and pharmaceutical businesses, particularly in the Chicago area. If we are not able to attract and retain the necessary personnel to
accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our research and development objectives and our ability to meet the demands of our
collaborators in a timely fashion.

Our business will expose us to potential product liability risks and there can be no assurance that we will be able to acquire and maintain sufficient insurance to provide
adequate coverage against potential liabilities.

Our business will expose us to potential product liability risks that are inherent in the testing, manufacturing and marketing of
pharmaceutical products. The use of our product candidates in clinical trials also exposes us to the possibility of product liability claims and possible adverse publicity. These risks will increase
to the extent our product candidates receive regulatory approval and are commercialized. We do not currently have any product liability insurance, although we plan to obtain product liability
insurance in connection with future clinical trials of our product candidates. There can be no assurance that we will be able to obtain or maintain any such insurance on acceptable terms. Moreover,
our product liability insurance may not provide adequate coverage against potential liabilities. On occasion, juries have awarded large judgments in class action lawsuits based on drugs that had
unanticipated side effects. A successful product liability claim or series of claims brought against us would decrease our cash reserves and could cause our stock price to fall significantly.

We face regulation and risks related to hazardous materials and environmental laws, violations of which may subject us to claims for damages or fines that could materially
affect our business, cash flows, financial condition and results of operations.

Our research and development activities involve the controlled use of hazardous materials and chemicals. The risk of accidental
contamination or injury from these materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages or fines that result, and the liability could have a
material adverse effect on our business, financial condition and results of operations. We are also subject to federal, state and local laws and regulations governing the use, manufacture, storage,
handling and disposal of hazardous materials and waste products. If we fail to comply with these laws and regulations or with the conditions attached to our operating licenses, the licenses could be
revoked, and we could be subjected to criminal sanctions and substantial liability or be required to suspend or modify our operations. In addition, we may have to incur significant costs to comply
with future environmental laws and regulations. We do not currently have a pollution and remediation insurance policy.

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Our business and operations would suffer in the event of system failures.

Despite the implementation of security measures, our internal computer systems are vulnerable to damage from computer viruses,
unauthorized access, natural disasters, terrorism, war, telecommunication and electrical failures. Our drug discovery and preclinical testing systems are highly technical and proprietary. Any system
failure, accident or security breach that causes interruptions in our operations could result in a material disruption of our drug discovery programs. To the extent that any disruption or security
breach results in a loss or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we may incur liability as a result, our drug discovery programs
may be adversely affected and the further development of our product candidates may be delayed. In addition, we may incur additional costs to remedy the damages caused by these disruptions or security
breaches.

Risks Related to Our Common Stock

Our common stock price has been highly volatile, and your investment could suffer a decline in value.

The market price of our common stock has been highly volatile since we completed our initial public offering in August 2005. The market
price of our common stock is likely to continue to be highly volatile and could be subject to wide fluctuations in response to various factors and events, including but not limited
to:



These
and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of
common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted
securities class

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action
litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit and the time and attention
of our management may be diverted.

There are substantial risks associated with the Investment Agreement with Dutchess Opportunity Fund, II, LP which could contribute to the decline of our stock price
and have a dilutive impact on our existing stockholders.

In order to obtain needed capital, we entered into an Investment Agreement with Dutchess, dated as of January 18, 2011. The sale
of shares of our common stock pursuant to the Investment Agreement will have a dilutive impact on our stockholders. Dutchess is not restricted in its ability to re-sell the shares we issue
to them, and any such re-sales could cause the market price of our common stock to decline. To the extent of any such decline, any subsequent advances would require us to issue a greater
number of shares of common stock to Dutchess in exchange for each dollar of the advance. Under these circumstances our existing stockholders would experience greater dilution. The sale of our common
stock under the Investment Agreement could encourage short sales by third parties, which could contribute to the further decline of our stock price. Through March 23, 2011 we have issued
47,403,618 shares to Dutchess, including 2,475,248 shares as a commitment fee, and received proceeds of approximately $0.7 million. Based on the last reported share price of our common stock on
March 21, 2011, we would be able to raise approximately an additional $0.3 million through the use of the Dutchess Agreement.

Because our common stock is not listed on a securities exchange, you may have difficulty trading our securities and our securities may trade at a lower market price than
they otherwise would.

Since being delisted from Nasdaq, trading in our common stock is conducted on the OTC Bulletin Board and in the
over-the-counter market in the so-called "pink sheets." Because of this, you may not be able to sell as many securities as you desire, you may experience delays in
the execution of your transactions and our securities may trade at a lower market price than they otherwise would. In addition, our securities could become subject to the SEC's "penny stock rules."
These rules would impose additional requirements on broker-dealers who effect trades in our securities, other than trades with their established customers and accredited investors. Consequently, the
delisting of our securities and the applicability of the penny stock rules may adversely affect the ability of broker-dealers to sell our securities, which may adversely affect your ability to resell
our securities. The delisting of our securities from Nasdaq could also have other negative results, including the potential loss of confidence by employees and others, the loss of institutional
investor interest and fewer business development and commercial partnership opportunities.

We have a significant number of outstanding warrants, and future sales of the underlying shares could adversely affect the market price of our common stock.

As of March 23, 2011, we had outstanding warrants exercisable for an aggregate of approximately 81.3 million shares of
common stock. Of our total outstanding warrants, warrants representing the right to purchase approximately 74.1 million shares of our common stock at an exercise price of $0.042 per share were
sold as part of the public equity offering completed on July 7, 2010 and warrants representing the right to purchase approximately 1.5 million shares of our common stock at an exercise
price of $0.0672 per share were issued to the placement agent in connection with the public equity offering completed on July 7, 2010. Additionally, warrants representing the right to purchase
0.5 million shares of our common stock at an exercise price of $0.042 per share were issued to our lender in connection with an amendment to our credit facility on September 9, 2010. The
remaining approximately 5.2 million in outstanding warrants have a weighted average exercise price of $2.14 per share. The holders may sell shares of common stock underlying the warrants in the
public markets from

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time
to time, without limitations on the timing, amount or method of sale. The sale of a significant number of shares of our common stock, or the perception that these sales could occur, could cause
the market price of our common stock to decline and impair our ability to raise capital through the issuance of additional equity securities.

Our Chairman and Chief Executive Officer has significant voting control over our company which may delay, prevent or deter corporate actions that may be in the best interest
of our stockholders.

As of March 23, 2011, Flavin Ventures, LLC controlled approximately 3.0% of our outstanding common stock.
Dr. Michael Flavin, our founder and Chairman and Chief Executive Officer, has effective voting control for all shares of our common stock held by Flavin Ventures. On July 22, 2010,
Dr. Flavin was issued 47,619,047 additional shares of common stock in exchange for the cancellation of certain outstanding indebtedness, as described under "Management's Discussion and Analysis
of Financial Condition and Results of OperationsFinancial Transactions Update." As a result, as of March 23, 2011, Dr. Flavin beneficially owns approximately 17.8% of our
outstanding common stock and will be able to exert significant influence for all matters requiring approval of our stockholders, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may delay, prevent or deter a change in control of our company even when such a change may be in the best interest of all the stockholders,
could deprive stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or assets and might affect the prevailing market price of our common stock.

Provisions of Delaware law or our charter documents could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders,
and could make it more difficult for you to change management.

Provisions of our amended and restated certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition
or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. This is because these provisions
may prevent or frustrate attempts by stockholders to replace or remove our current management or members of our Board of Directors.

These
provisions include:



As
a result, these provisions and others available under Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock.

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We have never paid cash dividends on our capital stock and we do not anticipate paying dividends in the foreseeable future.

We have paid no cash dividends on any of our classes of capital stock to date, and we currently intend to retain our future earnings,
if any, to fund the development and growth of our business. In addition, the terms of any future debt or credit facility may preclude us from paying any dividends. Capital appreciation of our common
stock, if any, will be your sole source of potential gain for the foreseeable future. Consequently, in the foreseeable future, you will only experience a gain from your investment in our common stock
if the price of our common stock increases.

Item 1B.Unresolved Staff Comments.

None.

Item 2.Properties.

Our corporate offices and chemistry and biology laboratories are located in the Advanced Life Sciences Product Development Center in
Woodridge, Illinois. The Product Development Center consists of approximately 9,440 square feet of office space. We believe that our current facilities are adequate to meet our needs for the
foreseeable future. Our facilities are leased and our current lease expires in September 2012. We believe that suitable additional or alternative space will be available in the future on commercially
reasonable terms as needed.

Item 3.Legal Proceedings.

None.

Item 4.Reserved.

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PART II

Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on the OTC Bulletin Board ("OTCBB") under the symbol ADLS.OB. The following table provides the high and low
sales prices as reported for the periods indicated.

2010

High

LowFirst Quarter

$
0.23

$
0.10Second Quarter


0.12


0.06Third Quarter


0.07


0.03Fourth Quarter


0.05


0.01




2009

High

LowFirst Quarter

$
0.45

$
0.14Second Quarter


1.62


0.24Third Quarter


0.82


0.18Fourth Quarter


0.30


0.17


As
of March 23, 2011, there were approximately 25 registered shareholders of record of our common stock.

Dividends

We have neither declared nor paid dividends on our common stock or the preferred stock of our subsidiary, Advanced Life
Sciences, Inc., since our inception and do not plan to pay dividends in the foreseeable future. Any determination in the future to pay cash dividends will depend on our financial condition,
capital requirements, result of operations, contractual limitations and other factors deemed relevant by our Board of Directors. As of December 31, 2010, cumulative accrued undeclared dividends
on our subsidiary's preferred stock totaled approximately $2.0 million.

Recent Sales of Unregistered Securities

None.

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Item 6.Selected Financial Data.

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the
notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report.

Period from
Inception
(January 1, 1999)
to
December 31, 2010Years ended December 31,2010

2009

2008

2007

2006Statement of Operations Data:Revenue

$
752,853

$
2,793,191

$
240,830

$


$
39,788

$
6,028,863Operating expensesResearch and development


2,499,488


4,462,281


15,709,293


25,735,759


17,202,113


105,522,469Selling, general and administrative


4,371,071


6,322,849


7,116,549


6,839,575


5,457,395


37,742,557Impairment charge


2,510,936














2,510,936Loss from operations


(8,628,642
)

(7,991,939
)

(22,585,012
)

(32,575,334
)

(22,619,720
)

(139,747,099
)Interest income


(8,360
)

(11,561
)

(306,846
)

(717,884
)

(1,651,916
)

(2,968,783
)Interest expense


946,191


1,036,762


525,703


466,963


511,884


5,131,806Other (income) expense, net


(244,479
)

146,092











(98,387
)Gain on disposal(1)














(939,052
)

(939,052
)Net other (income) expense


693,352


1,171,293


218,857


(250,921
)

(2,079,084
)

1,125,584Net loss


(9,321,994
)

(9,163,232
)

(22,803,869
)

(32,324,413
)

(20,540,636
)

(140,872,683
)Less net loss attributable to the non-controlling interest in subsidiary

















Net loss attributable to Advanced Life Sciences Holdings, Inc.


(9,321,994
)

(9,163,232
)

(22,803,869
)

(32,324,413
)

(20,540,636
)

(140,872,683
)Less accumulated preferred stock dividends of subsidiary for the period


175,000


175,000


175,000


175,000


175,000


2,019,792Net loss available to common shareholders

$
(9,496,994
)
$
(9,338,232
)
$
(22,978,869
)
$
(32,499,413
)
$
(20,715,636
)
$
(142,892,475
)Basic and diluted loss per common share

$
(0.06
)
$
(0.16
)
$
(0.59
)
$
(1.12
)
$
(0.78
)Weighted average shares outstanding


153,372,740


57,781,126


39,098,943


28,910,041


26,546,785




2010

2009

2008

2007

2006Consolidated Balance Sheet Data:Cash and cash equivalents

$
159,596

$
2,841,801

$
1,527,108

$
18,324,991

$
27,054,947Total assets


772,593


6,427,771


2,820,053


19,911,542


30,509,679Long-term debt, less current portion





12,000,000


11,915,000


5,915,000


3,923,810Total liabilities


10,494,615


14,507,818


15,197,594


12,250,568


9,115,174Deficit accumulated during development stage


(140,872,683
)

(131,550,689
)

(122,387,457
)

(99,583,588
)

(67,259,175
)Total equity (deficit)

$
(9,722,022
)
$
(8,080,047
)
$
(12,377,541
)
$
7,660,974

$
21,394,505


(1)Amount
for 2006 results from sale of ALS Inc.'s 50% interest in Sarawak MediChem Pharmaceuticals. See Note 1 to the consolidated financial
statements.


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Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion of our financial condition and results of operations in conjunction
with our consolidated financial statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. As
a result of many factors, including those set forth under the section entitled "Risk Factors" and elsewhere in this Annual Report, our actual results may differ materially from those anticipated in
these forward-looking statements.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel drugs in the areas of
infectious disease, oncology and respiratory disease. Using our internal discovery capabilities and our network of pharmaceutical and
academic partners, we have assembled a promising pipeline of clinical and preclinical product candidates. Our most advanced product candidate, cethromycin, is a novel
once-a-day oral antibiotic that is being developed for the treatment of CABP. Cethromycin is also being developed as a bio-defense agent for use in the treatment of
anthrax and other potential broad-spectrum medical countermeasures. We also have product candidates in earlier stages of development for the treatment of indications including respiratory distress
caused by inflammation-related tissue damage and malignant melanoma.

None
of our product candidates have been approved by the FDA or any comparable foreign agencies, and we have not generated any significant revenues to date. Our ability to generate
revenues in the future will depend on our ability to meet development or regulatory milestones under any license agreements that trigger payments to us, to enter into new license agreements for other
products or territories and to receive regulatory approvals for, and successfully commercialize, our product candidates either directly or through commercial partners.

At
present, our liabilities are significantly greater than our assets, and we are in default of our line of credit agreement. Due to the default on our line of credit arrangement, it is
possible, depending on the nature of any actions our lender would take, that we may need to file for bankruptcy. As a result of our current financial situation and the uncertainty in our ability to
obtain needed financing through equity offerings, commercial partnerships and grant awards or other means, there is substantial doubt about our ability to continue as a going concern. In further
recognition of our current financial situation, in January 2011, we publicly announced that with the oversight of our Board of Directors we intend to evaluate strategic alternatives, including a
possible sale of the Company.

Cethromycin CABP Program Update

In late June 2010 we submitted a final SPA with the FDA for the proposed Phase III clinical program of cethromycin in the
treatment of patients with CABP. We have been engaged in the SPA process with the FDA over the last year to establish the clinical trial design needed to gain approval in CABP. As filed, the SPA
incorporates written and oral comments from the FDA's Division of Anti-Infective and Ophthalmology Products.

An
SPA is a written agreement between the FDA and a drug sponsor concerning the clinical trial design, clinical endpoints and other clinical trial issues that can be used to support
regulatory approval of a drug candidate. The process is intended to provide assurance that if the agreed upon clinical trial protocols are followed, the clinical trial endpoints are achieved and there
is a favorable risk benefit profile, the data may serve as the primary basis of an efficacy claim in support of a NDA.

In
August 2010 we reached an agreement with the FDA, under the SPA process, on the design of our planned Phase III study of cethromycin to treat CABP. The trial, if and when
initiated, will be the first prospectively designed superiority study to be conducted in CABP.

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The
double-blind pivotal superiority study will compare the efficacy and safety of once-daily oral administration of 300 milligrams of cethromycin over seven days of
treatment to azithromycin. The primary efficacy endpoint will be the clinical cure rate in a macrolide-resistantStreptococcus pneumoniaepopulation.
The protocol also includes several unique features, such as the inclusion of patient-reported outcome measures, which have the potential to generate a more robust demonstration of effectiveness and
establish cethromycin as a new standard of care in treating pneumonia.

With
reported resistance rates as high as 40 percent to standard-of-care macrolide antibiotics in the U.S., there is a pressing medical need for new drugs
to treat CABP. Based on the data we have accumulated in our extensive pre-clinical and clinical program to date, coupled with a thorough review of published literature on the clinical
relevance of macrolide resistance, we believe that cethromycin has the potential to show a superior efficacy advantage in patients who are resistant to marketed macrolide drugs.

The
cost to complete the SPA is significant. In order to advance the CABP program, and commence the necessary clinical trial, we are seeking a partner to assist in the funding of the
program. We continue to have ongoing discussions with potential commercial partners focused on geographical markets such as the European Union and the United States as well as various government
agencies.

Background

We submitted the cethromycin NDA in September, 2008 based on the results of 53 clinical studies including 2 pivotal Phase III
studies wherein cethromycin demonstrated non-inferiority to Biaxin® in mild-to-moderate CABP.

On
June 2, 2009, the FDA AIDAC reviewed the cethromycin NDA. The AIDAC voted that cethromycin demonstrated safety for the outpatient treatment of adults with
mild-to-moderate CABP, but voted that cethromycin did not demonstrate efficacy in the treatment of CABP in light of the new FDA draft CABP guidance which was published in March
of 2009.

On
July 31, 2009 the FDA provided a complete response letter to us indicating that further clinical work would be required for the approval of cethromycin in CABP. Our pivotal
Phase III program was designed and conducted under prior FDA guidance and before the new draft guidance document was released.

Over
the past two years, the FDA has been conducting public workshops and advisory panels to discuss clinical trial design issues in CABP culminating in a draft guidance document
published in March of 2009. Public comments were received in response to the draft guidance and an AIDAC meeting was held in December of 2009 to further discuss and resolve the CABP clinical design
issues.

In
March 2010, we met with officials from the FDA's Anti-Infectives Division to gain clarity on the registration pathway for cethromycin. This meeting followed the
December 9, 2009 FDA AIDAC meeting which discussed clinical trial design issues for CABP relative to the earlier, March 2009, FDA CABP guidance document. In the meeting, the FDA guided that, to
assess the approvability for cethromycin to treat CABP, we should establish a SPA using a superiority clinical trial design comparing cethromycin to a marketed macrolide antibiotic in two clinical
trials. In light of this guidance, we worked with the FDA to finalize a SPA using a superiority design for the outpatient CABP indication.

If
cethromycin is approved for marketing by the FDA, we plan to sell cethromycin using commercial partners to access the primary care physician market and to build and utilize a focused
internal sales force that will market directly to early adopters such as, but not limited to, pulmonary medicine and infectious disease physicians. Discussions with potential commercial partners
focused on geographical markets such as the European Union and the United States are ongoing.

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Cethromycin Biodefense Program Update

In November 2010, we announced that we submitted a full proposal to the National Institute of Allergy and Infectious Diseases
("NIAID"). The proposal requests $38 million
over 5 years for the development of an intravenous ("IV") formulation of our novel antibiotic, cethromycin to therapeutically treat anthrax, tularemia and plague. In addition, the proposal
includes pre-clinical development as well as funding for four Phase 1 clinical trials and a Phase 2 clinical trial to evaluate the safety and efficacy of IV cethromycin in
patients hospitalized with moderate-to-severe CABP.

In
April 2010, we announced positive results from anin vitrostudy assessing the efficacy of cethromycin against 30 strains of Burkholderia pseudomallei(melioidosis), a serious, life-threatening bacterial pathogen. Cethromycin showed significant in vitroactivity against clinical and environmental strains of B. pseudomallei as measured by minimal
inhibitory concentration ("MIC"), the lowest
concentration of an antimicrobial that will inhibit the visible growth of a microorganism after 24 hours of incubation. Cethromycin demonstrated antibacterial activity with MIC values ranging
from 0.58 ug/ml and MIC90 of 4 ug/ml. Most notably, cethromycin also demonstrated positive activity against strains that were resistant to a commonly used antibiotic,
azithromycin, for which MIC values were all greater than 64 ug/ml. In a separate study, cethromycin also demonstratedin vitroactivity against 30
strains of Burkholderia mallei with MIC values ranging from 0.061 ug/ml and MIC90 of 0.5 ug/ml, which are comparable to azithromycin.

In
March 2010, we announced that we received notice from the BARDA of the U.S. Department of Health and Human Services that it has completed its initial technical evaluation of our
funding proposal for advanced development of cethromycin as a biodefense countermeasure and identified it as a scientifically and technically sound proposal important to program goals and objectives
that may require further development and may be recommended for acceptance subject to funds availability. We were invited to submit additional information to allow BARDA to make a final determination
on the appropriateness of the proposal to enter into contract negotiations. The Company is engaged in ongoing discussions with BARDA in light of recent amendments to the Broad Agency Announcement that
would fund the development of cethromycin, if awarded.

Related
to this development, we also gained clarity from the FDA on the biodefense regulatory package required for submission in light of recent AIDAC meetings discussing the use of the
FDA's Animal Rule for approval of biodefense therapeutics. As anticipated, the FDA recommended that, in parallel with pivotal animal studies demonstrating efficacy under FDA's Animal Rule, we should
complete the CABP clinical program and gain market approval to the CABP NDA prior to submitting an amended NDA for the biodefense indications.

IV Formulation Program Update

In July 2010 we announced positive results from preclinical toxicology and pharmacokinetic studies of an IV formulation for cethromycin
that support its use in a hospital setting. Cethromycin IV was administered as a single dose up to 60 mg/kg/day, the highest dose tested. Results demonstrated cethromycin IV was well tolerated and
generated 10-fold greater plasma exposure compared to oral administration. The studies were conducted in rats in accordance with good
laboratory practices. The increased bioavailability of cethromycin IV may allow for the treatment of serious hospital infections as well as the treatment of bioterror pathogens, such as anthrax,
plague and tularemia after signs and symptoms are present.

Antimicrobial Peptide Program

In July 2010 we announced that we entered into a sponsored research and option agreement with The University of British Columbia
("UBC") to develop several antimicrobial peptides. These peptides exhibit bactericidal properties and kill both Gram-positive and Gram-negative organisms rapidly and

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directly.
They have shown activity against clinically important resistant bacteria, such as vancomycin-resistant enterococci, a pathogen that is most commonly acquired by patients while hospitalized,
and methicillin-resistantStaphylococcus aureus. Also, these peptides are expected to have significant activity against biodefense pathogens such as Bacillus
anthracis.

Under
the terms of the agreement with UBC, we paid an option fee upon execution of the agreement and will make additional payments based on the completion of specific milestones. In
return, UBC granted us the exclusive option to evaluate the technology and obtain a worldwide, exclusive license to manufacture, distribute and market products emanating from the program.

Financial Transactions Update

Since our inception, we have incurred net losses each year. Our net loss for the year ended December 31, 2010 was
$9.3 million. As of December 31, 2010, we had an accumulated deficit of $140.9 million. We have funded operations to date primarily from debt financings and capital contributions
from our founder and Chief Executive Officer, proceeds from an initial public offering, and subsequent private placements, including issuances of common stock under three Standby Equity Distribution
Agreements.

On
March 17, 2011, our Board of Directors authorized and approved a 1-for-30 reverse stock split. Our shares are not yet trading on a
post-split basis and the expected effective date of the reverse stock split is March 28, 2011, subsequent to the issuance of our 2010 financial statements. Pro forma weighted
average shares
outstanding and earnings per share calculations have been included on the face of our consolidated statements of operations reflecting the post-split effect of the pending reverse stock
split. All other share information including shares issued and outstanding has been presented on a pre-split basis.

In
January 2011, we entered into an Investment Agreement with Dutchess, for the sale of up to $5.0 million of shares of our common stock over a period of two years. Under the
terms of the Investment Agreement, we may sell from time to time, in our discretion, newly-issued shares of our common stock to Dutchess at a discount to the current market price of 5%. Additionally,
we paid to Dutchess a commitment fee of $50,000 by issuing 2,475,248 shares of our common stock. We also have an effective registration statement on file with the SEC for the purchase and sale of up
to 72,162,601 shares, with respect to common stock issuable under the agreement with Dutchess. Through March 23, 2011 we have issued 47,403,618 shares to Dutchess, including the shares issued
as a commitment fee, and received proceeds of approximately $0.7 million. Based on the last reported share price of our common stock on March 21, 2011, we would be able to raise approximately
an additional $0.3 million through the use of the Dutchess Agreement.

In
October 2010, we were awarded a $245,000 cash grant under the Qualifying Therapeutic Discovery Project which was created by Congress as part of the Patient Protection and Affordable
Care Act of 2010. In July 2010, we applied for the grant to help fund the development of cethromycin for the treatment of CABP.

In
September 2010, we entered into a new Standby Equity Distribution Agreement with YA Master for the sale of up to $10.0 million of shares of our common stock over a two-year
commitment period. Under the terms of the 2010 SEDA, we may sell, from time to time, in our discretion, newly-issued shares of our common stock to YA Master at a discount to the current market price
of 5%. Additionally, we paid to YA Master a commitment fee of $100,000 by issuing 1,984,127 shares of our common stock. Between October 2010 and January 2011, we raised $1.1 million and issued
52,133,074 shares through the usage of the 2010 SEDA facility. In January 2011, the Company and YA Master agreed to terminate the 2010 SEDA.

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On
July 7, 2010, we closed a registered public offering of units. As part of the closing, we issued 379,188 units at a public offering price of $4.20 per unit, raising
approximately $1.6 million in gross offering proceeds and approximately $1.0 million in net proceeds after deducting placement agent fees and offering expenses payable by us. Each unit
sold in the offering consisted of (i) 100 shares of our common stock, (ii) 100 stock warrants to purchase shares of common stock at an exercise price of $0.042 per share and
(iii) one warrant to purchase an additional unit, consisting of 100 shares of common stock and 100 stock warrants, at an exercise price of $4.20 per additional unit. The stock warrants may be
exercised at any time during the period commencing six months after the closing date
and ending on the fifth anniversary of the closing date. The exercise period for the unit warrants has expired. Prior to expiration, we issued 36,196,800 shares of common stock and 36,196,800
additional stock warrants through the exercise of unit warrants and received an additional $1.5 million in gross proceeds as a result of these exercises.

Dawson
James acted as the placement agent for the offering. In addition to cash placement agent fees, we issued to Dawson James a compensation warrant to purchase 1,516,752 shares of
common stock at an exercise price of $0.0672 per share.

In
September 2010, we entered into a Second Amended and Restated Business Loan Agreement and related loan documents with our lender, amending our existing loan facility to give effect to
letter agreements entered into in May and June 2010. Among other things, the amendment extends the loan maturity by one year to January 1, 2012. Under the terms of the agreement, we repaid
$1.5 million of the outstanding loan balance on April 1, 2010 and were required to further reduce the balance by an additional $1.5 million by October 1, 2010 and
$1.0 million by April 1, 2011. Our Chief Executive Officer, Michael T. Flavin, Ph.D., provided a personal guarantee to the loan facility until the principal balance is reduced to
$7.0 million. In addition, the interest rate on the outstanding loan balance increased from 8.5% to 10.0% under the terms of the amended loan agreement. In connection with the amendment, we
issued 500,000 warrants, which are exercisable at $0.042 per share, and will issue an additional 500,000 warrants in September 2011. We have also agreed that the line of credit is secured by
substantially all of our assets including, subject to Abbott Laboratories' consent which has not been provided, our rights under our license agreement for cethromycin with Abbott Laboratories, and is
further secured by 2.5 million shares of our common stock held by ALS Ventures, LLC. The credit agreement contains a material adverse change clause, which is subject to the judgment of the
lender and, if triggered, can accelerate the payment of the debt.

In
October 2010, we paid $420,000 in a principal reduction to our lender toward a mandatory prepayment of $1.5 million that was due on October 1, 2010. Until the balance of
the prepayment is made, we are subject to the default provisions of the loan documents including acceleration of payment.

In
November 2010, we entered into a Forbearance Agreement with our lender relating to the Second Amended and Restated Business Loan Agreement. Under the terms of the agreement, the
lender agreed to forbear from exercising rights and remedies under the loan agreement from the date of the agreement to January 3, 2011, subject to certain conditions. Among other things, we
were required to engage an advisor for purposes of reviewing our business plans, budgets and expenditures and making recommendations regarding the same. We were also required to submit to the lender a
business plan outlining our budgets and capital raising plans.

In
December 2010, we entered into an Omnibus Amendment with our lender relating to the Second Amended and Restated Business Loan Agreement and Forbearance Agreement. Under the terms of
the amendment, the lender agreed to waive the existing defaults under the loan agreement and we agreed to make an interest reserve payment of $186,000 by January 10, 2011 which was paid on that
date. Upon receipt of this interest reserve payment, the due date for the $1.1 million principal payment
owed by us was extended to April 1, 2011. The $1.1 million principal payment, as well as an additional $1.0 million principal payment also due on April 1, 2011, can be
deferred until January 1, 2012 if we pay $486,000 in additional interest reserve by April 1, 2011.

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On February 21, 2011, we received a letter from our lender informing us that we were in default under the loan documents governing our principal credit
facility. The letter indicated that we had failed to fund an interest reserve account as required by an amendment to the credit facility. The lender requested that we cure such default by
February 25, 2011. The lender noted that it was reserving the right to exercise all rights and remedies under the loan documents if we failed to meet the payment deadline. Remedies available to
the lender include, among other things, the right to accelerate payment of all amounts outstanding under the line of credit.

On
February 25, 2011, we informed the lender that we would not be funding the interest reserve account in the amount demanded in the notice of default. We did, however, pay our
February 2011 interest payment to remain current with our interest payment obligation. Following this payment, we met with the lender and are engaged in a dialogue to develop a constructive and
workable solution to the current liquidity situation although there can be no guarantee that such a solution will be reached, or reached on terms that would be acceptable to us or that would not
require us to file for bankruptcy.

In
July 2010, acting through the independent audit committee of our Board of Directors, we entered into an agreement with Dr. Flavin, providing that our $2.0 million
promissory note with Dr. Flavin would be exchanged for 47,619,047 shares of our common stock. The price of $0.042 per share used in the exchange was the same price per share used in our public
equity offering. As a result of the exchange, the promissory note was cancelled and retired and accrued interest of $52,000 has been deferred based on our current liquidity situation.

In
April 2010, our shareholders approved an amendment to our articles of incorporation to increase the number of authorized shares from 125,000,000 to 625,000,000 including an increase
in the number of authorized shares of common stock from 120,000,000 to 620,000,000.

In
March 2010, the Company and YA Master, agreed to terminate the 2009 SEDA dated as of June 19, 2009. We sold to YA Master 49,549,200 shares of our common stock and raised
approximately $11.7 million under the 2009 SEDA prior to its termination. Shares of common stock sold under the SEDA in excess of $9.0 million were sold with the consent of our lender
under our credit facility.

In
June 2009, the Company and YA Global terminated the 2008 SEDA. For the period of January 2009 through the end of the 2008 SEDA, we issued 9,883,994 shares to YA Global and received
approximately $3.9 million. In addition, in September 2008, we paid YA Global a commitment fee of $300,000 by issuing 393,339 shares of our common stock.

There
is uncertainty as to our ability to continue as a going concern, and a discussion of this uncertainty can be found in Note 1 to the consolidated financial statements and in
the liquidity and capital resources section of this management discussion and analysis. In further recognition of our current financial situation, on January 3, 2011, we publicly announced that
with the oversight of our Board of Directors we intend to evaluate strategic alternatives, including a possible sale of the company.

Results of Operations



Revenue.We recognized revenue of $753,000 for the year ended December 31, 2010 compared to $2.8 million for the year ended
December 31, 2009. Revenue was derived from a grant awarded by the DTRA of the U.S. Department of Defense. The contract award of $3.8 million was over a two year
period which began in August 2008. The revenue from this grant was fully recognized as of June 30, 2010.

Research and development expense.Research and development expense decreased $2.0 million to $2.5 million for the year ended
December 31, 2010. In conjunction with work performed under the grant awarded by DTRA, costs incurred decreased $1.4 million in the year ended December 31, 2010. Lower salary,
benefit and incentive compensation costs of approximately $0.3 million were partially

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offset
by approximately $0.1 million of higher expenses related to our IV formulation program for the year ended December 31, 2010 as compared to the same period last year. Research and
development expenses related to the FDA review of cethromycin including the June 2, 2009 AIDAC meeting, were $0.4 million for the year ended December 31, 2009.

General and administrative expense.General and administrative expenses were $4.4 million for the year ended December 31,
2010, a
decrease of approximately $1.9 million compared to the same period last year. This result reflects lower salary, benefit and incentive compensation costs of $0.8 million and decreased
facility expenses of $0.2 million as a result of renewing our lease agreement at a lower rate per square foot and reduced amount of space. In addition, legal services and other administrative
costs were approximately $0.8 million lower for the year ended December 31, 2010 compared to the same period previous year and in the year ended December 31, 2009 we recorded a
non-cash charge of $0.2 million to expense capitalized leasehold improvements which no longer are used in our operations.

Impairment charge.In the fourth quarter 2010, we decided to make our commercial launch materials available for sale. Based on
discussions with
prospective purchasers, none of which have resulted in a sale, we determined that the value of the commercial launch materials was impaired, and therefore recorded a $2.5 million
non-cash impairment charge during the fourth quarter of 2010 to eliminate the carrying value in excess of fair value.

Interest income.Interest income decreased $3,000 to $8,000 for the year ended December 31, 2010 as compared to the same period
last year.

Interest expense.Interest expense of $946,000 decreased $91,000 for the year ended December 31, 2010 as compared to the same
period last
year. This result reflects the retirement of our $2.0 million promissory note with Dr. Flavin in exchange for 47,619,047 shares of our common stock in July 2010 and the repayment of
$1.5 million and $420,000 of our outstanding loan balance with our lender in April 2010 and October 2010, respectively.

Other (income) expense, net.In October 2010, we were awarded a $245,000 cash grant under the Qualifying Therapeutic Discovery Project
which was
created by Congress as part of the Patient Protection and Affordable Care Act of 2010 and for the year ended December 31, 2009 we recorded a $146,000 currency transaction loss related to the
procurement of commercial launch materials.



Revenue.We reported revenue of $2.8 million for the year ended December 31, 2009 compared to $241,000 for the year ended
December 31, 2008. Revenue was derived from a grant awarded by DTRA. The contract award of $3.8 million is over a two year period which began in August 2008.

Research and development expense.Research and development expense decreased $11.2 million to $4.5 million for the year ended
December 31, 2009. Included in the prior year amount is a $10.0 million milestone expense incurred under our license agreement for cethromycin with Abbott. The milestone was triggered
upon submission of the cethromycin NDA to the FDA, which occurred on September 30, 2008. In addition, for the year ended December 31, 2008, we incurred cethromycin clinical trial related
expenses of $0.4 million and manufacturing expenses in relation to process optimization activities of $0.7 million. Expenses related to the compilation and FDA review of cethromycin
totaled $0.2 million for the year ended December 31, 2009 compared to $2.1 million for the same period last year. In conjunction with work performed under the grant awarded by
DTRA, costs incurred increased $2.1 million in the year ended December 31, 2009. Lower salary and benefit costs of $0.6 million for the year ended December 31, 2009 were
partially offset by expenses related to the FDA's June 2, 2009 AIDAC meeting which were approximately $0.3 million.

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General and administrative expense.General and administrative expenses decreased $0.8 million to $6.3 million for the year
ended
December 31, 2009. This result reflects $0.8 million of costs incurred in the prior year related to a various marketing programs, decreased facilities and other administrative costs of
$0.4 million and lower salary, benefit and other compensation expense of $0.3 million. These decreases were partially offset by increased legal and other professional services of
$0.5 million and a non-cash charge of $0.2 million to expense capitalized leasehold improvements which will no longer be used in our operations.

Interest income.Interest income declined $295,000 to $12,000 for the year ended December 31, 2009, resulting from a decrease of
cash, which
was used for the continued development and funding of cethromycin.

Interest expense.Interest expense increased $511,000 in the year ended December 31, 2009 as compared to the same period last year.
The
increase is the result of borrowing an additional $6.0 million on our line of credit in October 2008 for the continued development and funding of cethromycin and a higher interest rate.

Other (income) expense, net.For the year ended December 31, 2009 we recorded a $146,000 currency transaction loss related to the
procurement
of commercial launch materials.

Liquidity and Capital Resources

We have devoted substantially all of our cash resources to research and development and general and administrative expenses. To date,
we have not generated any revenues from the sale of products, and we do not expect to generate any such revenues in the near term, if at all. As a result, we have incurred an accumulated deficit of
$140.9 million as of December 31, 2010 and
we expect to incur significant operating losses for the foreseeable future. As of December 31, 2010 we had negative working capital of $10.3 million and cash and cash equivalents were
$0.2 million. Since our inception in 1999 to August 2005, we financed our operations primarily through debt and capital contributions from our founder and controlling stockholder and borrowings
under our bank line of credit. In August 2005 we completed our initial public offering in which we raised $28.7 million, net of underwriters discount and offering costs. Since that time, we
have completed three private placements in which we raised $52.8 million, net of underwriters' discounts and offering costs and raised additional debt financing through our $10.0 million
bank line of credit. Between January 2009 and March 2010 we raised $15.6 million under the 2008 and 2009 SEDA facilities. And in July 2010 we completed a secondary public offering and raised
approximately $2.5 million (including the exercise of unit warrants issued as part of that offering), net of placement agent fees and offering expenses payable by us. Between October 2010 and
January 2011, we raised $1.1 million under the 2010 SEDA facility, which was terminated in January 2011.

In
January 2011, we entered into an Investment Agreement with Dutchess, for the sale of up to $5.0 million of shares of our common stock over a period of two years. We also have
an effective registration statement on file with the SEC for the purchase and sale of up to 72,162,601 shares, with respect to common stock issuable under the agreement with Dutchess. Through
March 23, 2011 we have issued 47,403,618 shares to Dutchess, including 2,475,248 shares as a commitment fee, and received proceeds of approximately $0.7 million. Based on the last reported
share price of our common stock on March 21, 2011, we would be able to raise approximately an additional $0.3 million through the use of the Dutchess Agreement.

In
September 2001, we incurred indebtedness under a $2.0 million promissory note with our Chief Executive Officer, which bears interest at 7.75%. In July 2010, acting through the
independent audit committee of our Board of Directors, we entered into an agreement providing that our $2.0 million promissory note with Dr. Flavin would be exchanged for 47,619,047
shares of our common stock. The

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price
of $0.042 per share used in the exchange was the same price per share used in our public equity offering. As a result of the exchange, the promissory note was cancelled and retired and accrued
interest of $52,000 has been deferred based on our current liquidity situation.

We
have a revolving line of credit with a financial institution under which we had $8.1 million and $10.0 million outstanding as of December 31, 2010 and 2009,
respectively. In September 2010, we entered into a Second Amended and Restated Business Loan Agreement and related loan documents with our lender to give effect to letter agreements we entered into in
May and June 2010. Among other things, the amendment extends the loan maturity by one year to January 1, 2012. Under the terms of the agreement, we repaid $1.5 million of the outstanding
loan balance on April 1, 2010 and were required to further reduce the balance by an additional $1.5 million by October 1, 2010 and $1.0 million by April 1, 2011. Our
Chief Executive Officer, Michael T. Flavin, Ph.D., provided a personal guarantee to the loan facility until the principal balance is reduced to $7.0 million. In addition, the interest rate on
the outstanding loan balance increased from 8.5% to 10.0% under the terms of the amended loan agreement. In connection with the amendment, we also issued to our lender 500,000 warrants, which are
exercisable at $0.042 per share, and will issue an additional 500,000 warrants in September 2011.
We have also agreed that the line of credit is secured by substantially all of our assets including, subject to Abbott Laboratories' consent which has not been provided, our rights under the license
agreement for cethromycin with Abbott Laboratories, and is further secured by 2.5 million shares of our common stock held by ALS Ventures, LLC. The credit agreement contains a material adverse
change clause, which is subject to the judgment of the lender and, if triggered, can accelerate the payment of the debt.

In
October 2010, we paid $420,000 in a principal reduction to our lender toward a mandatory prepayment of $1.5 million that was due on October 1, 2010. Until the balance of
the prepayment is made, we are subject to the default provisions of the loan documents including acceleration of payment.

In
November 2010, we entered into a Forbearance Agreement with our lender relating to the Second Amended and Restated Business Loan Agreement. Under the terms of the agreement, the
lender agreed to forbear from exercising rights and remedies under the loan agreement from the date of the agreement to January 3, 2011, subject to certain conditions. Among other things, we
were required to engage an advisor for purposes of reviewing our business plans, budgets and expenditures and making recommendations regarding the same. We were also required to submit to the lender a
business plan outlining our budgets and capital raising plans.

In
December 2010, we entered into an Omnibus Amendment with our lender relating to the Second Amended and Restated Business Loan Agreement and Forbearance Agreement. Under the terms of
the amendment, the lender agreed to waive the existing defaults under the loan agreement and we agreed to make an interest reserve payment of $186,000 by January 10, 2011 which was paid on that
date. Upon receipt of this interest reserve payment, the due date for the $1.1 million principal payment owed by us was extended to April 1, 2011. The $1.1 million principal
payment, as well as an additional $1.0 million principal payment also due on April 1, 2011, can be deferred until January 1, 2012 if we pay $486,000 in additional interest reserve
by April 1, 2011.

On
February 21, 2011, we received a letter from our lender informing us that we were in default under the loan documents governing our principal credit facility. The letter
indicated that we had failed to fund an interest reserve account as required by an amendment to the credit facility. The lender requested that we cure such default by February 25, 2011. The
lender noted that it was reserving the right to exercise all rights and remedies under the loan documents if we failed to meet the payment deadline. Remedies available to the lender include, among
other things, the right to accelerate payment of all amounts outstanding under the line of credit.

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On
February 25, 2011, we informed the lender that we would not be funding the interest reserve account in the amount demanded in the notice of default. We did, however, pay our
February 2011 interest payment to remain current with our interest payment obligation. Following this payment, we met with the lender and are engaged in a dialogue to develop a constructive and
workable solution to the current liquidity situation, although there can be no guarantee that such a solution will be reached, or reached on terms that would be acceptable to us or that would not
require us to file for bankruptcy.

Net
cash used in operating activities was $6.4 million for the year ended December 31, 2010 compared to $11.9 million for the year ended December 31, 2009.
Approximately $1.7 million of cash was used in our cethromycin programs in the year ended December 31, 2010, compared to $6.1 million in the same period last year. These amounts
are net of DTRA grant award funds, which reimburse us for certain research and development expenses associated with the grant. Cash used for general corporate purposes was $4.7 million in the
year ended December 31, 2010 compared to $5.8 million for the year ended December 31, 2009.

Cash
provided from financing activities was $3.7 million for the year ended December 31, 2010 compared to $13.3 million in 2009. In July 2010 we closed our public
offering and received approximately $1.3 million net of fees paid through December 31, 2010 and through the exercise of unit warrants received an additional $1.4 million in net
proceeds as a result of these exercises. For the year ended December 31, 2010, we received approximately $3.0 million, net of offering expenses, for the sale of 50,659,541 shares under
our 2009 and 2010 SEDA facilities compared to $13.2 million reflecting the sale of 43,986,137 shares under the 2008 and 2009 SEDA facilities for the year ended December 31, 2009.
Additionally, we repaid approximately $1.9 million of our outstanding loan balance to our lender in 2010.



As of December 31, 2010, the annual amounts of future minimum payments under debt obligations, interest, lease obligations and
other long term liabilities consisting of executed research and development, and license agreements are as follows:

Payments Due by December 31,2011

2012

2013

2014

2015

TotalBank line of credit

$
2,080,000

$
6,000,000

$


$


$


$
8,080,000Interest


863,976


1,762


1,040


237





867,015CABP program related costs


229,870














229,870Biodefense program related costs


80,539














80,539Grant payable


500,000














500,000Operating leases


111,840


87,965


9,480


2,370





211,655Capital leases


4,779


5,416


6,137


4,884





21,216Total

$
3,871,004

$
6,095,143

$
16,657

$
7,491

$


$
9,990,295


The
above table does not include the potential $30.0 million product based milestone payment under our license agreement with Abbott which we will owe Abbott if cethromycin is
approved for marketing by the FDA. Under the terms of the amended license agreement, $20.0 million is payable within 20 business days after receipt of U.S. regulatory approval,
$5.0 million is payable within 6 months of U.S. regulatory approval and $5.0 million is payable within 12 months of U.S. regulatory approval. Thereafter, we would owe
Abbott an additional $2.5 million upon reaching $200.0 million in aggregate net sales of cethromycin and $5.0 million upon reaching $400.0 million in aggregate net sales.
The periods in which milestone obligations become payable, if at all, cannot be estimated due to uncertainties associated with the completion or achievement of the milestone.

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As
a result of our default status with our lender, the entire $8.1 million outstanding line of credit balance is classified as a current liability on the December 31, 2010
balance sheet. The above table reflects principal and interest obligations based on the terms of the loan agreement that existed as of December 31, 2010 prior to the notification we received
from the lender regarding our default under the terms of the loan agreement.

In
August 2008, the DTRA of the DoD awarded us a two-year contract worth up to $3.8 million to further study cethromycin as a potential broad-spectrum medical
countermeasure. In conjunction with the grant awarded by the DTRA, we entered into subcontractor arrangements to further study cethromycin as a potential broad-spectrum medical countermeasure. The
subcontractors' costs were approximately $3.0 million over approximately a two-year period which began in August 2008.

Our
commitments under operating leases consist of payments made to a related party relating to our facilities lease in Woodridge, Illinois, which expires on October 1, 2012.
Additionally, we rent certain office equipment under operating leases.

We
will not be generating any product-based revenues or realizing cash flows from operations in the near term, if at all. We are currently in default on our line of credit arrangement
and we may not have sufficient cash or other funding available to complete our anticipated business activities for the remainder of 2011. In order to continue our business activities during 2011, we
intend to raise additional capital through the issuance of equity securities, continuing our efforts in applying for grant awards through various agencies and by licensing our lead compound,
cethromycin, to commercial partners. We believe, based upon current market conditions, commercial partnership agreements would include a series of milestone payments, including up-front
milestones that would fund our continued operations. Although management believes we could secure commercial partnerships, there can be no assurances that such partnerships will be available at terms
acceptable to us, if at all. In January 2011, we entered into the Investment Agreement with Dutchess for the sale of up to $5.0 million of shares of our common stock over a two-year
commitment period. Under the terms of the Investment Agreement, we have the right to sell, from time to time, in our discretion, newly-issued shares of our common stock to Dutchess at a discount to
the current market price of 5%. We also have an effective registration statement on file with the SEC for the purchase and sale of up to 72,162,601 shares, with respect to common stock issuable under
the agreement with Dutchess. Through March 23, 2011 we have issued 47,403,618 shares to Dutchess, including 2,475,248 shares as a commitment fee, and received proceeds of approximately $0.7
million. Based on the last reported share price of our common stock on March 21, 2011, we would be able to raise approximately an additional $0.3 million through the use of the Dutchess
Agreement. There is also a reasonable possibility that due to the default on our line of credit arrangement, depending on the nature of any actions our lender would take, the Company may need to file
for bankruptcy in the near term. If we raise additional
capital by issuing equity securities, our shareholders could experience substantial dilution. As a result of our current financial situation and the uncertainty in our ability to obtain needed
financing through equity offerings, commercial partnerships and grant awards or other means, there is substantial doubt about our ability to continue as a going concern. In further recognition of our
current financial situation, on January 3, 2011, we publicly announced that with the oversight of our Board of Directors we intend to evaluate strategic alternatives, including a possible sale
of the company.

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



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

Off-Balance Sheet Arrangements

Under the definition contained in Item 303 (a)(4)(ii) of Regulation S-K, we do not have any
off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or
conditions. While our significant accounting policies are described in more detail in the notes to our financial statements included in this Annual Report, we believe the following accounting policies
to be the most critical judgments and estimates used in the preparation of our 2010 financial statements.



Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes or because of a change in the intended use of
such assets. Long lived asset impairment exists when the estimated fair value of a long lived asset is less than its carrying value. In the fourth quarter 2010, we decided to make our commercial
launch materials available for sale. Based on discussions with prospective purchasers, none of which have resulted in a sale, we determined that the value of the commercial launch materials was
impaired, and therefore recorded a $2.5 million non-cash impairment charge during the fourth quarter of 2010 to eliminate the carrying value in excess of the estimated fair value.
This charge is classified within "Impairment charge" in our consolidated statement of operations for the year ended December 31, 2010. An income-based valuation technique was used to measure
fair value as of December 31, 2010 using information from discussions with prospective purchasers. As of December 31, 2010 the estimated fair value of the commercial launch materials was
$250,000 and is classified as a non-current "Assets held for sale" in our consolidated balance sheet.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk.

Our exposure to market risk is currently confined to our cash, cash equivalents, and line of credit. We currently do not hedge interest
rate exposure. We have not used derivative financial instruments for speculation or trading purposes. Because of the short-term maturities of our cash and cash equivalents, we do not
believe that an increase in market rates would have any significant impact on their realized value.

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Item 8.Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of
Advanced Life Sciences Holdings, Inc.
Woodridge, Illinois

We
have audited the accompanying consolidated balance sheets of Advanced Life Sciences Holdings, Inc. (a Delaware corporation in the development stage) and its subsidiary (the
"Company") as of December 31, 2010 and 2009, and the related consolidated statements of operations, total equity (deficit), and cash flows for each of the three years in the period ended
December 31, 2010 and for the period from January 1, 1999 (inception) through December 31, 2010. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Advanced Life Sciences Holdings, Inc. and its subsidiary
as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, and for the period from
January 1, 1999 (inception) to December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the
Company's default on its line of credit arrangement, its recurring losses from operations and stockholders' capital deficiency, combined with the lack of sufficient cash on-hand or other
available funding to meet its business requirements for the foreseeable future raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters
are also discussed in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The
Company is in the development stage at December 31, 2010.

/s/ DELOITTE & TOUCHE LLP

Chicago,
Illinois
March 24, 2011

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ADVANCED LIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY  (A Development Stage Company)        CONSOLIDATED BALANCE SHEETS

December 31,
2010

December 31,
2009ASSETSCURRENT ASSETS:Cash and cash equivalents

$
159,596

$
2,841,801Grant receivable





530,219Prepaid insurance


33,576


111,761Other prepaid expenses


11,612


88,535Total current assets


204,784


3,572,316PROPERTY AND EQUIPMENT:Furniture and fixtures


214,380


244,072Computer software and equipment


281,257


258,786Leasehold improvements


177,253


177,253Total property and equipmentat cost


672,890


680,111Less accumulated depreciation


(628,347
)

(624,158
)Property and equipmentnet


44,543


55,953OTHER ASSETS:Assets held for sale


250,000


2,760,936Deferred offering and financing costs


248,266


13,566Other long-term assets


25,000


25,000Total other assets


523,266


2,799,502TOTAL ASSETS

$
772,593

$
6,427,771LIABILITIES AND EQUITY (DEFICIT)CURRENT LIABILITIES:Accounts payable

$
1,211,113

$
604,334Accrued payroll


34,803


664,436Other accrued expenses


548,725


661,504Accrued interest payable


99,134


73,194Short-term lease payable


4,829


4,350Current portion of the line of credit


8,080,000


Short-term grant payable


500,000


Total current liabilities


10,478,604


2,007,818Long-term lease payable


16,011


Long-term grant payable





500,000Long-term notes payablerelated party





2,000,000Line of credit





10,000,000Total liabilities


10,494,615


14,507,818COMMITMENTS AND CONTINGENCIESEQUITY (DEFICIT):Common stock, $0.01 par value620,000,000 shares authorized and 259,303,325 issued and outstanding at December 31, 2010; 120,000,000 shares
authorized and 84,925,010 issued and outstanding at December 31, 2009


2,593,033


849,250Additional paid-in capital


128,557,628


122,621,392Deficit accumulated during the development stage


(140,872,683
)

(131,550,689
)Noncontrolling interest in subsidiary





Total equity (deficit)


(9,722,022
)

(8,080,047
)TOTAL LIABILITIES AND EQUITY (DEFICIT)

$
772,593

$
6,427,771


See notes to consolidated financial statements.

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ADVANCED LIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY  (A Development Stage Company)        CONSOLIDATED STATEMENTS OF OPERATIONS

Period From
Inception
(January 1, 1999)
Through
December 31, 2010Year ended December 31,2010

2009

2008Revenue:Management fees

$


$


$


$
1,161,180Grants


752,853


2,793,191


240,830


4,822,445Royaltyrelated party











45,238Total revenue


752,853


2,793,191


240,830


6,028,863Expenses:Research and development


2,499,488


4,462,281


15,709,293


97,542,170Contracted research and developmentrelated party











7,980,299Selling, general and administrative


4,371,071


6,322,849


7,116,549


37,742,557Impairment charge


2,510,936








2,510,936Total expenses


9,381,495


10,785,130


22,825,842


145,775,962Loss from operations


(8,628,642
)

(7,991,939
)

(22,585,012
)

(139,747,099
)Net other (income) expense:Interest income


(8,360
)

(11,561
)

(306,846
)

(2,968,783
)Interest expense


946,191


1,036,762


525,703


5,131,806Other (income) expense, net


(244,479
)

146,092





(98,387
)Gain on sale of interest in Sarawak Medichem Pharmaceuticals joint venture











(939,052
)Net other expense


693,352


1,171,293


218,857


1,125,584Net loss


(9,321,994
)

(9,163,232
)

(22,803,869
)

(140,872,683
)Less net loss attributable to the noncontrolling interest in subsidiary











Net loss attributable to Advanced Life Sciences Holdings, Inc.


(9,321,994
)

(9,163,232
)

(22,803,869
)

(140,872,683
)Less accumulated preferred stock dividends of subsidiary for the period


175,000


175,000


175,000


2,019,792Net loss available to common shareholders

$
(9,496,994
)
$
(9,338,232
)
$
(22,978,869
)
$
(142,892,475
)Net loss per share available to common shareholdersbasic and diluted

$
(0.06
)
$
(0.16
)
$
(0.59
)Weighted average shares outstandingbasic and diluted


153,372,740


57,781,126


39,098,943Unaudited pro forma share and per share information on a post-split basis(See Note 1)Pro forma net loss per share available to common shareholdersbasic and diluted

$
(1.86
)
$
(4.85
)
$
(17.63
)Pro forma weighted average shares outstandingbasic and diluted


5,112,425


1,926,038


1,303,298


See notes to consolidated financial statements.

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ADVANCED LIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY  (A Development Stage Company)        CONSOLIDATED STATEMENTS OF TOTAL EQUITY (DEFICIT)

Deficit
Accumulated
During the
Development
StageCommon StockAdditional
Paid-in
Capital

Noncontrolling
Interest
in SubsidiaryShares

Amount

TotalBALANCEJanuary 1, 1999 (inception)




$


$


$


$


$
Issuance of stock (at inception)


1,588,000


250,000











250,000Issuance of common stock, net of offering costs (August 2005)


6,721,814


67,218


29,210,558








29,277,776Issuance of common stock, net of offering costs (March 2006)


10,233,464


102,335


33,266,653








33,368,988Issuance of common stock, net of offering costs (December 2007)


10,191,083


101,911


17,750,327








17,852,238Exchange of shares under recapitalization (December 2004)


(1,629,685
)

(256,563
)










(256,563
)Issuance of shares under recapitalization (December 2004)


9,482,015


94,820


161,743








256,563Capital contributions (December 2004)








12,711,330








12,711,330Issuance of 14,887 warrants (December 2004)








11,898








11,898Issuance of common stock in exchange for licenses (December 2004)


1,122,569


11,226


8,988,774








9,000,000Issuance of common stock in exchange for reduction of milestones payable (August 2005)


600,000


6,000


3,000,000








3,006,000Modification of 14,887 warrants (August 2005)








18,925








18,925Issuance of stock related to option exercises (since inception)


193,727


8,083


27,192








35,275Compensation expense related to stock options (since inception)








1,712,132








1,712,132Net loss (since inception)











(99,583,588
)




(99,583,588
)BALANCEDecember 31, 2007


38,502,987

$
385,030

$
106,859,532

$
(99,583,588
)
$


$
7,660,974Adjustment to net offering costs (December 2007)








(50,141
)







(50,141
)Issuance of common stock, net of offering costs (September 2008)


1,888,606


18,886


1,634,193








1,653,079Issuance of common stock as payment for commitment fees (September 2008)


393,339


3,933


296,067








300,000Issuance of 65,000 warrants (October 2008)








7,445








7,445Issuance of stock related to option exercises


26,000


260


3,822








4,082Compensation expense related to stock options








850,889








850,889Net loss











(22,803,869
)




(22,803,869
)BALANCEDecember 31, 2008


40,810,932

$
408,109

$
109,601,807

$
(122,387,457
)
$


$
(12,377,541
)Issuance of common stock under the standby equity distribution agreements, net of offering costs


43,986,137


439,862


12,475,173








12,915,035Issuance of stock related to option exercises


127,941


1,279


18,855








20,134Compensation expense related to stock options








525,557








525,557Net loss











(9,163,232
)




(9,163,232
)BALANCEDecember 31, 2009


84,925,010

$
849,250

$
122,621,392

$
(131,550,689
)
$


$
(8,080,047
)Issuance of common stock under the standby equity distribution agreements, net of offering costs


50,659,541


506,596


2,384,313








2,890,909Issuance of common stock, net of offering costs (July 2010)


37,918,800


379,188


574,759








953,947Issuance of common stockdebt exchange (July 2010)


47,619,047


476,190


1,523,810








2,000,000Issuance of common stock as payment for commitment fees (September 2010)


1,984,127


19,841


80,159








100,000Issuance of common stock for Unit Warrant Exercises, net of offering costs


36,196,800


361,968


1,080,283








1,442,251Compensation expense related to stock options








292,912








292,912Net loss











(9,321,994
)




(9,321,994
)BALANCEDecember 31, 2010


259,303,325

$
2,593,033

$
128,557,628

$
(140,872,683
)
$


$
(9,722,022
)


See notes to consolidated financial statements.

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ADVANCED LIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY  (A Development Stage Company)        CONSOLIDATED STATEMENTS OF CASH FLOWS

Twelve months ended December 31,

Inception
(January 1, 1999)
Through
December 31, 20102010

2009

2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(9,321,994
)
$
(9,163,232
)
$
(22,803,869
)
$
(140,872,683
)Adjustments to reconcile net loss to net cash flows used in operating activities:Depreciation and amortization


32,513


106,907


218,796


980,990Non-cash interest expense


52,214


13,867


8,050


174,954Stock compensation expense


292,912


525,557


850,889


3,381,490Non-cash impairment charge


2,510,936








2,510,936Non-cash research and development











24,466,667Non-cash settlement of milestone payment











6,000Gain on sale of interest in Sarawak Medichem Pharmaceuticals (SMP)











(939,052
)(Gain) loss on disposal


(1,435
)

244,659


35


256,553Changes in operating assets and liabilities:Clinical supplies











533,333Accounts receivable


530,219


(466,775
)

(63,444
)

Prepaid expenses


155,108


170,825


946,899


(53,736
)Commercial launch materials





(2,760,936
)




(2,760,936
)Other assets





(25,000
)

10,000


(16,452
)Accounts payable


146,158


(616,900
)

(1,464,517
)

750,492Accrued expenses


(854,096
)

33,679


(1,814,721
)

471,846Licenses payable











(11,000,000
)Accrued interest on debt


25,940


622


49,816


677,197Net cash flows from operating activities


(6,431,525
)

(11,936,727
)

(24,062,066
)

(121,432,401
)CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment





(5,466
)

(362,353
)

(1,098,167
)Proceeds from the sale of SMP











939,052Proceeds from the sales of investments











31,557,158Purchase of investments











(31,557,158
)Net cash flows from investing activities





(5,466
)

(362,353
)

(159,115
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock and capital contributions


5,707,213


13,178,259


1,664,713


108,258,762Proceeds from issuance of note payable and line of credit





85,000


6,000,000


15,103,691Proceeds from grants











500,000Proceeds from stock options exercised





20,134


4,082


59,491Payments for financing fees


(34,714
)

(18,039
)

(35,000
)

(87,753
)Payments of debt


(1,920,000
)







(1,920,000
)Payments on capital leases


(3,178
)

(8,468
)

(7,259
)

(163,078
)Net cash flows from financing activities


3,749,321


13,256,886


7,626,536


121,751,113NET (DECREASE) INCREASE IN CASH


(2,682,205
)

1,314,693


(16,797,883
)

159,596CASHBeginning of period


2,841,801


1,527,108


18,324,991


CASHEnd of period

$
159,596

$
2,841,801

$
1,527,108

$
159,596SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest

$
816,261

$
1,023,530

$
477,835

$
4,230,432SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONSNoncash investment activity:Purchase of property and equipment under capital leases


22,471








186,720Capital expenses included in accounts payable








5,466


Noncash financing activity:Issuance of common shares for licenses











9,000,000Issuance of common shares for reduction of milestone payment











3,000,000Debt discount











30,823Unpaid costs associated with the issuance of common stock


320,257





61,775


320,257SEDA and financing related costs


385,205





423,911


722,650Issuance of common shares for related party note payable


2,000,000








2,000,000


See notes to consolidated financial statements.

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ADVANCED LIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY  (A Development Stage Company)        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        YEARS ENDED
DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION  (JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

1. Nature of Business

Advanced Life Sciences Holdings, Inc. and its subsidiary Advanced Life Sciences, Inc. (together, the "Company") conduct new drug research and development in the fields of
infectious disease, oncology and respiratory disease. Since inception, the Company has devoted substantially all of its efforts to activities such as financial planning, capital raising and product
development, and has not derived significant revenues from its primary business activity. Accordingly, the Company is in the development stage, as defined by the accounting principles generally
accepted in the United States of America ("GAAP") for development stage enterprises.

The
Company is subject to risks and uncertainties common to drug discovery companies, including technological change, potential infringement on intellectual property of third parties,
new product
development, regulatory approval and market acceptance of its products, activities of competitors, availability of funding and its limited operating history.

In
January 1999, MediChem Life Sciences, Inc. ("MediChem") contributed all of the net assets of its proprietary drug development business, including MediChem's 50% interest in
Sarawak MediChem Pharmaceuticals, Inc. ("SMP") to a wholly-owned subsidiary, Advanced Life Sciences, Inc. ("ALS Inc."), in exchange for 1,588,000 shares of common stock.

In
June 1999, MediChem exchanged its investment in 100% of the outstanding common stock of ALS Inc. for nonvoting preferred stock issued by ALS Inc. effecting a
spin-off of ALS Inc. Prior to the spin-off, Dr. Michael Flavin, the sole stockholder, owned 100% of MediChem and ALS Inc., then a wholly-owned subsidiary
of MediChem. As a result of the spin-off, Dr. Flavin became the sole common stockholder of ALS Inc. MediChem, which has subsequently been acquired by deCODE Genetics, holds
100% of the preferred stock of ALS Inc., which was issued in exchange for common stock held at the June 1999 spin-off.

In
December 2004, ALS Inc. executed a plan of reorganization. The Company was formed as a Delaware corporation with Dr. Flavin as its chief executive officer. Common
shareholders of ALS, Inc. exchanged their 1,629,685 common shares for 1,629,685 shares of common stock of the Company, and ALS, Inc. became a subsidiary of the Company.

In
April 2005, the Company filed a registration statement with the Securities and Exchange Commission ("SEC") covering the proposed sale by the Company of its common stock to the public.
In June 2005, the Board approved the amendment and restatement of the Company's Articles of Incorporation to provide for an increase in the number of authorized shares of common stock and preferred
stock to 60,000,000 shares and 5,000,000 shares, respectively, and a 3.97-for-1 stock split of the Company's common stock. All references in the consolidated financial
statements to shares of common stock, common stock options, common stock prices and per share of common stock amounts have been adjusted retroactively for all periods presented to reflect this stock
split. In August 2005, the Company completed the initial public offering of its common stock in which the Company sold 6,400,000 shares of common stock to the public at $5.00 per share, resulting in
gross proceeds of $32.0 million. The Company also completed a concurrent offering of 600,000 shares to an existing stockholder in exchange for a $3.0 million reduction of a milestone
payment obligation under its license agreement with the stockholder. In September 2005, the Company's underwriters exercised their option

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

1. Nature of Business (Continued)

to
purchase 100,000 shares to cover over-allotments resulting in additional gross proceeds of $500,000. In connection with these offerings, the Company paid approximately
$2.3 million in underwriting discounts and incurred other offering expenses of approximately $1.5 million. The net cash proceeds from the offerings were approximately
$28.7 million.

In
March 2006, the Company raised approximately $33.4 million, net of underwriting discounts and offering expenses, in connection with the issuance of 10,233,464 shares of its
common stock at a price of $3.53 per share and warrants to purchase an additional 5,116,732 shares of its common stock at an exercise price of $3.81 per share.

In
December 2006, the Company completed the sale of ALS Inc.'s 50% equity interest in SMP to the State Government of Sarawak, Malaysia ("Sarawak Government"), through Craun Sdn.
Bhd. ("CRAUN") for $1.0 million. Upon the closing of the Stock Purchase Agreement, the Sarawak Government became the sole owner of SMP and its HIV-therapeutic candidate, Calanolide
A. The net cash proceeds from the sale were approximately $940,000. In connection with the sale, the Company made customary representations and warranties and provided indemnification for losses not
to exceed the purchase price of $1 million. The parties mutually agreed to waive any future legal claims otherwise arising out of the SMP joint venture.

In
December 2007, the Company raised approximately $17.9 million, net of underwriting discounts and offering expenses in connection with the issuance of 10,191,083 shares and
warrants to purchase 5,095,542 shares of its common stock at a price of $1.96 per share. The warrant exercise price is $2.15 per share and they expire in December 2012.

In
September 2008, in connection with the Company's entry into a development and commercialization agreement, the Company entered into a stock purchase agreement with Wyeth (Wyeth was
subsequently acquired by Pfizer and as a result will be referred to as "Pfizer" throughout these financial statements). Under the terms of agreement, Pfizer made an up-front investment in
the Company by purchasing 1,888,606 shares of its common stock at a price of $0.908 per share for approximately $1.7 million, net of offering expenses, representing approximately 4.9% of the
Company's total then outstanding shares. In August 2010 the development and commercialization agreement was terminated by mutual agreement among the parties.

In
September 2008, the Company and YA Global Investments, L.P. ("YA Global"), an affiliate of Yorkville Advisors, entered into a Standby Equity Distribution Agreement (the "2008
SEDA"). For the period of January 2009 through the end of the 2008 SEDA, the Company issued 9,883,994 shares to YA Global and received approximately $3.9 million. In addition, in September
2008, the Company paid YA Global a commitment fee of $300,000 by issuing 393,339 shares of its common stock. The Company and YA Global agreed to terminate the 2008 SEDA in June 2009.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

1. Nature of Business (Continued)

In
June 2009, after terminating the 2008 SEDA, the Company and YA Global Master SPV Ltd. ("YA Master"), an affiliate of Yorkville Advisors, agreed to enter into another Standby
Equity Distribution Agreement (the "2009 SEDA"). For the period from June 2009 through March 10, 2010, the Company issued 49,549,200 shares to YA Master and received proceeds of approximately
$11.7 million. Shares of common stock sold under the 2009 SEDA in excess of $9.0 million were sold with the consent of the Company's lender under its credit facility. In March 2010, the
Company and YA Master agreed to terminate the 2009 SEDA.

In
July 2010, the Company completed a public offering of 379,188 units at a price of $4.20 per unit, raising approximately $1.6 million in gross offering proceeds and
approximately $1.0 million in net proceeds after deducting placement agent fees and offering expenses payable by the Company. Each unit sold in the offering consisted of (i) 100 shares
of the Company's common stock, (ii) 100 stock warrants to purchase shares of common stock at an exercise price of $0.042 per share and (iii) one warrant to purchase an additional unit,
consisting of 100 shares of common stock and 100 stock warrants, at an exercise price of $4.20 per additional unit. The stock warrants may be exercised at any time during the period commencing six
months after the closing date and ending on the fifth anniversary of the closing date. The exercise period for the unit warrants has expired. Prior to expiration, the Company issued 36,196,800 shares
of common stock and 36,196,800 additional stock warrants through the exercise of unit warrants and received an additional $1.5 million in gross proceeds as a result of these exercises. Dawson
James Securities, Inc. ("Dawson James") acted as the placement agent for the offering. In addition to cash placement agent fees, the Company issued to Dawson James a compensation warrant to
purchase 1,516,752 shares of common stock at an exercise price of $0.0672 per share.

In
July 2010, the Company, acting through the independent audit committee of its Board of Directors, entered into an agreement with Dr. Flavin, providing that the Company's
$2.0 million promissory note with Dr. Flavin would be exchanged for 47,619,047 shares of the Company's common stock. The price of $0.042 per share used in the exchange was the same price
per share used in the Company's public equity offering. As a result of the exchange, the promissory note was cancelled and retired.

In
September 2010, the Company entered into another Standby Equity Distribution Agreement (the "2010 SEDA"), with YA Master for the sale of up to $10.0 million of shares of the
Company's common stock over a two-year commitment period. Under the terms of the 2010 SEDA, between October 2010 and January 2011, the Company sold 52,133,074 shares of its common stock to
YA Master at a discount to the current market price of 5% and received proceeds of approximately $1.1 million. Additionally, the Company paid to YA Master a commitment fee of $100,000 by
issuing 1,984,127 shares of its common stock. In January 2011, the Company and YA Master agreed to terminate the 2010 SEDA.

In
January 2011, the Company and Dutchess Opportunity Fund, II, LP ("Dutchess"), entered into an Investment Agreement for the sale of up to $5.0 million of shares of the
Company's common stock over a period of two years. Under the terms of the Investment Agreement, the Company may sell from time to time, in its discretion, newly-issued shares of its common stock to
Dutchess at a discount to the

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

1. Nature of Business (Continued)

current
market price of 5%. Additionally, the Company paid to Dutchess a commitment fee of $50,000 by issuing 2,475,248 shares of its common stock. The Company also has an effective registration
statement on file with the Securities and Exchange Commission ("SEC") for the purchase and sale of up to 72,162,601 shares, with respect to common stock issuable under the agreement with Dutchess.
Through March 23, 2011 the Company has issued 47,403,618 shares to Dutchess, including the shares issued as a commitment fee, and received proceeds of approximately $0.7 million.
Based on the last reported share price of the Company's common stock on March 21, 2011, the Company would be able to raise approximately an additional $0.3 million through the use of the
Dutchess Agreement.

On
March 17, 2011, the Company's Board of Directors authorized and approved a 1-for-30 reverse stock split. The Company's shares are not yet trading on a
post-split basis and the expected effective date of the reverse stock split is March 28, 2011, subsequent to the issuance of the Company's 2010 financial statements. Pro forma
weighted average shares outstanding and earnings per share calculations have been included on the face of the Company's consolidated statements of operations reflecting the post-split
effect of the pending reverse stock split. All other share information including shares issued and outstanding has been presented on a pre-split basis.

The
consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations and the realization of assets and liquidation of
liabilities in the ordinary course of business. Given the uncertainty described in the following paragraph, there is substantial doubt as to the Company's ability to continue as a going concern, and
therefore, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business. The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts nor to the amounts and classification of liabilities that may be necessary should the entity be unable to continue as a going concern.

The
Company has incurred losses since its incorporation in January 1999 and has funded its operations to date primarily from debt financings and capital contributions from its founder
and Chief Executive Officer, proceeds of the initial public offering and the subsequent private placements, including issuances of common stock under Standby Equity Distribution Agreement facilities.
The Company will not be generating any product-based revenues or realizing cash flows from operations in the near term, if at all. The Company is currently in default on its line of credit arrangement
and may not have sufficient cash or other funding available to complete its anticipated business activities for the remainder of 2011. In order to continue its business activities during 2011, the
Company intends to raise additional capital through the issuance of equity securities, continuing its efforts in applying for grant awards through various agencies and by licensing its lead compound,
cethromycin, to commercial partners. The Company believes, based upon current market conditions, commercial partnership agreements would include a series of milestone payments, including
up-front milestones that would fund its continued operations. Although management believes it could secure commercial partnerships, there can be no assurances that such partnerships will
be available at terms acceptable to the Company, if at all. As noted above, in January 2011, the Company entered into an Investment Agreement with Dutchess and through March 23, 2011 the
Company has issued 47,403,618 shares to Dutchess, including 2,475,248 shares as a commitment fee, and received proceeds of approximately $0.7 million. Based on

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

1. Nature of Business (Continued)

the
last reported share price of the Company's common stock on March 21, 2011, the Company would be able to raise approximately an additional $0.3 million through the use of the Dutchess
Agreement. If the Company raises additional capital by issuing equity securities, its shareholders could experience substantial dilution. There is also a reasonable possibility that due to the default
on the line of credit arrangement, depending on the nature of any actions the Company's lender would take, the Company may need to file for bankruptcy in the near term (see Note 4). As a result
of the Company's current financial situation and the uncertainty in its ability to obtain needed financing through equity offerings, commercial partnerships and grant awards or other means, there is
substantial doubt about its ability to continue as a going concern. In further recognition of the Company's current financial situation, in January 2011, it publicly announced that with the oversight
of its Board of Directors the Company intends to evaluate strategic alternatives, including a possible sale of the Company.

2. Summary of Significant Accounting Policies

Basis of PresentationThe consolidated financial statements include the accounts of the Company and its subsidiary ALS Inc. All significant
intercompany balances and transactions have been eliminated.

Cash and Cash EquivalentsThe Company considers all highly liquid investments with original maturities of three months or less when purchased to
be
cash equivalents.

Property and EquipmentProperty and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful
life of three to five years. Assets under capital leases were recorded at the present value of the minimum lease payments and are amortized over the shorter of their estimated useful lives or the term
of the respective leases using the straight-line method. Maintenance and repair costs are expensed as incurred. Fixed assets capitalized under capital leases amounted to $22,000 and
$30,000 as of December 31, 2010 and 2009, and accumulated depreciation of $2,000 and $26,000, as of December 31, 2010 and 2009, respectively.

Impairment of Long-Lived AssetsLong-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes or because of
a change in the intended use of such assets. Long-lived asset impairment exists when the estimated fair value of a long lived asset is less than its carrying value. In the fourth quarter
2010, the Company decided to make its commercial launch materials available for sale. Based on discussions with prospective purchasers, none of which have resulted in a sale, the Company determined
that the value of the commercial launch materials was impaired, and therefore recorded a $2.5 million non-cash impairment charge during the fourth quarter of 2010 to eliminate the
carrying value in excess of the estimated fair value. This charge is classified within "Impairment charge" in the Company's consolidated statement of operations for the year ended December 31,
2010. The measurement to determine the fair value of the commercial launch materials is considered a Level 3 measurement under GAAP, as it relies on unobservable inputs that are supported by
limited market activity. An income-based valuation technique was used to measure fair value as of December 31, 2010

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

2. Summary of Significant Accounting Policies (Continued)

using
information from discussions with prospective purchasers. As of December 31, 2010, the estimated fair value of the commercial launch materials was $250,000 and is classified as a
non-current "Assets held for sale" in the Company's consolidated balance sheet.

Deferred Offering and Financing CostsDeferred offering and financing costs represent legal, accounting, and commitment fees incurred to raise
capital
and obtain financing. In September 2010, the Company entered into the 2010 SEDA with YA Master for the sale of up to $10.0 million of shares of the Company's common stock over a two-year
commitment period. In connection with this agreement, the Company incurred deferred offering costs which included legal, accounting and commitment fees of approximately $293,000. These costs which are
attributable to a proposed offering of securities were deferred and ratably allocated against gross proceeds of future offerings under the 2010 SEDA. As of December 31, 2010, the unamortized
amount of deferred offering costs related to the 2010 SEDA was $119,000. Also in September 2010, the Company entered into an amended loan agreement with its lender. Deferred financing costs of
approximately $173,000 related to legal and other closing fees were incurred. These costs were capitalized and will be amortized over the life of the remaining term. The unamortized amount of deferred
financing costs related to this amended loan agreement was $130,000 as of December 31, 2010.

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Foreign Currency TranslationThe Company's functional currency is the U.S. dollar. As such, revenue and expense transactions denominated in
currencies
other than the Company's functional currency are translated into U.S. dollars at the exchange rates in effect at the time of such transactions. Monetary assets and liabilities are translated at
current rates at the balance sheet date. Gains or losses resulting from these translation adjustments are included in other income or expense. During 2009, the Company incurred foreign exchange losses
associated with certain purchases that had been denominated in foreign currencies. There was no foreign exchange activity in 2010.

Commercial Launch MaterialsThe Company may scale-up and make commercial quantities of its product candidates prior to the date when such
products will receive final Food and Drug Administration ("FDA") approval. The scale-up and production of commercial launch materials involves the risk that such products may not be
approved for marketing by the FDA on a timely basis, if at all. This risk notwithstanding, the Company may scale-up and build commercial launch materials of certain products that have not
yet received final governmental approval when the Company believes that such action is appropriate in relation to the commercial value of the product launch opportunity. The cost of these commercial
launch materials, which are not intended to be used in future research and development activities, were capitalized as a non-current asset awaiting the Company's receipt of FDA approval,
at which time the materials would be classified as inventory. In the fourth quarter of 2010, given its liquidity position, the Company decided to make the commercial launch materials

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

2. Summary of Significant Accounting Policies (Continued)

available
for sale, and held discussions with prospective purchasers. Although those discussions did not lead to a sale of the materials, based on those discussions, the Company determined that the
estimated value of its commercial launch materials was impaired and recorded an impairment charge to eliminate the carrying value in excess of fair value.

Research and Development ExpensesResearch and development expenses consist of internal research costs and fees paid for contract research in
conjunction with the research and development of the Company's proprietary product portfolio. All such costs are expensed as incurred including in-process research and development.
Clinical trial costs incurred by third parties are expensed as the contracted work is performed. The Company estimates both the total cost and time period of the trials and the percent completed as of
that accounting date. Research and development expenses resulting from contracts that require payments based upon the progress towards completion of certain milestones are estimated based upon the
percentage of completion method.

The
Company recognizes in-process research and development in accordance with GAAP. Assets to be used in research and development activities, specifically, compounds that
have yet to receive new drug approval from the FDA and would have no alternative use should approval not be given, are immediately charged to expense when acquired.

Clinical SuppliesClinical supplies consist of clinical trial raw material purchased from Abbott Laboratories which were valued at the lower of
cost
or market. Such supplies were expensed to research and development expense as they were manufactured into tablets for use in clinical trials.

Revenue RecognitionPayments received for the reimbursement of expenses for research and development activities are recorded in accordance with
FASB
ASC 605-45,Principal Agent Considerations. Pursuant to that guidance, for transactions in which the Company acts as principal, with
discretion to choose suppliers, bear credit risk and perform a substantive part of the services, revenue is recorded at the gross amount of the reimbursement. Costs associated with these
reimbursements are reflected as a component of research and development expenses.

Fair Value of Financial InstrumentsThe carrying values of certain of the Company's financial instruments, including cash equivalents and accounts
payable, approximate fair value due to their short maturities. As of December 31, 2010, the Company has an outstanding loan obligation with its lender in the amount of $8.1 million. The
terms of the amended loan agreement with the lender are such that a $1.1 million principal payment, as well as an additional $1.0 million principal payment also due on April 1,
2011, can be deferred until January 1, 2012 if the Company pays $486,000 in additional interest reserve by April 1, 2011 (see Note 4). The remaining $6.0 million balance is
due on January 1, 2012 and the loan carries an interest rate of 10%. The Company is currently in default of the loan documents governing the loan facility and is engaged in a dialogue to
develop a constructive and workable solution to its current liquidity situation, although there can be no guarantee that such a solution will be reached, or reached on terms that would be acceptable
to the Company. Given its current situation with its lender, the Company does not believe it is practicable to estimate a fair value of its outstanding loan obligation.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

2. Summary of Significant Accounting Policies (Continued)

Income TaxesDeferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company has determined that the deferred tax asset does not meet the "more likely
than not" criteria under GAAP for income taxes, and, accordingly, a valuation allowance has been recorded to reduce the net deferred tax asset to zero.

Milestone and Intellectual Property CostsMilestone and intellectual property costs consist of milestone payments made for agreed-upon
achievements in the course of development of the compounds the Company licenses. Milestone payments are expensed when the milestone is achieved.

Stock-Based CompensationStock-based compensation cost is measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation expense is recognized over the period that an employee provides service in exchange for the award. The Company utilizes a Black-Scholes-Merton option pricing model to
estimate the fair value of options.

Disclosure About Segments of an EnterpriseOperating segments are identified as components of an enterprise about which separate discrete
financial
information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions regarding resource allocation and assessing performance. To date, the
Company has viewed its operations and manages its business as principally one segment. The chief operating decision-maker is the Chief Executive Officer.

Recent Accounting PronouncementsIn April 2010, the FASB issued ASU 2010-17, which establishes a revenue recognition model for contingent
consideration that is payable upon the achievement of an uncertain future event, referred to as a milestone. The scope of this guidance is limited to research or development arrangements and requires
an entity to record the milestone payment in its entirety in the period received if the milestone meets all the necessary criteria to be considered substantive. An entity would not be precluded from
making an accounting policy election to apply another appropriate accounting policy that results in the deferral of some portion of the arrangement consideration. The statement is effective for fiscal
years (and interim periods within those fiscal years) beginning on or after June 15, 2010. The Company does not expect the adoption of ASU 2010-17 will have a material impact on its
statements of financial position, results of operations and cash flows.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

3. Related Party Transactions

The Company's Chief Executive Officer, Michael T. Flavin Ph.D., loaned $2.0 million to the Company in 2001 (see Note 4). Interest expense related to the note of $91,000,
$158,000 and $155,000 was recorded for the years ended December 31, 2010, 2009 and 2008, respectively.

In
July 2010, the Company, acting through the independent audit committee of the Company's Board of Directors, entered into an agreement with Dr. Flavin, providing that the
Company's $2.0 million promissory note with Dr. Flavin would be exchanged for 47,619,047 shares of the Company's common stock. The price of $0.042 per share used in the exchange was the
same price per share used in the Company's July 2010 public equity offering. As a result of the exchange, the promissory note was cancelled and retired and accrued interest of $52,000 has been
deferred based on the Company's current liquidity situation.

In
September 2010, the Company entered into a Second Amended and Restated Business Loan Agreement with a financial institution. As part of the amendment, the Company's Chief Executive
Officer provided a personal guarantee to the loan facility until the principal balance is reduced to $7.0 million (see Note 4).

The
Company leases facilities from the BioStart Property Group, LLC ("BioStart"), a wholly-owned subsidiary of Flavin Ventures, LLC, which is owned by the Company's Chief
Executive Officer. The lease, which commenced on October 1, 2009, is for a term of three years and provides the Company with 9,440 square feet of space at an annual rental rate of $10.50 per
square foot. The rental rate increases by 2.5% for the second year and by 3.0% in the final year of the lease term. The lease has a provision allowing the Company to negotiate an amendment to lease
additional laboratory and office space should the need arise. Lease payments totaled approximately $135,000, $235,000 and $284,000 for the years ended December 31, 2010, 2009 and 2008,
respectively (see Note 10).

4. Long Term Obligations

In September 2001, the Company incurred indebtedness under a $2.0 million promissory note with the Chief Executive Officer of the Company, which bears interest at 7.75%. On
January 4, 2010, the note was extended to January 5, 2012 and all other terms remained unchanged and in effect. In July 2010, the $2.0 million promissory note was exchanged for
47,619,047 shares of the Company's stock and as a result of the exchange, the promissory note was cancelled and retired and accrued interest of $52,000 has been deferred based on the Company's current
liquidity situation (see Note 3).

The
Company has a revolving line of credit with a financial institution under which the Company had $8.1 million and $10.0 million outstanding as of December 31,
2010 and 2009, respectively. In September 2010, the Company entered into an amended loan agreement and related documents, with its lender, amending its existing loan facility to give effect to letter
agreements the Company entered into in May and June 2010. Among other things, the amendment extends the loan maturity by one year to January 1, 2012. Under the terms of the agreement, the
Company repaid $1.5 million of the outstanding loan balance on April 1, 2010 and was required to further reduce the balance by an additional $1.5 million by October 1, 2010
and $1.0 million by April 1, 2011. The Company's Chief Executive Officer, Michael T. Flavin, Ph.D., provided a personal guarantee to the loan facility until the

59

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

4. Long Term Obligations (Continued)

principal
balance is reduced to $7.0 million. In addition, the interest rate on the outstanding loan balance increased from 8.5% to 10.0% under the terms of the amended loan agreement. In
connection with the amendment, the Company issued to its lender 500,000 warrants, which are exercisable at $0.042 per share, and will issue an additional 500,000 warrants in September 2011. The
Company also agreed that the line of credit is secured by substantially all of its assets including, subject to Abbott Laboratories' consent which has not been provided, its rights under its license
agreement for cethromycin with Abbott Laboratories, and is further secured by 2.5 million shares of the Company's common stock held by ALS Ventures, LLC. The credit agreement contains a
material adverse change clause, which is subject to the judgment of the lender and, if triggered, can accelerate the payment of the debt.

In
October 2010, the Company paid $420,000 in a principal reduction to its lender toward a mandatory prepayment of $1.5 million that was due on October 1, 2010. Until the
balance of the prepayment is made, the Company is subject to the default provisions of the loan documents including acceleration of payment.

In
November 2010, the Company entered into a Forbearance Agreement with its lender relating to the Second Amended and Restated Business Loan Agreement. Under the terms of the agreement,
the lender agreed to forbear from exercising rights and remedies under the loan agreement from the date of the agreement to January 3, 2011, subject to certain conditions. Among other things,
the Company was required to engage an advisor for purposes of reviewing the Company's business plans, budgets and expenditures and making recommendations regarding the same. The Company was also
required to submit to the lender a business plan outlining its budgets and capital raising plans.

In
December 2010, the Company entered into an Omnibus Amendment with its lender relating to the Second Amended and Restated Business Loan Agreement and Forbearance Agreement. Under the
terms of the amendment, the lender agreed to waive the existing defaults under the loan agreement and the Company agreed to make an interest reserve payment of $186,000 by January 10, 2011
which was paid on that date. Upon receipt of this interest reserve payment, the due date for the $1.1 million principal payment owed by the Company was extended to April 1, 2011. The
$1.1 million principal payment, as well as an additional $1.0 million principal payment also due on April 1, 2011, can be deferred until January 1, 2012 if the Company pays
$486,000 in additional interest reserve by April 1, 2011.

On
February 21, 2011, the Company received a letter from its lender informing it that the Company was in default under the loan documents governing its principal credit facility.
The letter indicated that the Company had failed to fund an interest reserve account as required by an amendment to the credit facility. The lender requested that the Company cure such default by
February 25, 2011. The lender noted that it was reserving the right to exercise all rights and remedies under the loan documents if the Company failed to meet the payment deadline. Remedies
available to the lender include, among other things, the right to accelerate payment of all amounts outstanding under the line of credit.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

4. Long Term Obligations (Continued)

On
February 25, 2011, the Company informed the lender that it would not be funding the interest reserve account in the amount demanded in the notice of default. The Company did,
however, pay its February 2011 interest payment to remain current with its interest payment obligation. Following this payment, the Company met with the lender and is engaged in a dialogue to develop
a constructive and workable solution to the current liquidity situation, although there can be no guarantee that such a solution will be reached, or reached on terms that would be acceptable to the
Company or that would not require the Company to file for bankruptcy. As a result of the Company's default status with its
lender, the entire $8.1 million outstanding loan balance is classified as a current liability on the December 31, 2010 balance sheet.

5. Stockholders' Equity (Deficit)

Authorized CapitalIn April 2010, the Company's shareholders approved an amendment to the Company's articles of incorporation to increase the
number
of authorized shares from 125,000,000 to 625,000,000 including an increase in the number of authorized shares of common stock from 120,000,000 to 620,000,000. As of December 31, 2010, the
authorized capital stock of the Company consists of 620,000,000 shares of voting common stock authorized for issuance with a par value of $0.01 and 5,000,000 shares of undesignated preferred stock
which may be issued from time to time in one or more series. The Company has not issued any preferred stock as of December 31, 2010.

6. Noncontrolling Interest

The Series A preferred stock ("Series A Preferred Stock") of the Company's subsidiary, ALS, Inc., is held by deCODE Genetics ("deCODE") as a result of
ALS Inc.'s spin-off from MediChem Life Sciences in January 1999, and MediChem's subsequent acquisition by deCODE Genetics in March 2002.

As
of December 31, 2010, ALS Inc. had 250,000 shares of Series A Cumulative Preferred Stock authorized, issued and outstanding to deCODE. The Series A
Preferred Stock is nonvoting except as to certain matters including the issuance of any class of stock ranking prior to the shares of Series A Preferred Stock, or the merger or consolidation of
ALS Inc. if such merger would adversely affect the powers, preferences or rights of the Series A Preferred Stock. The Series A Preferred stockholder is entitled to receive
dividends payable in cash at the rate of 7.0% per annum per share on the amount of liquidation preference of the shares.

Liquidation PreferencesUpon dissolution or winding up of ALS Inc., whether voluntary or involuntary, the holders of the shares of the
Series A Preferred Stock are entitled to receive a liquidation preference of $10 per share, plus all accrued and unpaid dividends.

The
total liquidation preference values as of December 31, 2010 and 2009 are approximately $4.5 million and $4.3 million respectively, including approximately
$2.0 million and $1.8 million of unpaid dividends. Any determination in the future to pay cash dividends will depend on the Company's financial condition, capital requirements, result of
operations, contractual limitations and other factors deemed relevant by the Board of Directors.

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

7. Incentive Stock Plan

In December 1999, the Company's Board of Directors and stockholders adopted and approved the Company's Incentive Compensation Plan (the "Plan"). The Plan provides for the grant of stock
options and the award of restricted stock to selected officers and consultants of the Company. Options expire 10 years from the date of grant. The Plan provides for graduated vesting whereby
options to purchase 1/36th of the shares granted vest at the end of each month following the date of grant. Awards of restricted stock are subject to certain terms,
conditions, restrictions and limitations as determined by the Board of Directors. The 1999 plan concluded in 2005 when the final options authorized under the plan were issued.

In
April 2005, the Company's Board of Directors adopted the 2005 Stock Incentive Plan. The 2005 Stock Incentive Plan permits awards of non-qualified stock options, incentive
stock options, stock appreciation rights, restricted stock, restricted stock units and performance shares. In addition, the plan provides an opportunity for the deferral of salary and bonuses into
restricted stock units and the deferrals of gains or payments due upon the vesting or exercise of awards under our stock incentive plan. As of December 31, 2010, only non-qualified
stock options have been issued under this plan.

The
maximum number of shares of common stock that may be subject to awards under the Company's incentive plans is 6,686,107. Options granted under the 2005 Stock Incentive Plan vest at
the discretion of the Board of Directors and expire 10 years from the date of grant. To date, the vesting term of the options granted under the Plan has ranged from immediate vesting to
3 years. As of December 31, 2010, all options were granted under the plan.

The
compensation cost that has been charged to expense for the Company's Plans was approximately $293,000, $526,000 and $851,000 for 2010, 2009 and 2008, respectively. Since the Company
records a full valuation allowance against its deferred tax assets, no tax benefit has been recognized related to these share-based compensation charges.The following schedule details the grants under
the Company's plan for the year ended December 31, 2010.

Options

Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Term

Aggregate
Intrinsic
ValueOutstanding at January 1, 2010


3,381,706

$
1.55


7.5

$
Granted


2,996,027

$
0.05Exercised




$
Expired




$
Forfeited


(98,430
)
$
2.27Outstanding at December 31, 2010


6,279,303

$
0.82


8.0

$
Options exercisable at December 31, 2010


3,085,221

$
1.54


6.6

$
Vested or expected to vest at December 31, 2010


6,060,793

$
0.85


8.0

$



The
weighted-average grant-date fair value of options granted during the years 2010, 2009 and 2008 was approximately $0.05, $0.56 and $0.19, respectively. The fair value of
options vested during the

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

7. Incentive Stock Plan (Continued)

years
2010, 2009 and 2008 was approximately $195,000, $573,000 and $688,000, respectively. There were no options exercised in 2010. The total intrinsic value of options exercised during the years
ended December 31, 2009 and 2008 was approximately $14,000 and $21,000, respectively.

As
of December 31, 2010, there was approximately $318,000 of total unrecognized compensation cost related to unvested stock options granted under the Plans; that cost is expected
to be recognized over a period of 3 years.

Cash
received from options exercises under the Plans for the years ended December 31, 2009 and 2008 was approximately $20,100 and $4,100, respectively. The Company issues new
shares of common stock as a result of stock option exercises. No tax benefits have been recognized in connection with the stock option exercises due to the Company's net operating losses and full
valuation allowance on its deferred tax assets.

The
Company estimates the fair value of each option award on the date of grant using a Black-Scholes-Merton model that uses assumptions noted in the table below:

2010

2009

2008Expected volatility


120.7
%

104.0
%

71% - 81
%Weighted-average volatility


120.7
%

104.0
%

76.5
%Expected dividends


0.0
%

0.0
%

0.0
%Expected term (in years)


6.0


6.0


6.0 - 6.5Risk-free rate


1.70
%

2.33
%

2.79% - 3.34
%


The
Company's expected volatility is computed based upon its historical stock price volatility. The Company's dividend yield assumption is based on the fact that it has never paid cash
dividends and does not anticipate paying cash dividends in the foreseeable future. The Company's risk-free interest rate assumption is based on yields of US treasury notes in effect at the
date of grant. Due to the Company's limited data on stock option exercises, the expected term of options granted is derived from the average of the vesting period and the term of the option as defined
in the Plans, following GAAP for determining the expected term of an option.

8. Income Taxes

Net deferred tax assets consist primarily of net operating loss ("NOL") carryforwards. As of December 31, 2010, the Company had a NOL carryforward for income tax
purposes of approximately $108.2 million. In addition, the Company had federal tax credits for increasing research and development expenditures of approximately $2.6 million. Utilization
of the Company's NOL carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an
annual limitation could result in the expiration of the NOL carryforwards before utilization. Realization of future tax benefits related to deferred tax assets is dependent on many factors, including
the Company's ability to generate future taxable income in the near term. The Company establishes a valuation allowance for deferred tax assets in accordance with GAAP when it is
more-likely-than-not that the deferred tax asset will not

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

8. Income Taxes (Continued)

be
realized through future reversals of existing taxable temporary differences and, to a lesser extent, future taxable income. Due to the uncertainty of future earnings, management is unable to
predict whether its net deferred tax assets will be realized and, accordingly, has recorded a full valuation allowance against these assets.

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

The
Company files tax returns in the U.S., and in the state of Illinois. In 2009, the Company went through an examination for the tax years of 2006 and 2007 by the department of revenue
in the state of Illinois. The audit review resulted in no liability to the Company and an audit closure notice was received. The tax years 2004 through 2010 remain open to examination by all other
major taxing jurisdictions to which the Company is subject. The Company has not made any cash payments for income taxes since its inception.

The
following is a summary of the significant components of the Company's deferred tax assets as of December 31, 2010 and 2009:

2010

2009Deferred tax assets:Net operating losses

$
42,186,203

$
38,328,035Stock based compensation


1,303,037


1,236,255Depreciation


86,330


91,437In-process research and development


7,511,021


8,794,221Other accruals and reserves


1,360,031


361,096Less valuation allowance


(52,446,622
)

(48,811,044
)Deferred tax assetnet

$


$



The
reconciliation of the federal statutory rate to the Company's effective tax rate is as follows:

Years ended
December 31,2010

2009Tax provision at the statutory federal rate


34
%

34
%State income taxes, net of federal income tax benefit


5
%

5
%Valuation allowance


(39
)%

(39
)%Effective tax rate


0
%

0
%


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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

9. Employee Benefit Plan

The Company has established a 401(k) plan that covers all employees who meet minimum eligibility requirements. Eligible persons can defer a portion of their annual compensation into the
401(k) plan subject to certain limitations imposed by the Internal Revenue Code. Employees' elective deferrals are immediately vested upon contribution to the 401 (k) plan. The Company matches
employee contributions at a rate of 50% up to 6% of the employee's annual salary. Company contributions vest 25% per year after the first year of service has been completed. Approximately $69,000,
$74,000 and $83,000 were recognized as expense in 2010, 2009 and 2008, respectively.

10. Commitments

Lease ObligationsThe Company leases facilities from the BioStart, a wholly-owned subsidiary of Flavin Ventures, which is owned by the Company's
Chief
Executive Officer. The lease, which commenced on October 1, 2009, is for a term of three years and provides the Company with 9,440 square feet of space at an annual rental rate of $10.50 per
square foot. The rental rate increases by 2.5% for the second year and by 3.0% in the final year of the lease term. The lease has a provision allowing the Company to negotiate an amendment to lease
additional laboratory and office space should the need arise. Additionally, the Company leases certain equipment under both operating and capital leases.

Minimum
annual payments under operating leases and the present value of minimum capital lease payments as of December 31, 2010 are as follows:

Operating Leases

Capital lease ObligationsYear ending December 31,2011


111,840


7,1772012


87,965


7,1772013


9,480


7,1772014


2,370


5,1212015





Total

$
211,655


26,652Less amount representing interest





5,436Present value of minimum lease payments




$
21,216


Rental
expense relating to the lease with BioStart totaled approximately $102,000, $206,000 and $229,000 in 2010, 2009 and 2008, respectively. Common area maintenance expense totaled
approximately $34,000, $43,000 and $40,000 in 2010, 2009 and 2008, respectively.

Employment ContractsThe Company has employment contracts with certain executive officers. In the event of termination without cause, the
contracts
provide for severance benefits ranging from 12 to 36 months of salary and benefit continuation.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

10. Commitments (Continued)

On
February 25, 2011, the Company announced that its Chief Executive Officer informed the Company's employees that as a measure to help address its liquidity issues, it had
implemented a company-wide compensation reduction plan that would reduce salaries of impacted employees by 30%-50%. Included in this reduction were all of the officers of the
Company with whom the Company has entered into employment agreements.

Vendor ContractsThe Company administers its cethromycin program largely under contracts with third parties. Through December 31, 2010,
contracts totaling $47.3 million have been executed related to the cethromycin program, which includes the development, commercialization, regulatory review and pre-launch
activities associated with cethromycin as well as anthrax-related studies. To date the Company has paid $47.1 million under these contracts and the remaining balance of $0.2 million is
expected to be paid in 2011. Subcontractor arrangements in connection with the Defense Threat Reduction Agency ("DTRA") award grant were approximately $3.0 million over a two-year
period which began in August 2008. The commencement of clinical trials to study ALS-357 as a topical treatment for patients with metastatic melanoma has been delayed and as such the
Company has terminated a $0.9 million contract with a university to study ALS-357. Through December 31, 2010 the Company has paid $0.3 million in other contracts
related to the ALS-357 program.

Grant PayableIn April 2005, the Company was awarded a $500,000 grant from the State of Illinois to fund expansion of its corporate headquarters
in
Woodridge, Illinois. Under the terms of the grant, the Company is to create 100 full-time jobs at its corporate headquarters between January 31, 2005 and December 31, 2010
("Grant Period"). Under the current terms of the agreement, if the Company does not create the specified number of full-time jobs, it is
required to repay the grant proceeds on a pro-rata basis of actual jobs created compared to the total defined in the grant within 45 days of the expiration or termination of the
agreement. The entire grant has been spent and therefore the $500,000 has been classified as a current liability as the Company must create and maintain positions created during the Grant Period
through December 31, 2010. Through December 31, 2010, four new jobs have been created and retained since the grant was awarded. In December 2010, the Company submitted a request to the
Illinois Department of Commerce to extend the deadline to create 100 full-time jobs to December 31, 2011. As of March 23, 2011, the Illinois Department of Commerce has not
made a determination regarding the request to extend the deadline.

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

11. Research and Development Alliances

Abbott LaboratoriesIn December 2004, the Company entered into an agreement with Abbott Laboratories under which the Company acquired from Abbott
a
license to certain patent applications, patents and proprietary technology relating to cethromycin. The term of the agreement commenced on December 13, 2004 and continues until the expiration
of the last patent licensed under the agreement, unless the agreement is otherwise terminated. The primary patent licensed under the agreement, used by the Company in connection with cethromycin,
expires in the U.S. on September 4, 2016, and in most foreign countries or jurisdictions on September 2, 2017, all subject to any term restoration that may be granted for the time
necessary for regulatory approval in each respective jurisdiction. Upon the expiration of the license agreement, the Company maintains a non-exclusive, perpetual and irrevocable license to
use Abbott's proprietary technology and other types of information directly related or used in connection with cethromycin and its manufacture into pharmaceutical products without any further payment
obligations to Abbott, except
for those payment obligations accruing prior to such expiration. The agreement may be terminated by either party on 30 days notice if the other party ceases its business operations or if the
other party passes a resolution or a court of competent jurisdiction makes an order for winding up its business. Either party may also terminate the agreement for material breach if not cured within
90 days of notice or if not cured within 30 days of notice if the breach relates to a payment provision. Finally, the Company has the right to sublicense its rights under the agreement
at its discretion. Under the terms of the agreement the Company paid $23.0 million to date in license fees and milestones and issued 1,722,569 shares of its common stock to Abbott.

As
previously disclosed in a Form 8-K filed with the SEC on March 30, 2009, the Company alleged in a notice of dispute delivered to Abbott Laboratories that
Abbott had breached its obligations under the license agreement for cethromycin entered into between the Company and Abbott on December 13, 2004. Subsequent to delivering the notice of dispute,
the Company initiated arbitration proceedings against Abbott under the alternative dispute resolution provisions of the license agreement. On September 30, 2009, prior to the completion of
arbitration proceedings, the Company and Abbott entered into a binding term sheet in settlement of the dispute. The binding term sheet provides for certain amendments to the license agreement. The
license agreement was amended to restructure the $30.0 million lump sum milestone payment due from the Company to Abbott upon U.S. regulatory approval of cethromycin, such that
$20.0 million is payable within twenty days of U.S. regulatory approval, $5.0 million is payable within 6 months of U.S. regulatory approval and $5.0 million is payable
within 12 months of U.S. regulatory approval. In addition, the license agreement was amended to reduce the royalty due from the Company to Abbott by two percentage points per tier such that the
Company will owe Abbott royalty payments of 17% on the first $100.0 million of aggregate net sales of cethromycin, 16% on net sales once aggregate net sales exceed $100.0 million but are
less than $200.0 million, and 15% on all net sales once aggregate net sales exceed $200.0 million. Finally, the terms to pay to Abbott $2.5 million upon cethromycin reaching
$200.0 million in aggregate net sales and $5.0 million upon the drug reaching $400.0 million in aggregate net sales was unchanged.

University of Illinois at ChicagoIn December 1999, the Company entered into a license agreement with the University of Illinois at Chicago ("UIC")
to
license an anti-melanoma compound. In consideration of the exclusive, world-wide license, the Company paid an upfront license fee of $15,000 upon the execution of the
agreement. The Company is obligated to make up to $135,000 in aggregate

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

11. Research and Development Alliances (Continued)

milestone
payments upon the achievement of certain objectives. In December 2004, the Company filed an IND with the FDA for the anti-melanoma compound which triggered a $10,000 milestone
payment to UIC which was classified as research and development expense. Under the terms of the agreement, the Company is obligated to reimburse UIC for patent protection costs which totaled
approximately $9,000, $18,000 and $54,000 in 2010, 2009 and 2008, respectively. In addition, the Company must pay royalties equal to 6% of net sales to UIC based on sales of the licensed compound by
the Company or its affiliates or sublicensees, as well as a percentage of all other income the Company receives from sublicensees, but in any event, a minimum royalty of $5,000 annually once
commercial sales commence.

Baxter InternationalAs part of the Company's spin-off from MediChem Life Sciences in 1999, it obtained the entire right, title and
interest to certain patented inventions relating to ALS-886 that were assigned by Baxter International, Inc. to Dr. Michael T. Flavin. The Company has assumed the obligation
of Dr. Flavin to pay Baxter, as a payment for the assignment, 3% of net sales of ALS-886. Further, the Company is also obliged to share with Baxter 50% of the sublicensing fees it
collects, other than royalties. In addition, if the Company sells the ongoing business of making, using or selling ALS-886, it is obligated to pay Baxter 50% of the fair market value of
the right or license to manufacture, use or sell ALS-886 that is conveyed as part of the sale.

12. Net Loss Per Share Available to Common Shareholders

Basic loss per share available to common shareholders is computed by dividing net loss available to common shareholders by the number of weighted average common shares outstanding during
the reporting period. Diluted loss per share available to common shareholders is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period.
The computation of diluted shares outstanding for the periods ended December 31, 2010, 2009 and 2008 excludes incremental shares of 92,688,929, 13,673,867 and 13,415,420 related to employee
stock options and warrants. These shares are excluded due to their anti-dilutive effect as a result of the Company's losses for the years ended December 31, 2010, 2009 and 2008.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2010

13. Unaudited Quarterly Financial Data

Selected quarterly data for 2010 and 2009 is as follows:

2010First

Second

Third

FourthRevenue

$
479,824

$
273,029

$


$
Research and development expenses


864,204


753,988


662,278


219,018Selling, general and administrative expenses


1,341,829


1,293,758


1,167,230


568,254Impairment charge











2,510,936Operating loss


(1,726,209
)

(1,774,717
)

(1,829,508
)

(3,298,208
)Net loss available to common shareholders


(2,020,513
)

(2,070,671
)

(2,056,179
)

(3,349,631
)Loss per share available to common shareholders:Basic and Diluted

$
(0.02
)
$
(0.02
)
$
(0.01
)
$
(0.01
)




2009First

Second

Third

FourthRevenue

$
411,485

$
706,814

$
616,940

$
1,057,952Research and development expenses


934,769


1,309,050


916,241


1,302,221Selling, general and administrative expenses


1,508,953


1,690,505


2,201,684


921,706Operating loss


(2,032,237
)

(2,292,741
)

(2,500,985
)

(1,165,975
)Net loss available to common shareholders


(2,326,973
)

(2,612,558
)

(2,901,996
)

(1,496,704
)Loss per share available to common shareholders:Basic and Diluted

$
(0.06
)
$
(0.06
)
$
(0.05
)
$
(0.02
)


Earnings
per share amounts for each quarter are required to be computed independently and, when summed may not equal the amount computed for the total year.

*
* * * * *

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Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.Controls and Procedures.

Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO have concluded that the Company's disclosure controls and procedures were effective as of the end of
the period covered by this report.

Management Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control
over financial reporting was designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published consolidated
financial statements. Internal control over financial reporting is promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company's principal executive and
principal financial officers and effected by the Company's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:



Internal
control over financial reporting, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Therefore, even effective internal control
over financial reporting can only provide reasonable assurance with respect to the financial statement preparation and presentation.

Our
management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2010. In making this assessment, it used the criteria based
on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in "Internal ControlIntegrated Framework". Based on our assessment we believe that, as
of December 31, 2010, our internal control over financial reporting is effective, at a reasonable assurance level, based on those criteria.

This
Annual Report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was
not subject to attestation by the Company's registered public accounting firm pursuant to SEC regulations that permit the Company to provide only management's report in this Annual Report.

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Changes in Internal Control

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

Item 9B.Other Information.

None.

PART III

Item 10.Directors and Executive Officers of the Registrant.

The information required by this item is incorporated by reference to the information set forth in the section entitled "Board of
Directors and Executive Officers" contained in our Notice of Annual Stockholders' Meeting and Proxy Statement to be filed within 120 days after the end of our fiscal year (the "2011 Proxy
Statement").

Item 11.Executive Compensation.

The information required by this item is incorporated by reference to the information set forth in the section entitled "Executive
Compensation" within the 2011 Proxy Statement.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item is incorporated by reference to the information set forth in the section entitled "Stock
Ownership" within the 2011 Proxy Statement.

Equity Compensation Plan Information

The following table sets forth information regarding all securities that could be issued through the exercise of stock options and
warrants:

Plan Category

Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights

Weighted-average
exercise price of
outstanding options,
warrants and rights

Number of securites remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column a)(a)

(b)

(c)Equity compensation plans approved by security holders


92,688,929

$
0.42


Equity compensation plans not approved by security holders








Total


92,688,929

$
0.42





Item 13.Certain Relationships and Related Transactions.

The information required by this item is incorporated by reference to the information set forth in the section entitled "Certain
Transactions" within the 2011 Proxy Statement.

Item 14.Principal Accountant Fees and Services.

The information required by this item is incorporated by reference to the information set forth in the section entitled "Fees of
Independent Registered Public Accounting Firm and Audit Committee Report" within the 2011 Proxy Statement.

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PART IV

Item 15.Exhibits and Financial Statement Schedules.

(a)   (1) Financial Statements



Report of Independent Registered Public Accounting Firm


46Consolidated Balance Sheets at December 31, 2010 and 2009


47Consolidated Statements of Operations for the years ended December 31, 2010, 2009, 2008 and period from
inception (January 1, 1999) through December 31, 2010


48Consolidated Statements of Total Equity (Deficit) for the years ended December 31, 2010, 2009, 2008 and period
from inception (January 1, 1999) through December 31, 2010


49Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009, 2008 and period from
inception (January 1, 1999) through December 31, 2010


50Notes to the Consolidated Financial Statements


51








(b)   Exhibits:

See Item 15(a)(3) above.

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, State of Illinois, on the 24th day of March, 2011.

ADVANCED LIFE SCIENCES HOLDINGS, INC.By:

/s/ MICHAEL T. FLAVIN, PH.D.Name:

Michael T. Flavin, Ph.D.Title:

Chairman and Chief Executive OfficerBy:

/s/ JOHN L. FLAVINName:

John L. FlavinTitle:

Chief Financial Officer


Pursuant
to the requirements of the Securities Act of 1934, this report has been signed below by the following persons, on behalf of the registrant and in the capacities and on the dates
indicated.

Signature

Title

Date/s/ MICHAEL T. FLAVIN, PH. D. Michael T. Flavin, Ph. D.

Chairman and Chief Executive Officer (Principal Executive Officer)

March 24, 2011/s/ JOHN L. FLAVIN John L. Flavin

President, Chief Financial Officer (Principal Financial and Accounting Officer) and Director

March 24, 2011/s/ SCOTT F. MEADOW Scott F. Meadow

Director

March 24, 2011/s/ TERRY W. OSBORN, PH. D. Terry W. Osborn, Ph. D.

Director

March 24, 2011/s/ RICHARD A. RECK Richard A. Reck

Director

March 24, 2011/s/ ISRAEL RUBINSTEIN, M.D. Israel Rubinstein, M.D.

Director

March 24, 2011


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Table of Contents

Signature

Title

Date/s/ ROSALIE SAGRAVES, PHARM. D. Rosalie Sagraves, Pharm. D.

Director

March 24, 2011/s/ THOMAS V. THORNTON Thomas V. Thornton

Director

March 24, 2011


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EXHIBIT INDEX

Exhibit No.

Description3.1

Third Amended and Restated Certificate of Incorporation of Advanced Life Sciences Holdings, Inc. (as filed in our Quarterly Report on Form 10-Q as exhibit 3.1 on May 10, 2010)3.2

By-laws of Advanced Life Sciences Holdings, Inc. (as filed in our Amended Registration Statement on Form S-1/A as exhibit 3.3 on July 28, 2005, as amended and filed in our Current Report on
Form 8-K as exhibit 3.1 on December 14, 2007)4.1

Standby Equity Distribution Agreement, dated as of September 29, 2008, by and between the Company and YA Global Investments L.P. (as filed in our Current Report on Form 8-K as exhibit 4.1 on
October 3, 2008)4.2

Standby Equity Distribution Agreement, dated June 19, 2009, by and between Advanced Life Sciences Holdings, Inc. and YA Global Master SPV Ltd. (as filed in our Current Report on Form 8-K as
exhibit 4.1 on June 19, 2009)4.3

Standby Equity Distribution Agreement, dated as of September 28, 2010, by and between the Company and YA Global Master SPV Ltd. (as filed in our Registration Statement on Form S-1 as exhibit 10.26 on
September 29, 2010)4.4

Form of Warrant to Purchase Shares of Common Stock of Advanced Life Sciences Holdings, Inc. Stock. (as filed in our Current Report on Form 8-K as exhibit 4.2 on March 2, 2006)4.5

Form of Warrant to Purchase Shares of Common Stock of Advanced Life Sciences Holdings, Inc. Stock. (as filed in our Current Report on Form 8-K as exhibit 4.2 on December 12, 2007)4.6

Form of common stock purchase warrant (2010 Unit Offering) (as filed in our Registration Statement on From S-1 as exhibit 4.3 on May 10, 2010)4.7

Warrant issued to The Leaders Group, Inc. to purchase 65,000 shares of Advanced Life Sciences Holdings Common stock at $1 per share, dated as of October 23, 2008 (as filed in our Quarterly Report on
Form 10-Q as exhibit 4.1 on November 6, 2008)4.8

Form of Warrant Agent Agreement between Advanced Life Sciences Holdings, Inc. and Onyx Stock Transfer LLC (as filed in our Registration Statement on Form S-1 as exhibit 4.5 on June 16,
2010)4.9

Form of unit purchase warrant (2010 Unit Offering) (as filed in our Registration Statement on Form S-1 as exhibit 4.5 on June 16, 2010)10.1
**
Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and Michael T. Flavin, Ph.D. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.1 on
November 14, 2007)10.2
**
Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and John L Flavin (as filed in our Quarterly Report on Form 10-Q as exhibit 10.2 on
November 14, 2007)10.3
**
Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and Suseelan Pookote, Ph.D. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.4 on
November 14, 2007)


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Exhibit No.

Description10.4
**
Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and Ze-Qi Xu, Ph.D. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.5 on
November 14, 2007)10.5
**
Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and Patrick W. Flavin (as filed in our Quarterly Report on Form 10-Q as exhibit 10.6 on
November 14, 2007)10.6
**
Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and David Eiznhamer, Ph.D. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.7 on
November 14, 2007)10.7
**
Stock Incentive Plan Assignment, Assumption and Amendment Agreement, dated December 13, 2004, by and between Advanced Life Sciences, Inc. and Advanced Life Sciences Holdings, Inc. (as filed in our
Registration Statement on Form S-1 as exhibit 10.1 on April 28, 2005)10.8
**
Amended Advanced Life Sciences Holdings, Inc. 2005 Stock Incentive Plan. (as filed in our Current Report on Form 8-K as exhibit 10.1 on April 13, 2010)10.9
**
Advanced Life Sciences, Inc. Annual Bonus Plan (as filed in our Registration Statement on Form S-1 as exhibit 10.18 on April 28, 2005)10.10

Assignment of Lease by Lessor with Consent of Lessee, dated November 1, 2004, by Flavin Ventures, LLC to BioStart Property Group, LLC. (as filed in our Registration Statement on Form S-1 as
exhibit 10.20 on April 28, 2005)10.11

Lease Agreement between Advanced Life Sciences, Inc. and BioStart Property Group, LLC (as filed in our Current Report on Form 8-K as exhibit 10.1 on October 30, 2009)10.12

License Agreement, dated December 13, 2004, by and between Abbott Laboratories and Advanced Life Sciences Holdings, Inc. (as amended on April 27, 2005, August 2, 2005 and August 5, 2005 as filed
in our Current Report on Form 8-K as exhibit 10.10 on August 12, 2005)10.13

Fourth Amendment to License Agreement between Advanced Life Sciences, Inc. and Abbott Laboratories (as filed in our Quarterly Report on Form 10-Q as exhibit 10.9 on November 14, 2007)10.14

License Agreement, dated April 28, 2003, by and between The University of Chicago, as Operator of Argonne National Laboratory, and Advanced Life Sciences, Inc. (as filed in our Registration Statement on
Form S-1 as exhibit 10.11 on April 28, 2005)10.15

Exclusive License Agreement, dated December 2, 1999, by and between the Board of Trustees of the University of Illinois and Advanced Life Sciences, Inc. (as filed in our Registration Statement on Form S-1
as exhibit 10.12 on April 28, 2005)10.16

Patent Assignment and License Agreement, dated January 24, 1989, Baxter International Inc. and Michael T. Flavin (as filed in our Registration Statement on Form S-1 as exhibit 10.13 on April 28,
2005)10.17

Letter of intent to proceed with purchase of raw materials to produce 1,750 Kg of Cethromycin between Advanced Life Sciences, Inc. and DSM Pharmaceutical Products, Inc. (as filed in our Quarterly Report on
Form 10-Q as exhibit 10.1 on August 14, 2008)


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Exhibit No.

Description10.18

Second Amended and Restated Business Loan Agreement between Advanced Life Sciences, Inc. and The Leaders Bank, dated as of September 9, 2010 (as filed in our Registration Statement on Form S-1 as
exhibit 10.16 on September 29, 2010)10.19

Amended and Restated Guaranty between Advanced Life Sciences Holdings, Inc. to and for the benefit of The Leaders Bank, dated as of September 9, 2010 (as filed in our Registration Statement on Form S-1 as
exhibit 10.17 on September 29, 2010)10.20

Amended and Restated Security Agreement between Advanced Life Sciences Holdings, Inc. and The Leaders Bank, dated as of September 9, 2010 (as filed in our Registration Statement on Form S-1 as
exhibit 10.18 on September 29, 2010)10.21

Amended and Restated Security Agreement between Advanced Life Sciences, Inc. and The Leaders Bank, dated as of September 9, 2010 (as filed in our Registration Statement on Form S-1 as exhibit 10.19 on
September 29, 2010)10.22

Intellectual Property Security Agreement between Advanced Life Sciences, Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.7 on
November 6, 2008)10.23

Guaranty by Michael T. Flavin to and for the benefit of The Leaders Bank, dated as of September 9, 2010 (as filed in our Registration Statement on Form S-1 as exhibit 10.21 on September 29,
2010)10.24

Amended and Restated Commercial Pledge Agreement between ALS Ventures, LLC, Advanced Life Sciences, Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on
Form 10-Q as exhibit 10.9 on November 6, 2008)10.25

Forbearance Agreement between Advanced Life Sciences Holdings, Inc. and The Leaders Bank, dated as of November 23, 2010 (as filed in our Registration Statement on Form S-1 as exhibit 10.22 on
January 18, 2011)10.26

Omnibus Amendment to the Second Amended and Restated Business Loan Agreement and Forbearance Agreement between Advanced Life Sciences Holdings, Inc. and The Leaders Bank, dated as of December 29, 2010 (as filed
in our Registration Statement on Form S-1 as exhibit 10.23 on January 18, 2011)10.27

Binding Term Sheet, dated September 30, 2009, by and between Abbott Laboratories and Advanced Life Sciences Holdings, Inc. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.1 on
November 10, 2009)10.28

Letter Agreement with Dawson James Securities, Inc. dated February 26, 2010, as amended on May 27, 2010 (as filed in our Registration Statement on Form S-1 as exhibit 10.29 on May 29,
2010)10.29

Second Amended and Restated Debt Exchange Agreement between Advanced Life Sciences Holdings, Inc. and Michael T. Flavin, Ph.D. dated as of July 22, 2010 (as filed in our Current Report on Form 8-K as
exhibit 10.1 on July 22, 2010)10.30

Standby Equity Distribution Agreement between Advanced Life Sciences Holdings, Inc. and YA Global Master SPV Ltd., dated September 27, 2010 (as filed in our Registration Statement on Form S-1 as
exhibit 10.26 on September 29, 2010)10.31

Investment Agreement between Advanced Life Sciences Holdings, Inc. and Dutchess Opportunity Fund, II, LP, dated January 17, 2011 (as filed in our Registration Statement on Form S-1 as
exhibit 10.29 on January 18, 2011)


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Exhibit No.

Description21.1

Subsidiaries of Advanced Life Sciences Holdings, Inc. (as filed in our Registration Statement on Form S-1 as exhibit 21.1 on April 28, 2005)21.2

Form of Indemnification Agreement (as filed in our Amended Registration Statement on Form S-1/A as exhibit 10.21 on June 3, 2005)23.1
*
Consent of Deloitte & Touche LLP31.1
*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
*
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 200232.2
*
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


(*)Filed herewith.(**)Compensatory plan or arrangement.


78

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