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, 2008o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission File No: 000-51436


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



DELAWARE

30-0296543(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification no.)


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

Registrant's telephone number: (630) 739-6744Securities registered pursuant to Section 12 (b) of the Act

Title of Each Class

Name of exchange on which registeredNone

Nasdaq


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 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, 2008 was approximately
$30.4 million (based upon the closing price of $1.05 per common share as quoted on the Nasdaq National Market). 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, 2008 was 28,911,123 shares.

Total
common stock outstanding as of February 9, 2009 was 41,592,309 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, 2008 (the "2009 Proxy Statement") are to be filed with the Securities and Exchange Commission within 120 days after the registrant's fiscal year ended December 31,
2008 and are incorporated by reference into Part III of this Report.



---



Table of Contents

ADVANCED LIFE SCIENCES HOLDINGS, INC
INDEX
Form 10-K



PART IItem 1.

Business

2Item 1A.

Risk Factors

16Item 1B.

Unresolved Staff Comments

31Item 2.

Properties

31Item 3.

Legal Proceedings

31Item 4.

Submission of Matters to a Vote of Security Holders

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

43Item 8.

Financial Statements and Supplementary Data

44Consolidated Balance Sheets as of December 31, 2008 and December 31, 2007

45Consolidated Statements of Operations for the years ended December 31, 2008, 2007, 2006 and period from
inception (January 1, 1999) through December 31, 2008

46Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2008, 2007, 2006 and
period from inception (January 1, 1999) through December 31, 2008

47Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007, 2006 and period from
inception (January 1, 1999) through
December 31, 2008

48Notes to Consolidated Financial Statements

49Item 9.

Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

66Item 9A.

Controls and Procedures

66Item 9B.

Other Information

67PART IIIItem 10.

Directors and Executive Officers of the Registrant

67Item 11.

Executive Compensation

67Item 12.

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

67Item 13.

Certain Relationships and Related Transactions

67Item 14.

Principal Accountant Fees and Services

68PART IVItem 15.

Exhibits

68


1

---





Table of Contents

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 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; 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 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:



2

---



Table of Contents



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 and one-time or limited payments associated with our collaborations
or grants. Our cumulative net loss was $122.4 million as of December 31, 2008, and we do not anticipate generating any revenue from the sale of cethromycin for the next several years. If
we secure commercial partnerships as planned during 2009, milestones received as a result of any of our commercial partnership agreements could be recognized as revenue in 2009 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 and borrowings under our
bank line of credit. We will continue to do so until we are able to generate revenues from our product candidates, if ever.

Our Background

In June 1999, MediChem Life Sciences ("MediChem"), our former parent, exchanged its investment in 100% of the outstanding common stock
of 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 ALS Inc., which was issued in exchange for common stock held at the June 1999 spin-off.

In
August 2005, we completed the initial public offering ("IPO") 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

3

---



Table of Contents

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.

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 Pharmaceuticals ("Wyeth"). Under
the terms of agreement, Wyeth 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 outstanding shares.

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 markets 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 mild-to-moderate community acquired pneumonia. 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 community acquired
pneumonia using a 300 mg once-daily dosing regimen. In September 2008 we submitted an NDA for the use of cethromycin in CAP. This submission was accepted for filing with a target PDUFA
date of July 31, 2009.

In
addition to pursuing an NDA for mild-to-moderate community acquired pneumonia in pivotal Phase III clinical trials, we intend to evaluate opportunities
for cethromycin in the treatment of other respiratory tract infections.

4

---



Table of Contents



Whereas
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.



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. As part of this strategy, we signed a development and commercialization agreement with Wyeth in September 2008 for cethromycin in the Asia
Pacific region excluding Japan.



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. We
are initially developing cethromycin as a treatment for mild-to-moderate community acquired pneumonia and have recently completed Phase III clinical development in this
indication. 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 mild-to-moderate community acquired pneumonia, when compared to the published data on antibiotics
currently on the market. Cethromycin has also shownin vitroevidence of

5

---



Table of Contents

an
extended post-antibiotic effect, meaning that the suppression of bacterial growth persists in the absence of measurable antibiotic concentration. Prior to our acquisition of
cethromycin, six Phase III clinical trials had been completed by Abbott for the treatment of respiratory tract infections, and cethromycin demonstrated a clinical cure rate as high as 93% for
subjects with mild-to-moderate community acquired pneumonia. We were able to reproduce similar results in our two pivotal Phase III trials in CAP, which 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%). Looking at the pooled
results, per protocol clinical cure rates were 92.8% for cethromycin and 94.9% for Biaxin. This gives a confidence interval of [-5.4, +1.2]. Cethromycin was
well-tolerated with the most common adverse events being taste disturbance (cethromycin 9.3%, Biaxin 4.0%), diarrhea (cethromycin 4.7%, Biaxin 4.4%), nausea (cethromycin 3.6%, Biaxin 2.6%)
and headache (cethromycin 2.7%, Biaxin 4.6%). There were no serious drug-related events. These results were well in line with current FDA guidelines for non-inferiority trials
in CAP. A total of 1,106 patients were enrolled in the two studies. In February 2008, we announced the results from Trial CL07-001, a thorough QT study of cethromycin. This study was
conducted to evaluate the cardiac safety of cethromycin. The FDA usually requires thorough QT studies for all new chemical entities because prolongation in QT interval (corrected for changes in heart
rate, or QTc) may signify an increased risk of developing cardiac arrhythmias. Trial CL07-001 evaluated the potential of cethromycin to cause a prolongation in electrocardiographic QT
interval in accordance with FDA and ICH E14 guidance. Trial CL07-001 was a double-blind, randomized, parallel study in which cethromycin, given at a therapeutic does (300 mg
once-daily for 5 days) and supratherapeutic dose (900 mg once daily for 5 days) was compared to placebo and moxifloxacin in 238 health adult volunteers. At the therapeutic
and supratherapeutic doses, cethromycin showed no signal of any electrocardiographic effects and hence supported its favorable cardiac safety profile. In December 2008, we were notified that our NDA
package had been filed with the FDA and were given a target PDUFA date of July 31, 2009.



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

6

---



Table of Contents

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
mild-to-moderate community acquired pneumonia 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 community
acquired pneumonia each year.



Until recently, there have been three main classes of antibiotics prescribed for respiratory tract infections such as
mild-to-moderate community acquired pneumonia. 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% ofStreptococcus pneumoniaeisolates, the most common pathogens that cause
respiratory tract infections such as mild-to-moderate community acquired pneumonia, 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.

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 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.

7

---



Table of Contents

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 mild-to-moderate community acquired pneumonia. 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 community acquired pneumonia. 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 relating to cethromycin. 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. In addition, we will owe Abbott $30.0 million if and when the FDA approves the NDA. We also agreed to pay to Abbott $2.5 million upon cethromycin
reaching $200 million in aggregate net sales and $5.0 million upon the

8

---



Table of Contents

drug
reaching $400 million in aggregate net sales. Finally, we will owe Abbott royalty payments of 19% on the first $100 million of aggregate net sales of cethromycin, 18% on net sales
once aggregate net sales exceed $100 million but are less than $200 million, and 17% on all net sales once aggregate net sales exceed $200 million.

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.

Wyeth Collaboration

In September 2008, we entered into a development and commercialization agreement with Wyeth for cethromycin in the Asia Pacific region
excluding Japan. We will retain exclusive rights to cethromycin in the rest of the world, including North America and Europe excluding Japan. In addition to future royalty payments, we would receive
milestone and regulatory payments based on successful achievement of clinical, regulatory and commercial objectives in specific markets. We will collaborate to develop additional clinical data in the
Asia Pacific region to support regulatory filings in that region.

In
connection with our entry into a development and commercialization agreement, we entered into a stock purchase agreement with Wyeth. Under the terms of agreement, Wyeth 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 outstanding shares.

Other Collaborations and License Agreements

In addition to our collaborations with Abbott Laboratories and Wyeth, 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 agreement. To date we have paid UIC approximately $531,000 for patent reimbursement. In addition,

9

---



Table of Contents

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 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,

10

---



Table of Contents

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 drugs under the Federal Food, Drug, and Cosmetic Act and implementing regulations. 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:



11

---



Table of Contents



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.

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.

12

---



Table of Contents

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.



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

13

---



Table of Contents

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.

In
2003, the United States government enacted legislation providing a partial prescription drug benefit for Medicare recipients, beginning in 2006. Government payment for some of the
costs of prescription drugs may increase demand for any products for which we receive marketing approval. However, to obtain payments under this program, we would be required to sell products to
Medicare recipients through drug procurement organizations operating pursuant to this legislation. These organizations would negotiate prices for our products, which are likely to be lower than we
might otherwise obtain. Federal, state, and local governments in the United States continue to consider legislation to limit the growth of healthcare costs, including the cost of prescription drugs.
Future legislation could limit payments for pharmaceuticals such as the product candidates that we are developing.

The
marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third party payors fail to provide adequate coverage and
reimbursement. In addition, an increasing emphasis on managed care in the United States has increased and will continue to increase the pressure on pharmaceutical pricing.

Another
development that may affect the pricing of drugs is proposed Congressional action regarding drug reimportation into the United States. Proposed legislation would allow the
reimportation of approved drugs originally manufactured in the United States back into the United States from other countries where the drugs are sold at a lower price. If legislation or regulations
are passed allowing the reimportation of drugs, they could reduce the price we receive for any products that we may develop, negatively affecting our revenues and prospects for profitability. Even
without legislation authorizing reimportation, patients have been purchasing prescription drugs from Canadian and other non-United States sources, which have reduced the price received by
pharmaceutical companies for their products.

Employees

As of December 31, 2008, we employed 30 people of which there are 13 in research and 17 in administration. Our employees are not
represented by any collective bargaining agreements and we believe our employee relations are good.

14

---



Table of Contents

On
February 6, 2009, we committed to a restructuring plan that will result in the reduction of approximately 30% of our workforce. In connection with the restructuring plan, we
will focus our resources on the cethromycin program. We anticipate incurring restructuring charges of approximately $60,000, primarily associated with personnel-related termination costs.

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.

15

---





Table of Contents

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 2008 financial statements
related to the uncertainty in our ability to continue as a going concern. The paragraph stated that we 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. Our cash and cash equivalents were sufficient to fund our existing development
commitments, indebtedness and general operating expenses through the end of 2008, however, we will not be generating any product-based revenues or realizing cash flows from operations in the near
term, if at all, and may not have sufficient cash or other funding available to complete our anticipated business activities during 2009. In order to address our working capital shortfall we intend to
raise additional capital by licensing our lead compound, cethromycin, to commercial partners. There can be no assurances that such partnerships will be available on terms acceptable to us, if at all.

In
order to provide access to needed capital, we executed a Standby Equity Distribution Agreement ("SEDA") that allows us to sell shares of our common stock to an accredited investor,
YA Global Investments, L.P. ("YA Global"), subject to certain terms and conditions. Any shares of our common stock that we determine to sell pursuant to the SEDA will have a
dilutive impact on our stockholders. The SEDA terms also provide that YA Global may promptly re-sell the shares we issue to them under the SEDA and such re-sales could
cause the market price of our common stock to decline significantly with advances under the SEDA. To the extent of any such decline, any subsequent advances would require us to issue a greater number
of shares of common stock to YA Global 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 SEDA could encourage short sales by third parties, which could contribute to the further decline of our stock price. There can be no assurance that we will be able to obtain adequate
capital funding in the future, under the SEDA 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 U.S. Food and Drug Administration, ("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. We have incurred an accumulated deficit of $122.4 million as of December 31, 2008. Our operating losses
are due in large part to the significant research and development costs required to identify, validate and license

16

---



Table of Contents

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 and one-time or limited payments associated with our collaborations or grants, and we do not anticipate generating any significant revenues in the near term, if ever. We
expect to increase our operating expenses over the next several years as we plan to:



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.

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

Our operations will require significant additional funding in large part due to our research and development expenses, future
preclinical and clinical testing costs, the possibility of expanding our facilities, and 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. If we cannot raise additional funds, we may be required to reduce our capital expenditures, scale back product development or programs, reduce our
workforce and license to others products or technologies that we may otherwise be able to commercialize.

To
the extent we raise additional capital by issuing equity securities, our stockholders could experience substantial dilution. Any additional equity securities we issue or any
counterparties to credit facilities or issuances of debt we may enter into or undertake 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.

The FDA may change its approval policies or requirements, or apply interpretations to its policies or requirements, in a manner that could delay or prevent commercialization
of cethromycin.

Regulatory requirements for approval of antibiotics may change in a manner that requires us to conduct additional clinical trials,
which may delay or prevent commercialization of cethromycin. Historically, the FDA and foreign regulatory authorities have not required placebo-controlled clinical trials for approval of antibiotics
but instead have relied on non-inferiority studies. In a non-inferiority study, a drug candidate is compared with an approved antibiotic treatment and it must be shown that the
product candidate is not less effective than the approved treatment. After consultation with the FDA, we designed our pivotal Phase III clinical trials of cethromycin for the treatment of
mild-to-moderate community acquired pneumonia as non-inferiority studies. It appears, based on recent pronouncements by the FDA, that any requirement to conduct
placebo-controlled studies will be limited to self-resolving diseases such as acute bacterial sinusitis ("ABS") and acute bacterial exacerbation of chronic bronchitis ("ABECB") and acute
bacterial otitis media ("ABOM") and will not

17

---



Table of Contents

apply
to mild-to-moderate community acquired pneumonia. However, we cannot provide any assurance that the FDA will not require placebo-controlled trials to demonstrate the
superiority of cethromycin to placebo before considering the approval of cethromycin for the treatment of mild-to-moderate community acquired pneumonia. Further, FDA Advisory
Panel meetings discussing antibiotic drug approvals may result in the heightened scrutiny of cethromycin for the treatment of mild-to-moderate community acquired pneumonia.

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

We anticipate that 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, the NDA that we submitted September 30, 2008. If we
are unable to submit an NDA for other product candidates, or if the NDA we submitted is not approved by the FDA, we will be unable to commercialize those product in the United States and our business
will be materially harmed. 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.

Data
obtained from preclinical and clinical activities are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. In addition, delays or
rejections may be encountered based on changes in, or additions to, regulatory policies for drug approval during the period of product development and regulatory review. The effect of government
regulation may be to delay or prevent the commencement of clinical trials or marketing of our product candidates for a considerable period of time, to impose costly procedures upon our activities and
to provide an advantage to our competitors that have greater financial resources or are more experienced in regulatory affairs. The FDA may not approve our product candidates for clinical trials or
marketing on a timely basis or at all. Delays in obtaining or failure to obtain such approvals would adversely affect the marketing of our product candidates and our liquidity and capital resources.

Drug
products and their manufacturers are subject to continual regulatory review after the product receives FDA approval. Later discovery of previously unknown problems with a product or
manufacturer may result in additional clinical testing requirements or restrictions on such product or manufacturer, including withdrawal of the product from the market. Failure to comply with
applicable regulatory requirements can, among other things, result in fines, injunctions and civil penalties, suspensions or withdrawals of regulatory approvals, product recalls, operating
restrictions or shutdown and criminal prosecution. We may lack sufficient resources and expertise to address these and other regulatory issues as they arise.

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 include Wyeth, the University of Illinois at Chicago and Baxter International. A description of

18

---



Table of Contents

our
agreements with collaborators can be found under the headings "BusinessAbbott Laboratories Collaboration" and "BusinessOther Collaborations and License Agreements" in
Part I, Item I of this current Annual Report. 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, 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 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. We have entered into a Commercialization and Development Agreement
dated as of September 29, 2008 with Wyeth to utilize their selling and marketing capabilities in Asia. 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 mild-to-moderate community acquired pneumonia, 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. With respect to the Wyeth agreement and to the extent we enter other 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:



19

---



Table of Contents



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
community acquired pneumonia. 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:



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 comparator trials were related to dosing levels, we may be incorrect. The failure to meet primary endpoints in the Abbott 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
mild-to-moderate community acquired pneumonia, our failure to expand cethromycin into other indications would harm our ability to generate additional revenues in the future.

20

---



Table of Contents

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:



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.

21

---



Table of Contents

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:



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

22

---



Table of Contents

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 21 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.

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 mild-to-moderate community acquired pneumonia, although we
believe that cethromycin may have other applications in bronchitis, pharyngitis, sinusitis and inhalation anthrax. 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

23

---



Table of Contents

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:



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

24

---



Table of Contents

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 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.

Prescription drug coverage legislation and future legislative or regulatory reform of healthcare systems in the United States and overseas could limit future revenues from
our product candidates.

In the United States, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that
could affect our ability to market and sell our product candidates profitably. In particular, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the "2003 Act") and Medicare
Part D, which was established pursuant thereto in January of 2006, grant responsibility to reimburse the cost of drugs and broad discretion on which drugs should be covered and to what extent
to the Centers for Medicare and Medicaid Services, or CMS, the agency within the Department of Health and Human Services that administers Medicare. Additionally there is some likelihood of further
reform of the United States health care system, and changes in reimbursement policies or health care cost containment initiatives that limit or restrict reimbursement for our products may cause our
revenues to decline.

25

---



Table of Contents

In
addition, in some foreign countries, particularly countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. This may affect our
revenues both overseas and domestically, as the 2003 Act requires the Secretary of the U.S. Department of Health and Human Services to promulgate regulations allowing drug reimportation from Canada
into the United States under certain circumstances. These provisions will become effective only if the Secretary certifies that such imports will pose no additional risk to the public's health and
safety and result in
significant cost savings to consumers. To date, the Secretary has made no such finding, but he could do so in the future. Proponents of drug reimportation may also attempt to pass legislation that
would remove the requirement for the Secretary's certification or allow reimportation under circumstances beyond those anticipated under current law. If legislation is enacted, or regulations issued,
allowing the reimportation of drugs, it could decrease the reimbursement we receive for any products that we may commercialize, negatively affecting our anticipated revenues and prospects for
profitability.

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 21 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.

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., David A. Eiznhamer, 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,
David A. Eiznhamer, Ph.D., our Executive Vice President of Clinical Development 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.

26

---





Table of Contents

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.

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 the Ownership of 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

27

---



Table of Contents

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 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 Standby Equity Distribution Agreement with YA Global Investments, L.P. 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 a Standby Equity Distribution Agreement with YA Global
Investments, L.P. dated as of September 29, 2008. The terms of the SEDA are described in Items 1.01 and 3.02 of our Current Report filed on form 8-K on
October 3, 2008.

The
sale of shares of our common stock pursuant to the SEDA will have a dilutive impact on our stockholders. We believe YA Global intends to promptly re-sell the
shares we issue to them under the SEDA and that such re-sales could cause the market price of our common stock to decline significantly with advances under the SEDA. To the extent of any
such decline, any subsequent advances would require us to issue a greater number of shares of common stock to YA Global in exchange for each dollar of the advance. Under these circumstances our
existing stockholders would experience greater

28

---



Table of Contents

dilution.
The sale of our common stock under the SEDA could encourage short sales by third parties, which could contribute to the further decline of our stock price.

In
addition, under the terms of the SEDA, we are not able to utilize the facility after receipt of a delisting notice from the principal trading market on which our common stock is being
traded. As discussed below, we received such a notice on November 5, 2008. While we have obtained a waiver from YA Global dated as of November 19, 2008 with respect to such
notice, receipt of additional delisting
notices or an unsuccessful appeal of the original delisting determination may result in our inability to issue shares to YA Global pursuant to the terms of the SEDA.

If we do not maintain our Nasdaq listing, you may have difficulty trading our securities.

We received a notice on October 1, 2008 from the Nasdaq Listings Qualification Department that we are not in compliance with
Nasdaq Marketplace Rules 4310(c)(3)(B), 4310(c)(3)(A) or 4310(c)(3)(C) regarding minimum market value, shareholder equity and net income from operations requirements for the continued listing
of our common stock on the Nasdaq Capital Market. We were provided with a period of 30 calendar days, or until October 31, 2008, to regain compliance with the continued listing requirements. We
were not compliant by October 31, 2008 and received notice from the Nasdaq Listings Qualification Department on November 5, 2008 stating that our securities are subject to delisting from
the Nasdaq Capital Market if we do not choose to appeal this determination. The Company has appealed the determination. On February 2, 2009, we were informed that the Nasdaq Hearings Panel
("the Panel") has determined to grant our request for continued listing on the Nasdaq Capital Market, subject to certain conditions which include filing a Form 8-K on or before
May 4, 2009 evidencing pro forma shareholders' equity at or above $2.5 million, and providing projections to the Panel showing our expectation that we will remain in compliance for at
least 12 months. If we are unable to meet the continued listing standards by that date, the Panel will issue a final delisting determination and suspend trading of our shares on the second
business day after the date of the delisting determination. The Panel reserves the right to reconsider the terms of this exception based on any event, condition, or circumstance that exists or
develops that would, in the opinion of the Panel, make continued listing of our securities on The Nasdaq Capital Market inadvisable or unwarranted.

In
the event of delisting, trading, if any, would be conducted in the over-the-counter market in the so-called "pink sheets" or on the OTC Bulletin
Board. 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. If any of these events take place, 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.

Future sales of common stock by our existing stockholders may cause our stock price to fall.

Approximately 9,746,064 shares of our common stock and options to purchase 1,327,326 shares of our common stock which are
exercisable (or will be exercisable within sixty days of December 31, 2008) and that are owned by affiliates, directors, executive officers or other insiders are currently eligible for sale
subject only to the volume limitations of Rule 144 under the Securities Act. Additionally, 15,350,196 shares of our common stock, including 5,116,732 shares of our common stock
underlying warrants, which were issued to institutional investors pursuant to a private placement in March of 2006 and registered for resale pursuant to a currently effective Registration Statement
and 15,286,625 shares of our common stock, including 5,095,542 shares of our common stock underlying warrants, which were issued to institutional investors pursuant to a private
placement in December of 2007 and registered for

29

---



Table of Contents

resale
pursuant to a separate currently effective Registration Statement are eligible for sale without restriction. The sale of a significant number of shares of our common stock, or the perception
that these sales could occur, particularly with respect to large stockholders, other institutional investors, affiliates, directors, executive officers or other insiders, could materially and
adversely affect the market price of our common stock and impair our ability to raise capital through the sale 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 December 31, 2008, Flavin Ventures, LLC controlled approximately 23.5% 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. As a result, Dr. Flavin 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.

The cost of public company compliance with the securities laws and regulations is substantial and recently enacted and proposed changes to these laws and regulations will
further increase our general and administrative expenses.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a
report of management on the company's internal controls over financial reporting in their annual reports on Form 10-K. In addition, the public accounting firm auditing the company's
financial statements must attest to and report on management's assessment of the

30

---



Table of Contents

effectiveness
of the company's internal controls over financial reporting. This requirement will first apply to our annual report on Form 10-K for our fiscal year ending
December 31, 2009. If we are unable to conclude that we have effective internal controls over financial reporting or, if our independent auditors are unable to provide us with an unqualified
report as to the effectiveness of our internal controls over financial reporting as of December 31, 2009 and future year ends as required by Section 404 of the Sarbanes-Oxley Act of
2002, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities.

In
addition, the changes in securities laws and regulations may make it more difficult and more expensive for us to maintain directors and officers liability insurance, and we may be
required to accept reduced coverage or incur substantially higher costs to obtain coverage. These developments also could make it more difficult for us to attract and retain qualified executive
officers and members of our board of directors, particularly with regard to our audit committee.

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 15,000 square feet of laboratory and office space. We believe that our current facilities are adequate to meet our needs
for the foreseeable future. The operating lease expired in September of 2008 and we are currently in negotiations to renew the lease. Pursuant to the terms of the lease, we continue to rent the
premises on a monthly basis and are currently making payments equal to its most recent rental rate. 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.    Submissions of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the quarter ended December 31, 2008.

31

---





Table of Contents

PART II

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

Our common stock is listed on the Nasdaq Capital Market under the symbol ADLS. The following table provides the high and low sales
prices as reported by Nasdaq for the periods indicated.

2008

High

LowFirst Quarter

$
1.79

$
0.67Second Quarter


1.66


0.88Third Quarter


1.45


0.67Fourth Quarter


0.87


0.152007

High

LowFirst Quarter

$
3.11

$
2.31Second Quarter


3.97


2.24Third Quarter


2.82


1.29Fourth Quarter


2.85


1.55


As
of February 9, 2009, there were approximately 29 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, 2008, cumulative accrued undeclared dividends
on our subsidiary's preferred stock totaled approximately $1.7 million.

Recent Sales of Unregistered Securities

None.

32

---



Table of Contents

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, 2008Years ended December 31,2008

2007

2006

2005

2004Statement of Operations Data:Revenue

$
240,830

$


$
39,788

$
121,451

$
319,780

$
2,482,819Operating expensesResearch and development(1)


15,709,293


25,735,759


17,202,113


3,121,616


25,661,868


98,560,700Selling, general and administrative


7,116,549


6,839,575


5,457,395


3,237,997


1,649,953


27,048,637Loss from operations


(22,585,012
)

(32,575,334
)

(22,619,720
)

(6,238,162
)

(26,992,041
)

(123,126,518
)Interest income


(306,846
)

(717,884
)

(1,651,916
)

(272,216
)




(2,948,862
)Interest expense


525,703


466,963


511,884


478,300


194,877


3,148,853Gain on disposal(2)








(939,052
)







(939,052
)Net other (income) expense


218,857


(250,921
)

(2,079,084
)

206,084


194,877


(739,061
)Net loss


(22,803,869
)

(32,324,413
)

(20,540,636
)

(6,444,246
)

(27,186,918
)

(122,387,457
)Less subsidiary accumulating preferred dividends for the period


175,000


175,000


175,000


175,000


175,000


1,669,792Net loss allocable to common shareholders

$
(22,978,869
)
$
(32,499,413
)
$
(20,715,636
)
$
(6,619,246
)
$
(27,361,918
)
$
(124,057,249
)Basic and diluted loss per common share(3)

$
(0.59
)
$
(1.12
)
$
(0.78
)
$
(0.49
)
$
(13.27
)Weighted average shares outstanding(3)


39,098,943


28,910,041


26,546,785


13,610,694


2,062,3512008

2007

2006

2005

2004Consolidated Balance Sheet Data:Cash and cash equivalents

$
1,527,108

$
18,324,991

$
27,054,947

$
15,224,932

$
194,555Total assets


2,820,053


19,911,542


30,509,679


16,021,910


1,015,932Long-term debt, less current portion


11,915,000


5,915,000


3,923,810


5,905,634


2,027,279Total liabilities(4)


15,197,594


12,250,568


9,115,174


7,726,173


19,289,733Deficit accumulated during development stage


(122,387,457
)

(99,583,588
)

(67,259,175
)

(46,718,539
)

(40,274,293
)Total stockholders equity (deficit)

$
(12,377,541
)
$
7,660,974

$
21,394,505

$
8,295,737

$
(18,273,801
)


---

33

---





Table of Contents

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 recently completed two pivotal
Phase III clinical trials in community acquired pneumonia ("CAP") and a new drug application ("NDA") of cethromycin has recently been submitted to the Food and Drug Administration ("FDA").
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 has 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.

Development Update

In December 2008, the FDA accepted and filed our NDA for cethromycin and established a goal of a standard 10-month review
such that the anticipated target Prescription Drug User Fee Act ("PDUFA") date of the cethromycin NDA would be July 31, 2009. The NDA submission is based on a full clinical development and
manufacturing program for cethromycin. The program included two global Phase III pivotal studies for the treatment of mild-to-moderate CAP in which cethromycin was dosed
at 300 milligrams once daily for seven days compared to the standard of care therapy, Biaxin, which was dosed at 250 milligrams twice daily for seven days. The data from these trials showed
that cethromycin was non-inferior to Biaxin with a similar safety profile. The most common adverse reactions for cethromycin were taste disturbance, diarrhea, nausea and headache. No
visual disturbances, loss of consciousness, exacerbation of myasthenia gravis and hepatotoxicity were reported from these studies. More than 5,000 patients have been treated with cethromycin in
53 clinical trials to date. We hold the rights to cethromycin under an exclusive worldwide license (except in Japan) from Abbott Laboratories ("Abbott").

As
of December 31, 2008, we estimate that our cethromycin development program will require an additional $31.0 million in expenditures which includes $30.0 million
in additional milestone payments to Abbott, $300,000 to complete the cethromycin clinical trials and $700,000 for the preparation of the cethromycin NDA and other pre-commercialization
related costs. The additional $30.0 million Abbott milestone payment is triggered upon receiving FDA approval for cethromycin. A $10.0 million milestone obligation due upon submitting
our NDA application was expensed in September 2008 and paid in October 2008. Development timelines and related costs are difficult to estimate and may vary significantly from our current estimates.

34

---



Table of Contents

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. While we recently entered into a development and
commercialization agreement for cethromycin with Wyeth Pharmaceuticals ("Wyeth"), in the Asia Pacific region, excluding Japan (see Note 1), discussions with other potential commercial partners
focused on other geographical markets such as the European Union and the United States are ongoing.

In
February 2008, we announced the results from Trial CL07-001, a thorough QT study of cethromycin. This study was conducted to evaluate the cardiac safety of
cethromycin. The FDA usually requires thorough QT studies for all new chemical entities because prolongation in QT interval (corrected for changes in heart rate, or QTc) may signify an increased risk
of developing cardiac arrhythmias. Trial CL07-001 evaluated the potential of cethromycin to cause a prolongation in electrocardiographic QT interval in accordance with FDA and
ICH E14 guidance. At the therapeutic and supratherapeutic doses, cethromycin shows no signal of any electrocardiographic effects and hence supported its favorable cardiac safety profile.

In
addition to its use in the treatment of CAP, cethromycin has also demonstrated significantin vitroactivity against over 30 anthrax
(Bacillus anthracis) strains. During the third quarter of 2007, we concluded a study testing cethromycin's efficacy in treating inhalation anthrax
post-exposure for prophylaxis in non-human primates. Results from this study demonstrated that a thirty (30) day course of oral cethromycin at a 16 mg/kg of
once-daily dosing (the human equivalent dose of 300 mg) was 100% protective against a lethal dose of inhaledB. anthracisAmes strain
spores. We are collaborating with the National Institute of Allergy and Infectious Diseases to evaluate cethromycin's potential in preventing inhalational anthrax and other high-priority
bioterror agents.

In
September 2008, we entered into a development and commercialization agreement for cethromycin with Wyeth, in the Asia Pacific region excluding Japan. We will retain exclusive rights
to cethromycin in the rest of the world, including North America and Europe excluding Japan. In addition to future
royalty payments, we would receive milestone and regulatory payments based on successful achievement of clinical, regulatory and commercial objectives in specific markets. We will collaborate with
Wyeth to develop additional clinical data in the Asia Pacific region to support regulatory filings in that region.

In
August 2008, we signed a letter of intent with DSM Pharma Chemicals North America ("DSM"), Inc. to proceed with a proposal to purchase raw materials to produce commercial quantities
of cethromycin. Our intent is conditional upon the parties entering into a formal supply agreement which will govern the terms and conditions including but not limited to the timing of production and
the milestone payment schedule. While these conditions are pending, the parties recognize that there are lengthy lead times for the raw materials needed to be used to complete the production described
in the proposal. Therefore, we authorized DSM to procure the necessary raw materials to be used to complete the production in anticipation of entering into the formal supply agreement. Upon execution
of this agreement, we agreed to issue a purchase order to DSM for the necessary raw materials at an estimated cost of $4.2 million. The costs of these raw materials are subject to price
increases and changes in the Euro/US Dollar exchange rate. The hypothetical cost of these raw materials at December 31, 2008 was $4.2 million.

In
August 2008, we announced that the Defense Threat Reduction Agency ("DTRA") of the U.S. Department of Defense awarded us a two-year contract worth up to
$3.8 million to further study cethromycin as a potential broad-spectrum medical countermeasure. The contract, part of the agency's Transformational Medical Technologies Initiative ("TMTI"),
will fund NDA-enabling studies evaluating cethromycin's efficacy in combating Category A and B bioterror agents such asFransicella
tularensis(tularemia),Yersinia pestis(plague) andBurkholderia pseudomallei(melioidosis). Under the terms of the

35

---



Table of Contents

contract,
$1.8 million of DTRA funds are available over a nine-month base period beginning in August 2008 and the remaining $2.0 million may be awarded over the ensuing
15 months to complete the project.

Financial Update

Since our inception, we have incurred net losses each year. Our net loss for the year ended December 31, 2008 was
$22.8 million. As of December 31, 2008, we had an accumulated deficit of $122.4 million. We have funded operations to date primarily from debt financings and capital contributions
from our founder and Chief Executive Officer, proceeds from the initial public offering of our common stock, the subsequent sale of our common stock in three private placements, including our
commercial partnership agreement with Wyeth (see Note 1) and borrowings under our bank line of credit.

In
September 2008, we raised approximately $1.7 million, net of offering expenses, through a stock purchase agreement in connection with our entry into a development and
commercialization agreement with Wyeth. We issued 1,888,606 shares of common stock at a price of $0.908 per share.

In
September 2008, we entered into a Standby Equity Distribution Agreement ("SEDA"), with an accredited investor, 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. In connection with entering into the SEDA, we
also entered into a Registration Rights Agreement with YA Global. Under the terms of the SEDA, we may from time to time, in our discretion, sell newly-issued shares of our common stock to
YA Global at a discount to market of 5%. The amount of each advance is limited to the greater of $400,000 or the average trading volume for the five trading days prior to the advance notice
date. We are not obligated to utilize any of the $15.0 million available under the SEDA and there are no minimum commitments or minimum use penalties. Based upon our outstanding shares of
common stock, and options and warrants to purchase common stock as of December 31, 2008, the aggregate number of shares that we may sell under the SEDA without stockholder approval is limited
to approximately 4.4 million shares. Unless stockholder approval is sought and obtained, the total amount of funds that ultimately can be raised under the SEDA over the two-year
term will depend on the then-current price for our stock and the number of shares actually sold. The amendment to our credit facility, discussed below, contains a covenant limiting our
utilization of the SEDA to $9.0 million without the bank's prior consent. In addition, under the terms of the SEDA, the Company is not able to utilize the facility after receipt of a delisting
notice from the principal trading market on which our common stock is being traded. The Company received such a notice on November 5, 2008. While the Company obtained a waiver from
YA Global dated as of November 19, 2008 with respect to such notice, receipt of additional delisting notices or an unsuccessful appeal of the original delisting determination may result
in our inability to issue shares to YA Global pursuant to the terms of the SEDA. Pursuant to the terms of the SEDA, the Company paid YA Global a commitment fee of $300,000 by issuing
393,339 shares of the Company's common stock, and incurred $55,000 of other closing fees.

In
October 2008, we restructured our line of credit. The terms of the new line of credit increased the availability under the facility from $4.0 million to $10.0 million,
extended the maturity date one year to January 1, 2011, and changed the floating rate to a fixed interest rate of 8.5%. The line of credit is secured by substantially all of our assets, except
that the collateral specifically excludes any rights that we may have as a result of our license agreement with Abbott for cethromycin, 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. The terms also include a covenant limiting the use of the SEDA to $9.0 million without the bank's prior consent. We have issued warrants for the purchase of
65,000 shares of our common stock at an exercise price of $1.00 per share to the lender as

36

---



Table of Contents

a
closing fee. The warrants became exercisable upon issuance and will expire five years from the date of the grant. We borrowed $6.0 million on our new line of credit in October 2008, to
partially fund the $10.0 million Abbott milestone payment made in October 2008.

We
received a notice on October 1, 2008 from the Nasdaq Listings Qualification Department that we are not in compliance with Nasdaq Marketplace Rules 4310(c)(3)(B),
4310(c)(3)(A) or 4310(c)(3)(C) regarding minimum market value, shareholder equity and net income from operations requirements for the continued listing of our common stock on the Nasdaq Capital
Market. We were provided with a period of 30 calendar days, or until October 31, 2008, to regain compliance with the continued listing requirements. We were not compliant by October 31,
2008 and received notice from the Nasdaq Listings Qualification Department on November 5, 2008 stating that our securities are subject to delisting from the Nasdaq Capital Market if we do not
choose to appeal this determination. The Company has appealed the determination. On February 2, 2009, we were informed that the Nasdaq Hearings Panel ("the Panel") has determined to grant our
request for continued listing on the Nasdaq Capital Market, subject to certain conditions which include filing a Form 8-K on or before May 4, 2009 evidencing pro forma
shareholders' equity at or above $2.5 million, and providing projections to the Panel showing our expectation that we will remain in compliance for at least 12 months. If we are unable
to meet the continued listing standards by that date, the Panel will issue a final delisting determination and suspend trading of our shares on the second business day after the date of the delisting
determination. The Panel reserves the right to reconsider the terms of this exception based on any event, condition, or circumstance that exists or develops that would, in the opinion of the Panel,
make continued listing of our securities on The Nasdaq Capital Market inadvisable or unwarranted.

In
the event of delisting, trading, if any, would be conducted in the over-the-counter market in the so-called "pink sheets" or on the OTC Bulletin
Board. 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 existing shareholders ability to resell our securities. If any of these events take place, existing shareholders 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.

A
discussion of our ability to continue as a going concern can be found in Note 1 to the consolidated financial statements.

Results of Operations



Revenue.Revenue for the year ended December 31, 2008 was $241,000 compared to $0 for the year ended December 31, 2007.
Revenue in 2008
was derived from a grant awarded by the DTRA of the U.S. Department of Defense. The terms of the grant agreement include a nine-month base period, beginning in August 2008, totaling
$1.8 million and an option period totaling $2.0 million that would extend the grant for an additional 15 months.

Research and development expense.Research and development expense decreased $10.0 million to $15.7 million for the year
ended
December 31, 2008 as compared to 2007. Included in the 2008 amount is a $10.0 million milestone expense incurred under our license agreement for cethromycin with Abbott. The largest
component of the total decline was cethromycin clinical trial expenses which were $14.5 million lower than the same period last year. Data from the second of two pivotal Phase III
clinical trials was released in November of 2007 effectively bringing the trials to their natural

37

---



Table of Contents

conclusion.
Expenses incurred to compile our NDA totaled $2.1 million for the year ended December 31, 2008 and represented a decline of $5.0 million when compared to the same
period last year. The majority of this decrease is attributable to our cethromycin bulk-scale manufacturing program that was successfully concluded during the third quarter of 2007.
Manufacturing expenses incurred in relation to process optimization activities of cethromycin totaled $0.7 million for the year ended December 31, 2008 and $0.5 million higher
than the same period in the previous year. Expenses related to our study testing cethromycin's efficacy in treating inhalation anthrax post-exposure for the prophylaxis in
non-human primates declined $1.1 million to $0 for the year ended December 31, 2008 as compared to the same period last year. This study was completed during the third
quarter of 2007.

General and administrative expense.General and administrative expense increased $0.3 million to $7.1 million for the year
ended
December 31, 2008 as compared to the same period in 2007. Increases in patent, facilities and marketing expenses were partially offset by minor decreases in salary and benefit, and investor
relations expenses.

Interest income.Interest income declined $0.4 million to $0.3 million for the year ended December 31, 2008, the result
of a
lower average cash balance and associated interest rates in the first half of 2008 as compared to the same period in 2007.

Interest expense.Interest expense increased $59,000 to $526,000 for the year ended December 31, 2008 compared to $467,000 for the
year ended
December 31, 2007. The increase is the result of increased borrowings under our restructured line of credit and a higher interest rate.



Revenue.The Company had no revenue for the year ended December 31, 2007. In 2006, the Company had revenue of $40,000 which
resulted from a
small business innovative research grant.

Research and development expense.Research and development expenses increased $8.5 million to $25.7 million for the year ended
December 31, 2007 compared to $17.2 million for the year ended December 31, 2006. Expenses related to our clinical trials, which we completed during 2007, totaled
$15.0 million representing an increase of $3.3 million in 2007 as compared to 2006. As of December 31, 2007, we had paid out $35.0 million of $42.2 million in
executed contracts. Regulatory activities and studies associated with preparation of the cethromycin NDA represented an increase in expenses of $3.6 million over 2006. As of December 31,
2007 we had recognized expenses of $39.5 million out of a total of $42.2 million in executed contracts.

Expenses
related to our study testing cethromycin's efficacy in treating inhalation anthrax post-exposure for prophylaxis in non-human primates increased $741,000
over 2006 and represented the conclusion of the study. Formulation expenses of our next clinical candidate, ALS-357 increased $108,000, in 2007 as compared to 2006. The clinical supplies
will be used in our upcoming Phase I/II escalating dose study for the topical treatment of cutaneous melanoma, which commenced during the second quarter of 2008. Salaries and benefits of our
research and development staff increased $617,000 in 2007 as compared to 2006. Of this increase,
$143,000 represents non-cash compensation costs related to the issuance of stock options. The remainder of the increase is attributable to increases in compensation of our existing staff
as well as several regulatory positions that were added in the last quarter of 2006 and at various points during 2007.

General and administrative expense.General and administrative expense increased $1.4 million to $6.8 million for the year
ended
December 31, 2007 compared to $5.5 million for the year ended December 31, 2006. Salary and benefit expense increased $944,000 and was comprised of $614,000 of incremental salary
and benefit expense and $330,000 in non-cash compensation expense related to stock option issuances. Incremental salary expense was the result of market adjustments to compensation for
existing staff and several new staff positions that focus on Sarbanes-Oxley compliance which were

38

---



Table of Contents

added
during the last quarter of 2006 and first quarter of 2007. Marketing expenses related to the branding of cethromycin increased $235,000 over 2006, the result of a larger presence at key
scientific meetings throughout the year. Facilities expense increased $143,000 as compared to 2006 which resulted from our facilities expansion that was completed during the fourth quarter of 2006.

Interest income.Interest income decreased $934,000 to $718,000 for the year ended December 31, 2007. Interest income is derived
through the
investment of private placement proceeds in money market funds, until they are used in operations. The decrease in interest income reflects lower cash balances throughout 2007 versus 2006.

Interest expense.Interest expense decreased $45,000 to $467,000 for the year ended December 31, 2007. The decline is attributable
to two
factors. In May 2006, we paid all outstanding accumulated and capitalized interest to our Chief Executive Officer in connection with his $2.0 million note, reducing the balance upon which
interest is calculated by $837,000, the amount of accumulated and capitalized interest. Also, in April 2006, we restructured our line of credit reducing the interest rate we pay under our
$4.0 million line of credit by 1.8%.

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
$122.4 million as of December 31, 2008 and we expect to incur significant operating losses for the foreseeable future. As of December 31, 2008 we had negative working capital of
$800,000. Cash and cash equivalents were $1.5 million as of December 31, 2008. 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 we have raised additional debt financing through our bank line of credit.

In
September 2001, we incurred indebtedness under a $2.0 million promissory note with the Chief Executive Officer of the Company, which bears interest at 7.75%. Principal plus any
accrued interest was due in a lump sum on January 5, 2009. On January 5, 2009, the note was extended to January 5, 2010, all other terms remained unchanged and in effect.

We
have a line of credit with a local financial institution. In October 2008, we restructured our line of credit. The terms of the new line of credit increased the availability under the
facility from $4.0 million to $10.0 million, extended the maturity date one year to January 1, 2011, and changed the floating rate to a fixed interest rate of 8.5%. The line of
credit is secured by substantially all of our assets, except that the collateral specifically excludes any rights that we may have as a result of our license agreement with Abbott for cethromycin, 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. The terms also include a covenant limiting the use of the SEDA to $9.0 million without the bank's prior consent. We
issued warrants for the purchase of 65,000 shares of common stock at an exercise price of $1.00 per share to the lender as a closing fee. The warrants became exercisable upon issuance and will
expire five years from the date of the grant. We borrowed $6.0 million on our new line of credit in October 2008, to partially fund the $10.0 million Abbott milestone payment made in
October 2008. As of December 31, 2008 the line of credit had an outstanding balance of $9.9 million.

During
the year ended December 31, 2008, cash used in operating activities totaled $24.1 million. $10.0 million of this amount was contributed to the Abbott
milestone payment, approximately

39

---



Table of Contents

$8.0 million
was used for the development of cethromycin, $0.3 million for anthrax trials, $0.4 million for research activities related to our proprietary portfolio of compounds
and $5.4 million for general
operations net of $0.3 million in interest income. Cash provided from financing activities totaled $7.6 million during the year ended December 31, 2008. During the year, we
borrowed $6.0 million on our new line of credit to partially fund the $10.0 million Abbott milestone payment and raised $1.7 million, net of offering expenses, through a stock
purchase agreement in connection with our entry into a development and commercialization agreement with Wyeth.



As of December 31, 2008, the annual amounts of future minimum payments under debt obligations, interest, and other long term
liabilities consisting of executed research, development and license and commercialization agreements are as follows:

Payments Due by December 31,2009

2010

2011

2012

2013

TotalNotes payable and bank line of credit

$


$
2,000,000

$
9,915,000

$


$


$
11,915,000Interest


999,408


844,801











1,844,209Cethromycin clinical & NDA costs


1,046,310














1,046,310Commercialization costs


4,659,061














4,659,061ALS-357 clinical program


346,884


545,100











891,984Government contracts


2,256,813


804,499











3,061,312Capital leases


8,468


4,350











12,818Total

$
9,316,944

$
4,198,750

$
9,915,000

$


$


$
23,430,694


In
October 2008, we made a $10.0 million milestone payment to Abbott triggered by our NDA submission for cethromycin. 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 and when the FDA approves the NDA, which we estimate will occur in 2009.
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, are only estimates due to uncertainties associated with regulatory filings.

For
the year ended December 31, 2008, we executed cethromycin development-related contracts totaling $1.5 million. Of the total contracts executed, $0.8 million
related to the compilation of our cethromycin NDA and NDA directed studies, $0.6 million related to process optimization of our commercial manufacturing program, and $0.1 million related
to the development of an intravenous formulation for cethromycin.

In
the third quarter of 2008, we entered into contracts totaling $4.7 million related to the commercialization and pre-launch activities associated with cethromycin.
This includes a letter of intent for the procurement and synthesis of raw materials to be used in the commercial scale production of cethromycin. The lead time for acquiring these raw materials is
expected to be six to eight months, therefore we do not expect cash payment associated with this agreement to be made until the second quarter of 2009. The costs of these raw materials are subject to
changes in the Euro/US Dollar exchange rate. The hypothetical cost of these raw materials (reflected in the table above) at December 31, 2008 was $4.2 million. The remaining
$0.5 million of contracts executed related to pre-launch activities associated with cethromycin.

40

---





Table of Contents

We also executed a contract during the second quarter of 2008 to initiate a Phase I/II clinical trial of our anti-melanoma compound
ALS-357. This trial will assess the safety, tolerability, and preliminary efficacy of ALS-357 when administered topically to patients with cutaneous metastatic melanoma. The
contract totals approximately $0.9 million which represents the upper limit of cost if the maximum number of patients is enrolled. To the extent fewer patients are required as determined by the
protocol; expenses related to the trial could be lower. Enrollment will be based upon a number of factors which are difficult to forecast and therefore we cannot reasonably estimate the true cost of
the trial beyond what is defined as the maximum limit per the contract.

Our
commitments under operating leases consist of payments made to a related party relating to our facilities lease in Woodridge, Illinois. The operating lease expired in September of
2008 and we are currently in negotiations to renew the lease. Pursuant to the terms of the lease, we continue to rent the premises on a monthly basis and are currently making payments equal to its
most recent rental rate.

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 are expected to be approximately $3.1 million over a two-year period beginning in August 2008. The subcontractors' agreements provide a provision to terminate
the contract in the event the grant awarded by DTRA is not extended beyond the nine-month base period.

We
will not be generating any product-based revenues or realizing cash flows from operations in the near term, if at all. In addition, our current liabilities exceed our current assets.
Based on management's best estimates, we have resources to fund operations into the second quarter of 2009. In order to continue our business activities during 2009, we intend to raise additional
capital by licensing our lead compound, cethromycin, to commercial partners. We believe, based upon current market conditions, additional 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 additional commercial partnerships, there can be no
assurances that such partnerships will be available at terms acceptable to us, if at all. In addition, we have executed a SEDA which provides for the sale of up to $15.0 million of our common
stock to an accredited investor, YA Global, subject to certain terms and conditions (see Note 1). If we raise additional capital by issuing equity securities, our shareholders could
experience substantial dilution. As a result of these uncertainties, there is significant doubt about our ability to continue as a going concern.

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



41

---



Table of Contents



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 critical to the judgments and estimates used in the preparation of our financial statements.



Research and development expenses consist of internal research costs and fees paid for contract research in conjunction with the
research and development of our proprietary product portfolio. All such costs are expensed as incurred. Clinical trial costs incurred by third parties are expensed as the contracted work is performed.
We estimate both the total cost and time period of the trials and the percent completed as of that accounting date. We believe that the estimates made as of December 31, 2008 are reflective of
the actual expenses incurred as of that date.



We account for stock-based awards to employees and non-employees using the accounting provisions of Statement of Financial
Accounting Standards No. 123(R)Share-Based Paymentswhich provides for the use of the fair value based method to determine compensation for all
arrangements where shares of stock or equity instruments are issued for compensation. We use a Black-Scholes options-pricing model to determine the fair value of each option grant as of the date of
grant for expense incurred. The Black-Scholes model requires inputs for risk-free interest rate, dividend yield, volatility and expected lives of the options. Expected volatility is based
on historical volatility of our stock since August 5, 2005, the date our stock began to trade publicly. The risk-free rate for periods within the contractual life of the option is
based on the U.S. Treasury yield curve in effect at the time of the grant. The expected lives for options granted represents the period of time that options granted are expected to be outstanding and
is derived from the contractual terms of the options granted. We estimate future forfeitures of options based upon historical forfeiture rates.

42

---



Table of Contents

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

Our exposure to market risk is currently confined to our cash, cash equivalents, line of credit and certain contract manufacturing
agreements. 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.

Our
most liquid assets are cash and cash equivalents. Because of their liquidity, these assets are not directly affected by inflation. We also believe that we have intangible assets in
the value of our intellectual property. In accordance with generally accepted accounting principles, we have not capitalized the value of this intellectual property on our balance sheet. Due to the
nature of this intellectual property, we believe that these intangible assets are not affected by inflation. Because we intend to retain and continue to use our equipment, furniture and fixtures and
leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not materially affect our operations. However, the rate of inflation affects our
expenses, such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources. The fluctuation in the exchange rate
between the U.S. Dollar and the Euro could affect amounts due under certain contract manufacturing agreements. A hypothetical increase in the exchange rate between the Euro and the U.S. Dollar as of
December 31, 2008 of ten percent would increase contract manufacturing costs by approximately $144,000.

43

---





Table of Contents

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, 2008 and 2007, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended
December 31, 2008 and for the period from January 1, 1999 (inception) through December 31, 2008. 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, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, and for the period from
January 1, 1999 (inception) to December 31, 2008 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 does not have sufficient cash on-hand or other funding available to meet its financial obligation in connection with the approval of its New Drug Application to the U.S. Food and
Drug Administration for cethromycin, should such approval occur. Further, the Company's current liabilities exceed its current assets. These factors raise substantial doubt about the Company's 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, 2008.

/s/DELOITTE & TOUCHE LLP

Chicago,
Illinois
February 10, 2009

44

---





Table of Contents

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

December 31,
2008

December 31,
2007ASSETSCURRENT ASSETS:Cash and cash equivalents

$
1,527,108

$
18,324,991Grant receivable


63,444


Prepaid insurance


227,313


251,493Prepaid clinical trial expenses





926,168Other prepaid expenses and deposits


143,808


140,359Total current assets


1,961,673


19,643,011PROPERTY AND EQUIPMENT:Furniture and fixtures


244,072


221,417Laboratory equipment


159,186


159,186Computer software and equipment


258,786


242,707Leasehold improvements


505,804


177,253Total property and equipmentat cost


1,167,848


800,563Less accumulated depreciation


(760,329
)

(542,032
)Property and equipmentnet


407,519


258,531OTHER ASSETS:Deferred offering and financing costs


450,861


Other long-term assets





10,000Total other assets


450,861


10,000TOTAL ASSETS

$
2,820,053

$
19,911,542LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT LIABILITIES:Accounts payable

$
1,379,941

$
2,685,751Accrued clinical trial and NDA expenses


458,260


2,776,543Accrued payroll


506,537


68,094Other accrued expenses


352,466


262,347Accrued interest payable


72,572


22,756Short-term lease payable


8,468


7,259Total current liabilities


2,778,244


5,822,750Long-term lease payable


4,350


12,818Long-term grant payable


500,000


500,000Long-term notes payablerelated party


2,000,000


2,000,000Line of credit


9,915,000


3,915,000Total liabilities


15,197,594


12,250,568COMMITMENTS AND CONTINGENCIESMINORITY INTEREST





STOCKHOLDERS' EQUITY (DEFICIT):Common stock, $0.01 par value60,000,000 shares authorized; 40,810,932 issued and outstanding at December 31, 2008; 38,502,987 shares issued and
outstanding at December 31, 2007


408,109


385,030Additional paid-in capital


109,601,807


106,859,532Deficit accumulated during the development stage


(122,387,457
)

(99,583,588
)Total stockholders' equity (deficit)


(12,377,541
)

7,660,974TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

$
2,820,053

$
19,911,542


See
notes to consolidated financial statements.

45

---





Table of Contents

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

Period From
Inception
(January 1, 1999)
Through
December 31, 2008Year ended December 31,2008

2007

2006Revenue:Management fees

$


$


$


$
1,161,180Grants


240,830





39,788


1,276,401Royaltyrelated party











45,238Total revenue


240,830





39,788


2,482,819Expenses:Research and development


15,709,293


25,735,759


17,202,113


90,580,401Contracted research and developmentrelated party











7,980,299Selling, general and administrative


7,116,549


6,839,575


5,457,395


27,048,637Total expenses


22,825,842


32,575,334


22,659,508


125,609,337Loss from operations


(22,585,012
)

(32,575,334
)

(22,619,720
)

(123,126,518
)Net other (income) expense:Interest income


(306,846
)

(717,884
)

(1,651,916
)

(2,948,862
)Interest expense


525,703


466,963


511,884


3,148,853Gain on sale of interest in Sarawak Medichem Pharmaceuticals joint venture








(939,052
)

(939,052
)Net other (income) expense


218,857


(250,921
)

(2,079,084
)

(739,061
)Net loss


(22,803,869
)

(32,324,413
)

(20,540,636
)

(122,387,457
)Less accumulated preferred stock dividends for the period


175,000


175,000


175,000


1,669,792Net loss available to common shareholders

$
(22,978,869
)
$
(32,499,413
)
$
(20,715,636
)
$
(124,057,249
)Net loss per share available to common shareholdersbasic and diluted

$
(0.59
)
$
(1.12
)
$
(0.78
)Weighted average shares outstandingbasic and diluted


39,098,943


28,910,041


26,546,785


See
notes to consolidated financial statements.

46

---





Table of Contents

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

Deficit
Accumulated
During the
Development
StageCommon StockAdditional
Paid-in
CapitalShares

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





29,277,776Exchange 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)


105,609


7,202


14,240





21,442Compensation expense related to stock options (since inception)








716,905





716,905Net loss (since inception)











(46,718,539
)

(46,718,539
)BALANCEDecember 31, 2005


17,990,322


179,903


54,834,373


(46,718,539
)

8,295,737Issuance of common stock, net of offering costs (March 2006)


10,233,464


102,335


33,266,653





33,368,988Issuance of stock related to option exercises


58,891


589


8,656





9,245Compensation expense related to stock options








261,171





261,171Net loss











(20,540,636
)

(20,540,636
)BALANCEDecember 31, 2006


28,282,677

$
282,827

$
88,370,853

$
(67,259,175
)
$
21,394,505Issuance of common stock, net of offering costs (December 2007)


10,191,083


101,911


17,750,327





17,852,238Issuance of stock related to option exercises


29,227


292


4,296





4,588Compensation expense related to stock options








734,056





734,056Net loss











(32,324,413
)

(32,324,413
)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
)


See
notes to consolidated financial statements.

47

---





Table of Contents

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

Year ended December 31,

Inception
(January 1, 1999)
Through
December 31, 20082008

2007

2006CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(22,803,869
)
$
(32,324,413
)
$
(20,540,636
)
$
(122,387,457
)Adjustments to reconcile net loss to net cash flows used in operating activities:Depreciation and amortization


218,796


206,755


131,114


841,570Non-cash interest expense


8,050


37,768


37,768


108,873Stock compensation expense


850,889


734,056


261,171


2,563,021Non-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
)

(939,052
)Loss on disposal


35


1,761





13,329Changes in operating assets and liabilities:Clinical supplies











533,333Accounts receivable


(63,444
)




6,160


(63,444
)Prepaid expenses


946,899


1,691,599


(2,537,663
)

(379,669
)Other assets


10,000





4,610


8,548Accounts payable


(1,464,517
)

1,674,355


745,823


1,221,234Accrued expenses


(1,814,721
)

1,469,209


1,397,014


1,292,263Licenses payable











(11,000,000
)Accrued interest on debt


49,816





(748,092
)

650,635Net cash flows from operating activities


(24,062,066
)

(26,508,910
)

(22,181,783
)

(103,064,149
)CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment


(362,353
)

(58,436
)

(288,027
)

(1,092,701
)Proceeds from the sale of SMP








939,052


939,052Proceeds from the sales of investments








14,807,158


31,557,158Purchase of investments








(4,332,158
)

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


(362,353
)

(58,436
)

11,126,025


(153,649
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock and capital contributions


1,664,713


17,852,238


33,368,988


89,373,290Proceeds from issuance of note payable and line of credit


6,000,000








15,018,691Proceeds from grants











500,000Proceeds from stock options exercised


4,082


4,588


9,245


39,357Payments of deferred offering and financing fees


(35,000
)







(35,000
)Payments on capital leases


(7,259
)

(19,436
)

(17,460
)

(151,432
)Net cash flows from financing activities


7,626,536


17,837,390


33,360,773


104,744,906NET (DECREASE) INCREASE IN CASH


(16,797,883
)

(8,729,956
)

22,305,015


1,527,108CASHBeginning of period


18,324,991


27,054,947


4,749,932


CASHEnd of period

$
1,527,108

$
18,324,991

$
27,054,947

$
1,527,108SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest

$
477,835

$
416,583

$
1,232,651

$
2,390,641SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONSNoncash investment activity:Purchase of property and equipment under capital leases








29,693


164,249Capital expenses included in accrued expenses


5,466








5,466Noncash financing activity:Issuance of common shares for licenses











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











3,000,000Unpaid costs associated with the issuance of common stock


61,775








61,775Debt discount











30,823Deferred offering and financing costs

$
423,911

$


$


$
453,911


See notes to consolidated financial statements.

48

---





Table of Contents

ADVANCED LIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY  (A Development Stage Company)        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        YEARS ENDED
DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION  (JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

1.    Nature of Business and Continuance of Operations

The Company's principal business activity is to 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 Statement of Financial Accounting Standards ("SFAS") No. 7,Accounting and
Reporting by Development Stage Enterprises.

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 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.

In
April 2005, we filed a registration statement with the Securities and Exchange Commission ("the 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 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

49

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

1.    Nature of Business and Continuance of Operations (Continued)

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 agree 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, the Company and Wyeth entered into a development and commercialization agreement for cethromycin in the Asia Pacific region excluding Japan. The Company will retain
exclusive rights to cethromycin in the rest of the world, including North America and Europe excluding Japan. In addition to future royalty payments, the Company would receive milestone and regulatory
payments based on successful achievement of clinical, regulatory and commercial objectives in specific markets. The Company and Wyeth will collaborate to develop additional clinical data in the Asia
Pacific region to support regulatory filings in that region. It is not anticipated that Wyeth would file for regulatory approval in the Asia Pacific region prior to the Company obtaining U.S. approval
for cethromycin from the Food and Drug Administration ("FDA").

In
connection with the Company's entry into a development and commercialization agreement, the Company entered into a stock purchase agreement with Wyeth. Under the terms of the
agreement, Wyeth 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 outstanding shares.

In
September 2008, the Company also entered into a Standby Equity Distribution Agreement ("SEDA"), with YA Global Investments, L.P. ("YA Global"), for the sale of up to
$15.0 million of shares of the Company's common stock over a two-year commitment period. In connection with entering into the SEDA, the Company also entered into a Registration
Rights Agreement with YA Global. Under the terms of the SEDA, the Company may from time to time, in its discretion, sell newly-issued shares of its common stock to YA Global at a discount to market of
5%. The amount of each advance is limited to the greater of $400,000 or the average trading volume for the five trading days prior the advance notice date. The Company is not obligated to utilize any
of the $15.0 million available under the SEDA and there are no minimum commitments or minimum use penalties. Based upon the Company's outstanding shares of common stock, and options and
warrants to purchase common stock as of December 31, 2008, the aggregate number of shares that the Company may sell

50

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

1.    Nature of Business and Continuance of Operations (Continued)

under
the SEDA without stockholder approval is limited to approximately 4.4 million shares. Unless stockholder approval is sought and obtained, the total amount of funds that ultimately can be
raised under the SEDA over the two-year term will depend on the then-current price for the Company's stock and the number of shares actually sold. The Company's restructured
credit facility with its lender (see Note 5) also contains a covenant limiting the Company's utilization of
the SEDA to $9.0 million without the bank's prior consent. In addition, under the terms of the SEDA, the Company is not able to utilize the facility after receipt of a delisting notice from the
principal trading market on which our common stock is being traded. The Company received such a notice on November 5, 2008. While the Company obtained a waiver from YA Global dated as of
November 19, 2008 with respect to such notice, receipt of additional delisting notices or an unsuccessful appeal of the original delisting determination may result in our inability to issue
shares to YA Global pursuant to the terms of the SEDA. Pursuant to the terms of the SEDA, the Company paid to YA Global a commitment fee of $300,000 by issuing 393,339 shares of the Company's common
stock, and incurred $55,000 of other closing fees.

Pursuant
to the SEDA entered into in September 2008, the facility is subject to having an effective registration statement covering the shares. A registration statement covering
10,361,251 shares was declared effective by the Securities and Exchange Commission on December 3, 2008. As of December 31, 2008 there were no shares issued under the SEDA. As of
February 9, 2009, the Company had issued 781,377 shares to YA Global and received $0.2 million through the usage of the SEDA facility.

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. However, as a result of the Company's continued losses and current cash and financing position, such realization of assets or liquidation of
liabilities, without substantial adjustments is uncertain. Given this uncertainty, there is significant doubt as to the Company's ability to continue as a going concern.

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 and its limited operating history.

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 IPO and the subsequent private placements. The Company will not be generating any product-based revenues or realizing cash flows from operations in the
near term, if at all. In addition, the Company's current liabilities exceed its current assets. Based on management's best estimates, the Company has resources to fund operations into the second
quarter of 2009. In order to continue its business activities during 2009, the Company intends to raise additional capital by licensing its lead compound, cethromycin, to commercial partners. The
Company believes, based upon current market conditions, additional commercial partnership agreements would include a series of milestone payments, including up-front milestones that would
fund the Company's continued

51

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

1.    Nature of Business and Continuance of Operations (Continued)

operations.
Although management believes the Company could secure additional commercial partnerships, there can be no assurances that such partnerships will be available at terms acceptable to
the Company, if at all. In addition, the Company executed a SEDA which provides for the sale of up to $15.0 million of its common stock to an accredited investor, YA Global, subject to certain
terms and conditions (see Note 1). If the Company raises additional capital by issuing equity securities, its shareholders could experience substantial dilution. The accompanying financial
statements do not include any adjustments that might result from the outcome of these uncertainties.

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.

InvestmentsThe Company has, at times, invested in marketable debt securities which were classified as
available-for-sale, the fair value of which was determined using currently available market prices. The Company reviews the carrying value of investments each quarter to
determine whether an other than temporary decline in market value exists. If such a decline is deemed to have occurred, the investment is written-down with a charge to other (income)
expense, net. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a component of stockholders' equity
(deficit) in accumulated other comprehensive loss. Marketable securities available for current operations are classified in the balance sheet as current assets; marketable securities held for
long-term purposes are classified as noncurrent assets. Interest income and realized gains and losses on securities are included in "Interest income" in the statements of operations. As of
December 31, 2008 and 2007, the Company had no marketable securities and therefore no unrealized holding gains or losses were recognized in the statements of operations and stockholders equity
(deficit).

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 $30,000 and $30,000 as of December 31, 2008 and 2007, and accumulated depreciation of $19,000 and $12,000, as of December 31, 2008 and 2007, respectively.

Deferred Offering and Financing CostsDeferred offering and financing costs represent legal, accounting, and commitment fees
incurred to raise capital and obtain financing. The Company incurred deferred offering costs related to the September 2008 SEDA (see Note 1). These costs, which are attributable to a proposed
offering of securities, are deferred and ratably allocated against the gross proceeds of each offering under the SEDA. Deferred financing costs were incurred as a result of the

52

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

2.    Summary of Significant Accounting Policies (Continued)

Company
restructuring its line of credit (see Note 5). These costs are capitalized and amortized over the life of the applicable financing.

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. To date, the Company has
not recorded any gains or losses from such a transaction.

Fair Value MeasurementsIn September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, Fair Value Measurements("SFAS 157"). SFAS 157 provides a definition of fair value, establishes acceptable methods of measuring fair value
and expands disclosures for fair value measurements. The principles apply under accounting pronouncements which require measurement of fair value. The adoption of SFAS 157 did not have a
material impact on the Company's statements of financial position, results of operations and cash flows.

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities("SFAS 159"). SFAS 159 permits an entity to irrevocably elect fair value on a
contract-by-contract basis as the initial and subsequent measurement attribute for many financial assets and liabilities and certain other items including insurance contracts.
Entities electing the fair value option would be required to recognize changes in fair value in earnings and to expense upfront cost and fees associated with the item for which the fair value option
is elected. As of December 31, 2008, the Company has not elected to apply the provisions of SFAS 159.

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 believes that the estimates made as of December 31, 2008 are reflective of the actual expenses incurred as of that date.

The
company recognizes in-process research and development in accordance with FASB Interpretation No. 4,Applicability of FASB Statement
No. 2 to Business Combinations Accounted for by the Purchase Methodand the AICPA Technical Practice Aid,Assets Acquired in a Business
Combination to be used in Research and Development activities: A Focus on Software, Electronic Devices, and

53

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

2.    Summary of Significant Accounting Policies (Continued)

Pharmaceutical Industries.Assets to be used in research and development activities, specifically, compounds that have yet to receive new drug approval from the FDA and would
have no alternative use should approval not be given, are immediately charged to expense when acquired. The Company does not expect the adoption of SFAS No. 141 (revised 2007) Business Combinations("SFAS 141R") will have a material impact on its accounting policy for research and development expenses.

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Revenue related to award grants from various government agencies is recorded as expenses are incurred and
services performed in accordance with the terms of the grant agreements. Royalty revenue is earned from a license of the Company's chemical process technology.

Fair Value of Financial InstrumentsThe carrying values of certain of the Company's financial instruments, including cash
equivalents and accounts payable approximates fair value due to their short maturities. The fair values of the Company's long-term obligations (see Note 5) are based on assumptions
concerning the amount and timing of estimated future cash flows and
assumed discount rates reflecting varying degrees of risk. The carrying values of the Company's long-term obligations approximate their fair values.

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 SFAS No. 109, Accounting 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 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.

54

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

2.    Summary of Significant Accounting Policies (Continued)

Recent Accounting PronouncementsIn March 2007, the Emerging Issues Task Force ("EITF") issued EITF 07-03,
"Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development" and the FASB ratified the tentative conclusion. EITF 07-03 addresses the
diversity which exists with respect to the accounting for the non-refundable portion of a payment made by a research and development entity for future research and development activities.
Under this conclusion, an entity would defer and capitalize non-refundable advance payments made for research and development activities until the related goods are delivered or the
related services are performed. EITF 07-03 was
effective for interim or annual reporting periods in fiscal years beginning after December 15, 2007. The adoption of EITF 07-03 did not have a material impact on the
Company's statements of financial position, results of operations and cash flows.

In
December 2007, the FASB issued SFAS 141RBusiness Combinationsand SFAS No. 160Noncontrolling
Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulleting No. 51("SFAS 160"). SFAS 141R will change how business
acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interest and classified as a component of equity. SFAS 141R and SFAS 160 are effective beginning the first fiscal quarter of
2009. Early adoption is not permitted. The Company does not expect the adoption of either SFAS 141R or SFAS 160 will have a material impact on its statements of financial position,
results of operations and cash flows.

3.    Joint Venture

Sarawak MediChem Pharmaceuticals, which was formed in 1996, was a joint venture between the Sarawak Government and the Company. The Sarawak Government, through CRAUN, and ALS Inc.
each maintained a 50% share in SMP.

In
October 2006, the Company and the Sarawak Government entered into a Stock Purchase Agreement, pursuant to which the Sarawak Government, through CRAUN, agreed to purchase
ALS Inc.'s 50% equity interest in SMP, in exchange for a $1.0 million cash payment to ALS Inc. The parties made certain representations and warranties in the Stock Purchase
Agreement and mutually agreed to waive any future legal claims otherwise arising out of the SMP joint venture. The Company provided indemnification under the Stock Purchase Agreement for losses not to
exceed the purchase price of $1.0 million. In connection with this transaction, ALS Inc. and the Sarawak Government agreed to terminate the joint venture agreement, which released the
Company and ALS Inc. from any future obligations to SMP. As a result of the transaction, the Company no longer has any interest in SMP's HIV-therapeutic candidate, Calanolide A.

55

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

3.    Joint Venture (Continued)

The Company accounted for its investment in SMP under the modified equity method of accounting, which provides that the Company record its proportional share of earnings once the
accumulated deficit incurred by SMP has been recovered. At the time of the closing of the Stock Purchase Agreement in December 2006, SMP had not recovered its accumulated deficit and accordingly, the
Company's investment in SMP had a carrying value of zero, therefore a gain equal to the purchase price less transaction costs, or approximately $940,000, was recognized.

4.    Related Party Transactions

The Company's Chief Executive Officer, Michael T. Flavin, loaned $2.0 million to the Company in 2001 (see Note 5). Interest expense of $155,000, $155,000 and $175,000 was
recorded related to the note, for the years ended December 31, 2008, 2007 and 2006, respectively.

The
Company's bank line of credit, as discussed in Note 5, is secured by substantially all of the Company's assets, except that the collateral specifically excludes any rights
that the Company has as a result of its license agreement with Abbott Laboratories ("Abbott") for cethromycin, and is further secured by 2.5 million shares of the Company's stock held by ALS
Ventures, LLC (see Note 5), which is beneficially owned by the Company's Chief Executive Officer.

The
Company leases facilities from the BioStart Property Group ("BioStart"), a wholly-owned subsidiary of Flavin Ventures, which is owned by the Company's Chief Executive Officer. The
operating lease expired in September of 2008 and the Company is currently in negotiations to renew the lease. Pursuant to the terms of the lease, the Company continues to rent the premises on a
monthly basis and the Company is currently making payments equal to its most recent rental rate. Lease payments totaled approximately $284,000, $272,000 and $263,000 for the years ended
December 31, 2008, 2007 and 2006, respectively (see Note 11). Under the terms of the agreement, the Company may reduce its required rental and common area maintenance payments to
BioStart to offset for any shared expenses between
the Company and other tenants in the building. The rental and common area maintenance reductions during the years ended December 31, 2008, 2007 and 2006, were $0 and $0, $3,000 and $2,800 and
$9,700 and $9,100, respectively.

5.    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%. Principal
plus any accrued interest was due in a lump sum on January 5, 2009. On January 5, 2009, the note was extended to January 5, 2010, all other terms remained unchanged and in effect.
As of December 31, 2008 and December 31, 2007, the Company had $2.0 million outstanding under the note.

In
October 2008, the Company restructured its revolving line of credit with a financial institution. The terms of the new line of credit increased the availability under the facility
from $4.0 million to $10.0 million, extended the maturity date one year to January 1, 2011, and changed the floating rate to a fixed interest rate of 8.5%. The line of credit is
secured by substantially all of the Company's assets, except that the collateral specifically excludes any rights that the Company may have as a result of its

56

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

5.    Long Term Obligations (Continued)

license
agreement with Abbott for cethromycin, 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. The terms also include a covenant limiting the use of the SEDA
to $9.0 million without the bank's prior consent. The Company issued warrants for the purchase of 65,000 shares of its common stock at an exercise price of $1.00 per share to the lender as a
closing fee. The warrants became exercisable upon issuance and will expire five years from the date of the grant. The Company borrowed $6.0 million on its new line of credit in October 2008, to
partially fund the $10.0 million Abbott milestone payment made in October 2008. As of December 31, 2008 and 2007, the Company had outstanding under the note $9.9 million and
$3.9 million, respectively.

6.    Stockholders' Equity (Deficit)

Authorized CapitalAs of December 31, 2008, the authorized capital stock of the Company consists of 60,000,000 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, 2008.

7.    Minority 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. deCODE provides analytical services to the
Company on an as needed basis.

As
of December 31, 2008, 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, 2008 and 2007 are approximately $4.2 million and $4.0 million respectively, including approximately
$1.7 million and $1.5 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.

57

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

8.    Incentive Stock Plan

In December 1999, our 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, our 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, 2008, 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 our incentive plans is 4,686,107. 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, 2008, 1,343,121 options were available to be granted under the plan.

The
compensation cost that has been charged against income for the Company's Plans was approximately $851,000, $734,000 and $261,000 for 2008, 2007 and 2006, 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, 2008.

Options

Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Term

Aggregate
Intrinsic
ValueOutstanding at January 1, 2008


1,848,500

$
2.50


7.3

$
Granted


1,484,749

$
0.57Exercised


(26,000
)
$
0.16Expired


Forfeited


(183,990
)
$
2.15Outstanding at December 31, 2008


3,123,259

$
1.62


7.7

$
Options exercisable at December 31, 2008


1,640,882

$
2.26


6.4

$



58

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

8.    Incentive Stock Plan (Continued)

The
weighted-average grant-date fair value of options granted during the years 2008, 2007 and 2006 was approximately $0.19, $1.42 and $1.38, respectively. The fair value of
options vested during the years 2008, 2007 and 2006 was approximately $688,000, $676,000 and $244,000, respectively. The total intrinsic value of options exercised during the years ended
December 31, 2008, 2007 and 2006 was approximately $21,000, $62,000 and $174,000, respectively.

As
of December 31, 2008, there was approximately $934,000 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, 2008, 2007 and 2006 was approximately $4,000, $4,600 and $9,000, 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 model that uses assumptions noted in the table below:

2008

2007

2006Expected volatility

71%81%

62%66%

61%66%Weighted-average volatility

76.5%

65.5%

61.9%Expected dividends

0.0%

0.0%

0.0%Expected term (in years)

6.06.5

6.5

6.5Risk-free rate

2.79%3.34%

4.63%4.65%

4.60%4.78%


Due
to the limited data available of the Company's historical stock price volatility, expected volatility is computed based upon historical volatilities of peer companies with similar
product portfolios. 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 the guidance in SEC Staff Accounting Bulletin Nos. 107 and 110.

59

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

9.    Income Taxes

Net deferred tax assets consist primarily of net operating loss ("NOL") carryforwards. 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. Due to the uncertainty of future earnings, management is unable to predict whether these net deferred
tax assets will be realized and, accordingly, has recorded a full valuation allowance against these assets.

NOL
carryforwards of approximately $86.5 million for income tax purposes are available to offset future taxable income. In addition, federal tax credits for increasing research
and development expenditures of approximately $2.4 million are available to offset future tax. These carryforwards begin to expire in varying amounts beginning in the year 2019. In March 2006,
in conjunction with the Company's issuance of common stock to a group of investors in March 2006, the Company had an ownership change as that term is defined in Section 382 of the Internal
Revenue Code. Approximately $19.8 million in NOL carryforwards have been limited as a result. Only approximately $4.1 million of the $19.8 million NOL carryforward can be used to
offset taxable income in a particular year. If taxable income exceeds $8.1 million in a year, $66.7 million of the unaffected NOL carryforwards are available. If some or all of the
$4.1 million NOL is not utilized in a tax year, the excess carries forward. This excess increases the $4.1 million available in the succeeding year. Tax credits have been similarly
limited.

The
Financial Accounting Standards Board issued Interpretation No. 48Accounting for Uncertainty in Income Taxesan Interpretation of FASB
Statement No. 109("FIN 48") which requires reporting of taxes based on tax positions which meet a more likely than not standard and which are measured at the
amount that is more likely than not to be realized. Differences between financial and tax reporting which do not meet this threshold are required to be recorded as unrecognized tax benefits.
FIN 48 also provides guidance on the presentation of tax matters and the recognition of potential IRS interest and penalties. The provisions of FIN 48 had no effect on the Company's
financial position, cash flows or results of operations upon adoption as the Company does not have any unrecognized tax benefits.

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 US, and in the state of Illinois. The tax years 2004 through 2008 remain open to examination by the major taxing jurisdictions to which the Company
is subject. The Company has not made any cash payments for income taxes since its inception.

60

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

9.    Income Taxes (Continued)

The
following is a summary of the significant components of the Company's deferred tax assets as of December 31, 2008 and 2007:

2008

2007Deferred tax assets:Net operating losses

$
33,745,721

$
28,209,928Stock based compensation


993,113


663,532Depreciation


112,370


64,965In-process research and development


10,077,422


7,094,998Other accruals and reserves


308,758


305,178Less valuation allowance


(45,237,384
)

(36,338,601
)Deferred tax assetnet

$


$



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

Years ended December 31,2008

2007Tax 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
%


10.    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 $83,000,
$72,000 and $55,000 were recognized as expense in 2008, 2007 and 2006, respectively.

11.    Commitments

Lease ObligationsThe Company leases facilities under an operating lease with the BioStart Property Group, ("BioStart"), a
wholly-owned subsidiary of Flavin Ventures, which is owned by the Company's Chief Executive Officer. The operating lease expired in September of 2008 and the Company is currently in negotiations to
renew the lease. Pursuant to the terms of the lease, the Company continues to rent the premises on a monthly basis and the Company is currently making payments equal to its most recent rental rate.
Additionally, the Company leases capital equipment of approximately $30,000 under a capital lease.

61

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

11.    Commitments (Continued)

Minimum
annual payments under operating leases and the present value of minimum capital lease payments as of December 31, 2008 are as follows:

Capital lease
ObligationsYear ending December 31,2009

$
10,1012010


4,6552011


2012


2013


Total


14,756Less amount representing interest


1,937Present value of minimum lease payments

$
12,819


Rental
expense relating to the Flavin Ventures lease totaled approximately $241,000, $230,000 and $207,000 in 2008, 2007 and 2006, respectively. Common area maintenance expense totaled
approximately $43,000, $41,000 and $45,000 in 2008, 2007 and 2006, 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.

Vendor ContractsThe Company administers its cethromycin program largely under contracts with third parties. Through
December 31, 2008, contracts totaling $47.6 million, net of expected savings of $3.2 million, have been executed related to the cethromycin program, which includes the
development, commercialization and pre-launch activities associated with cethromycin as well as anthrax-related studies. To date the Company has paid $41.9 million under these
contracts and the remaining balance of $5.7 million is expected to be paid in 2009. In October 2008, the Company entered into subcontractor arrangements to further study cethromycin as a
potential broad-spectrum medical countermeasure. These costs are expected to be approximately $3.1 million over a two-year period beginning in August 2008. In addition, to date the
Company has executed $1.2 million in contracts related to the ALS-357 program, of which the remaining balance of $892,000 is expected to be paid over the next two years. 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.

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"). 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

62

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

11.    Commitments (Continued)

compared
to the total defined in the grant. As of December 31, 2007, the entire grant had been spent or obligated and therefore the $500,000 has been classified as a long-term
liability as the Company must create and maintain positions created during the grant period through January 31, 2010. Through December 31, 2008, fifteen new jobs were created and
retained since the grant was awarded.

On
February 6, 2009, the Company committed to a restructuring plan that will result in the reduction of approximately 30% of the Company's workforce. In connection with the
restructuring plan, the Company will focus its resources on the cethromycin program. The Company anticipates incurring restructuring charges of approximately $60,000, primarily associated with
personnel-related termination costs.

12.    Research and Development Alliances

Abbott LaboratoriesIn December 2004, the Company entered into an agreement with Abbott Laboratories under which we acquired
from Abbott a license to certain patent applications, patents and proprietary technology relating to cethromycin. 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 our common stock to Abbott. In addition, the Company will owe Abbott $30.0 million if and when the FDA approves the NDA. The Company
also agreed to pay to Abbott $2.5 million upon cethromycin reaching $200 million in aggregate net sales and $5.0 million upon the drug reaching $400 million in aggregate
net sales. Finally, the Company will owe Abbott royalty payments of 19% on the first $100 million of aggregate net sales of cethromycin, 18% on net sales once aggregate net sales exceed
$100 million but are less than $200 million, and 17% on all net sales once aggregate net sales exceed $200 million.

WyethIn September 2008, the Company entered into a development and commercialization agreement with Wyeth for cethromycin in
the Asia Pacific region excluding Japan. The Company will retain exclusive rights to cethromycin in the rest of the world, including North America and Europe excluding Japan. In addition to future
royalty payments, the Company would receive milestone and regulatory payments based on successful achievement of clinical, regulatory and commercial objectives in specific markets. The Company will
collaborate to develop additional clinical data in the Asia Pacific region to support regulatory filings in that region.

In
connection with its entry into a development and commercialization agreement, the Company entered into a stock purchase agreement with Wyeth. Under the terms of agreement, Wyeth 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 outstanding shares.

63

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

12.    Research and Development Alliances (Continued)

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 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 $54,000, $41,000 and $114,000 in 2008, 2007 and 2006, 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.

13.    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, 2008, 2007 and 2006 excludes incremental shares of 13,415,420, 12,075,661 and 6,294,079 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, 2008, 2007 and 2006.

64

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2008

14.    Unaudited Quarterly Financial Data

Selected quarterly data for 2008 and 2007 is as follows:

2008First

Second

Third

FourthRevenue

$


$


$
32,006

$
208,824Research and development expenses


1,868,054


1,690,088


11,240,032


911,120Selling, general and administrative expenses


1,726,366


1,682,604


1,828,607


1,878,971Operating loss


(3,594,420
)

(3,372,692
)

(13,036,633
)

(2,581,267
)Net loss available to common shareholders


(3,585,884
)

(3,442,662
)

(13,132,416
)

(2,817,907
)Loss per share available to common shareholders:Basic and Diluted

$
(0.09
)
$
(0.09
)
$
(0.34
)
$
(0.07
)




2007First

Second

Third

FourthRevenue

$


$


$


$
Research and development expenses


9,050,912


8,833,078


3,838,184


4,013,585Selling, general and administrative expenses


1,548,163


1,810,249


2,004,357


1,476,806Operating loss


(10,599,075
)

(10,643,327
)

(5,842,541
)

(5,490,390
)Net loss available to common shareholders


(10,452,690
)

(10,589,418
)

(5,885,957
)

(5,571,348
)Loss per share available to common shareholders:Basic and Diluted

$
(0.37
)
$
(0.37
)
$
(0.21
)
$
(0.18
)


******

65

---





Table of Contents

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 generally accepted accounting principles 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, 2008. 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, 2008, our internal control over financial reporting is effective 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 temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's
report in this Annual Report.

66

---



Table of Contents

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 "2009 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 2009 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 2009 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
securities
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


13,415,420

$
2.66


1,343,121Equity compensation plans not approved by security holders








Total


13,415,420

$
2.66


1,343,121


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 2009 Proxy Statement.

67

---



Table of Contents

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 2009 Proxy Statement.

PART IV

Item 15.    Exhibits and Financial Statement Schedules.



The following consolidated financial statements of Advanced Life Sciences Holdings, Inc. are included in Part II, Item 8 of this report:



All schedules are omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule or because
the information required is provided in the consolidated financial statements or notes thereto.



Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Exhibit Index attached hereto, which in incorporated
herein by this reference.



See Item 15(a)(3) above.

68

---





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 12th day of February, 2009.

| |  |                                       |  |                                     
| |  | ------------------------------------- |  | ------------------------------------
| |  | ADVANCED LIFE SCIENCES HOLDINGS, INC.
| |  | By:                                   |  | /s/ MICHAEL T. FLAVIN, PH.D.        
| |  | Name:                                 |  | Michael T. Flavin, Ph.D.            
| |  | Title:                                |  | Chairman and Chief Executive Officer
| |  | By:                                   |  | /s/ JOHN L. FLAVIN                  
| |  | Name:                                 |  | John L. Flavin                      
| |  | Title:                                |  | 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.

|                                                      |  |                                                                                              |  |                  
|----------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | -----------------
|
|                                                      |  |                                                                                              |  |                  
|/s/ MICHAEL T. FLAVIN, PH.D. Michael T. Flavin, Ph.D. |  | Chairman and Chief Executive Officer (Principal Executive Officer)                           |  | February 12, 2009
|/s/ JOHN L. FLAVIN John L. Flavin                     |  | President, Chief Financial Officer (Principal Financial and Accounting Officer) and Director |  | February 12, 2009
|/s/ SCOTT F. MEADOW Scott F. Meadow                   |  | Director                                                                                     |  | February 12, 2009
|/s/ THERON E. ODLAUG, PH.D. Theron E. Odlaug, Ph.D.   |  | Director                                                                                     |  | February 12, 2009
|/s/ TERRY W. OSBORN, PH.D. Terry W. Osborn, Ph.D.     |  | Director                                                                                     |  | February 12, 2009

69

---



Table of Contents

|                                                            |  |          |  |                  
|----------------------------------------------------------- |  | -------- |  | -----------------
|
|                                                            |  |          |  |                  
|/s/ RICHARD A. RECK Richard A. Reck                         |  | Director |  | February 12, 2009
|/s/ ISRAEL RUBINSTEIN, M.D. Israel Rubinstein, M.D.         |  | Director |  | February 12, 2009
|/s/ ROSALIE SAGRAVES, PHARM. D. Rosalie Sagraves, Pharm. D. |  | Director |  | February 12, 2009
|/s/ THOMAS V. THORNTON Thomas V. Thornton                   |  | Director |  | February 12, 2009

70

---



EXHIBIT INDEX

Exhibit No.

Description3.1

Amended and Restated Certificate of Incorporation of Advanced Life Sciences Holdings, Inc. (as filed in our Amended Registration Statement on Form S-1/A as exhibit 3.1 on June 3, 2005, as amended and
filed in Amended Registration Statement on Form S-1/A as exhibit 3.2 on July 1, 2005)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

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)4.3

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)4.4

Warrant issued to The Leaders Group, Inc. to purchase 14,887 shares of our common stock at $5 per share, dated as of December 21, 2004 (as filed in our Amended Registration Statement on Form S-1/A as
exhibit 4.2 on June 3, 2005)4.5

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)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)10.4
**
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)


71

---



Exhibit No.

Description10.7
**
Amended and Restated Employment Agreement, dated May 2, 2008, between Advanced Life Sciences, Inc. and Michael J. Cogan (as filed in our Quarterly Report on Form 10-Q as exhibit 10.1 on May 7,
2008)10.8
**
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)10.9
**
Advanced Life Sciences Holdings, Inc. 2005 Stock Incentive Plan. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.2 on May 7, 2008)10.10

Development and Commercialization Agreement by and between Wyeth acting through its Wyeth Pharmaceuticals Division and Advanced Life Sciences Holdings, Inc., dated as of September 23, 2008 (as filed in our
Quarterly Report on Form 10-Q as exhibit 10.11 on November 6, 2008)10.11
**
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)10.12

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)10.13

First Amendment to Lease Agreement between Advanced Life Sciences, Inc. and BioStart Property Group, LLC (as filed in our Current Report on Form 8-K as exhibit 10.2 on April 20,
2006)10.14

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)10.15

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)10.16

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)10.17

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)10.18

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)10.19

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)


72

---



Exhibit No.

Description10.20

Amended and Restated Business Loan 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 10.1 on
November 6, 2008)10.21

Amended and Restated Promissory Note 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 10.2 on
November 6, 2008)10.22

Commercial Pledge 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 10.3 on November 6,
 2008)10.23

Commercial Guaranty between Advanced Life Sciences Holdings, Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.4 on
November 6, 2008)10.24

Commercial Security Agreement between Advanced Life Sciences Holdings, Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.5 on
November 6, 2008)10.25

Amended and Restated Commercial 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 10.6 on November 6, 2008)10.26

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)10.27

Commercial Guaranty between Advanced Life Sciences Holdings Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.8 on November 6,
 2008)10.28

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)10.29

Agreement to Provide Insurance 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 10.10 on
November 6, 2008)10.30

Condition Precedent Waiver between Advanced Life Sciences, Inc. and YA Global Investments, L.P., dated as of November 19, 2008. (as filed in our Amendment No. 1 to Registration Statement on
Form S-3 on Form S-1 as exhibit 10.30 on November 19, 2008)10.31

Amended and Restated Promissory Note Loan Amendment dated January 5, 2009, between Advanced Life Sciences Holdings, Inc. and Michael T. Flavin. (as filed in our Current Report on Form 8-K as
exhibit 10.1 on January 9, 2009)21.1

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 LLP


73

---



Exhibit No.

Description23.2

Consent of Deloitte & Touche LLP (as filed in our Amendment No. 1 to Registration Statement on Form S-3 on Form S-1 as exhibit 23.1 on November 19, 2008)23.3

Consent of Winston & Strawn LLP (as filed in our Amendment No. 2 to Registration Statement on Form S-3 on Form S-1 as exhibit 5.1 on December 3, 2008)24.1

Power of Attorney (as filed in our Registration Statement on Form S-3 as exhibit 24.1 on October 21, 2008)31.1
*
Certification of Chief Executive 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.

74

---