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



FORM 10-K



ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934For the Fiscal Period Ended: December 31, 2009o

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


Commission File No: 000-51436

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



DELAWARE(State or other jurisdiction of
incorporation or organization)

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


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

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



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

Title of Each Class

Name of exchange on which registeredNone

None


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

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

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

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

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

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

Large accelerated filer o

Accelerated filer o

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

Smaller reporting company ý


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

The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2009 was approximately
$21.0 million (based upon the closing price of $0.51 per common share as quoted on the OTC Bulletin Board). The registrant has no outstanding non-voting stock. For purposes of this
computation, it is assumed that the shares of voting stock held by directors and officers would be deemed to be stock held by affiliates. Non-affiliated common stock outstanding at
June 30, 2009 was 41,107,062 shares.

Total
common stock outstanding as of February 26, 2010 was 96,366,619 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, 2009 (the
"2010 Proxy Statement") are to be filed with the Securities and Exchange Commission within 120 days after the registrant's fiscal year ended December 31, 2009 and are incorporated by
reference into Part III of this Report.



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ADVANCED LIFE SCIENCES HOLDINGS, INC
INDEX
Form 10-K



PART IItem 1.

Business


1Item 1A.

Risk Factors


15Item 1B.

Unresolved Staff Comments


30Item 2.

Properties


30Item 3.

Legal Proceedings


30Item 4.

Reserved


30PART IIItem 5.

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


31Item 6.

Selected Financial Data


32Item 7.

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


33Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


42Item 8.

Financial Statements and Supplementary Data


43Consolidated Balance Sheets as of December 31, 2009 and December 31, 2008


44Consolidated Statements of Operations for the years ended December 31, 2009, 2008, 2007 and period
from inception (January 1, 1999) through December 31, 2009


45Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2009,
2008, 2007 and period from inception (January 1, 1999) through December 31, 2009


46Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008, 2007 and period from inception
(January 1, 1999) through December 31, 2009


47Notes to Consolidated Financial Statements


48Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


65Item 9A.

Controls and Procedures


65Item 9B.

Other Information


66PART IIIItem 10.

Directors and Executive Officers of the Registrant


66Item 11.

Executive Compensation


66Item 12.

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


66Item 13.

Certain Relationships and Related Transactions


66Item 14.

Principal Accountant Fees and Services


67PART IVItem 15.

Exhibits


67


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PART I

Item 1.Business.

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

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

Overview

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



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In
addition to the compounds summarized above, we have additional product candidates in preclinical development coming from our natural products-based chemistry platform. We have not
received FDA approval for any of our product candidates. Our revenues to date have consisted solely of management fees, one-time or limited payments associated with our collaborations and
government grant awards. Our cumulative net loss was $131.6 million as of December 31, 2009, and we do not anticipate generating any revenue from the sale of cethromycin in the near
term. If we secure commercial partnerships, milestones received as a result of any of our commercial partnership agreements could be recognized as revenue depending on the underlying nature of the
milestones. Since our inception in 1999, we have financed our operations primarily through public and private equity offerings, loans from our founder, borrowings under our bank line of credit, and
use of our Standby Equity Distribution Agreement ("SEDA"). We will continue to do so until we are able to generate revenues from our product candidates, if ever.

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Our Background

In June 1999, MediChem Life Sciences ("MediChem"), our former parent, exchanged its investment in 100% of the outstanding common stock
of Advanced Life Sciences, Inc. ("ALS Inc.") for nonvoting preferred stock issued by ALS Inc. affecting a spin-off of ALS Inc. Prior to the
spin-off, Dr. Michael Flavin, the sole stockholder, owned 100% of MediChem and ALS Inc., then a wholly-owned subsidiary of MediChem. As a result of the spin-off,
Dr. Flavin became the sole common stockholder of ALS Inc. MediChem holds 100% of the preferred stock of ALS Inc., which was issued in exchange for common stock held at the June
1999 spin-off. In 2004, Advanced Life Sciences Holdings, Inc. ("ADLS") was created as part of a recapitalization, and ALS, Inc. became a subsidiary of ADLS. ADLS has no
preferred shares outstanding as of December 31, 2009.

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 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 (Wyeth was subsequently acquired
by Pfizer and as a result will be referred to as "Pfizer" throughout this report). Under the terms of agreement, Pfizer made an up-front investment in ADLS by purchasing 1,888,606 shares
of its common stock at a price of $0.908 per share for approximately $1.7 million, net of offering expenses, representing approximately 4.9% of our total then outstanding shares.

In
June 2009, we entered into a SEDA with YA Global Master SPV Ltd. ("YA SPV"), 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. From the inception of the SEDA through December 31, 2009, we issued 34,102,143 shares to YA SPV and received proceeds of
approximately $9.4 million. In addition, between the period of January 1, 2010 and February 26, 2010, we raised approximately $1.8 million and issued 11,441,609 shares
through the usage of the SEDA facility. Shares of common stock sold under the SEDA in excess of $9.0 million were sold with the consent of our lender under our credit facility.

In
June 2009, prior to entering into the SEDA, the Company and YA Global Investments, L.P. ("YA Global"), an affiliate of Yorkville Advisors, agreed to terminate a prior Standby
Equity

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Distribution
Agreement dated as of September 29, 2008 ("Former SEDA"). For the period of January 1, 2009 through the end of the Former SEDA, we issued 9,883,994 shares to YA Global and
received approximately $3.9 million. In addition, in September 2008, we paid YA Global a commitment fee of $300,000 by issuing 393,339 shares of the Company's common stock.

Our Strategy

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



We currently intend to focus a significant portion of our business efforts on the regulatory approval and commercialization of
cethromycin for the treatment of community acquired bacterial pneumonia ("CABP"). 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 CAP using a 300 mg once-daily
dosing regimen. In September 2008 we submitted an NDA for the use of cethromycin in mild-to-moderate CAP. In June 2009, the FDA Anti-Infective Drugs Advisory
Committee ("AIDAC") reviewed the cethromycin NDA. The AIDAC voted that cethromycin demonstrated safety for the outpatient treatment of adults with mild-to-moderate CAP, but
voted that cethromycin did not demonstrate efficacy in the treatment of CAP. The committee's negative vote on the drug candidate's efficacy followed a discussion that the cethromycin NDA included data
on patients with mild-to-moderate disease and that the new draft guidance for developing treatments for CABP, released in March 2009, requires the enrollment of more severe CAP
patients for approval in the outpatient CAP indication. Our pivotal Phase III program included in the NDA was designed and conducted under prior FDA guidance and before the new draft guidance
was released. In
July 2009, we received a complete response letter from the FDA regarding cethromycin NDA for the outpatient treatment of adults with CAP. In its letter, the FDA indicated that they cannot approve the
application for cethromycin in its current form and that, to gain approval, additional clinical data is required to demonstrate efficacy with defined statistical methodology. We are working closely
with the FDA to identify the scope and protocol design for the additional clinical data needed under a Special Protocol Assessment. We are working collaboratively on these clinical plans with Pfizer,
our development and commercialization partner in the Asia Pacific region (excluding Japan).

In
addition to pursuing regulatory approval and commercialization of cethromycin for the treatment of CABP, we intend to evaluate opportunities for cethromycin in the treatment of other
respiratory tract infections.



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

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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 Pfizer 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.
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 CAP, when compared to the published data on antibiotics currently on the market. Cethromycin has also shown in vitroevidence
of an extended post-antibiotic effect, meaning that the suppression of bacterial growth persists in the absence of
measurable antibiotic concentration.

In
December 2005, we initiated our pivotal Phase III clinical program for the treatment of mild-to-moderate CAP, which enrolled a total of 1,106 patients
and were successfully completed in 2007. Cethromycin reported per protocol clinical cure rates of 94.0% in trial CL05-001 (comparator, Biaxin, was 93.8%) and 91.5% in trial
CL06-001 (comparator, Biaxin, was 95.9%). In February 2008, we announced that both the therapeutic and supratherapeutic doses of cethromycin showed no signal of any electrocardiographic
effects and hence supported its favorable cardiac safety profile, the results from a thorough QT study of cethromycin (trial CL07-001). In September 2008, we submitted a NDA for the use of
cethromycin in outpatient CAP. In June 2009, the FDA AIDAC reviewed the

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cethromycin
NDA and voted that cethromycin demonstrated safety for the outpatient treatment of adults with mild-to-moderate CAP but did not demonstrate efficacy in the
treatment of CAP due to release of the new FDA draft guidance for developing treatments for CABP in March 2009, which requires the enrollment of more severe CAP patients for approval in the outpatient
CAP indication. In July 2009, we received a complete response letter from the FDA, stating that cethromycin NDA can not be approved in its current form and that, to gain approval, additional clinical
data is required to demonstrate efficacy.



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

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

Respiratory
tract infections arise when bacterial infections develop in the inhalation passageway, including the nose, throat, sinuses and lungs. The four main types of respiratory tract
infections are pneumonia, bronchitis, pharyngitis and sinusitis. Many of these bacterial infections can be life threatening if not treated quickly. Bacterial pneumonia, which involves an infection of
the lung itself, is the most severe of the common respiratory tract infections. Pneumonia is often classified as CAP 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 CAP each year.



Until recently, there have been three main classes of antibiotics prescribed for respiratory tract infections such as CAP. These are
semi-synthetic penicillins (also known as beta-lactams), such as Augmentin® (amoxicillin and clavulanate potassium) sold by GlaxoSmithKline; macrolides, such as
erythromycin or Zithromax® (azithromycin) sold by Pfizer; and fluoroquinolones, such as Cipro® (ciprofloxacin) sold by Bayer. Penicillins, macrolides and fluoroquinolones have
all been shown to have certain shortcomings with respect to the treatment of respiratory tract infections. Studies have shown that, in the United States, approximately 26% of Streptococcus pneumoniaeisolates, the most common pathogens that cause respiratory tract infections such as CAP, 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

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difficileassociated disease ("CDAD"). Further, in July 2008, the FDA requested manufacturers of fluoroquinolones to include a black box warning for tendon damage. In March
2009, Tygacil® (tigecycline), a tetracycline derivative sold by Pfizer, was approved by the FDA for the in-patient treatment of community-acquired bacterial pneumonia. In
addition, Zyvox® (linezolid), an oxazolidinone analogue sold by Pfizer, is marked to treat nosocomial pneumonia.

Increased
bacterial resistance to many of the currently available antibiotics has been caused by certain common medical practices and sociological factors. By necessity, a wide variety
of antibiotics are often administered before the specific disease-causing pathogen has been identified. Bacterial resistance is fostered through the erroneous prescription of antibiotics for
non-bacterial infections. The lack of full patient compliance with prescribed courses of therapies has further contributed to bacterial resistance against currently marketed antibiotics.
Patients will frequently discontinue a prescribed dosing regimen after symptoms subside, but bacteria that are not entirely eradicated may re-emerge in resistant forms.

ALS Solution

We are developing cethromycin, a second generation once-a-day oral antibiotic from the ketolide class, in
response to the emerging antibiotic resistance observed in the treatment of CAP. 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 CAP. 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:



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

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

Pfizer Collaboration

In September 2008, we entered into a development and commercialization agreement with Pfizer 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

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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 Pfizer. Under the terms of agreement, Pfizer made an
up-front investment in ADLS by purchasing 1,888,606 shares of its common stock at a price of $0.908 per share for approximately $1.7 million, net of offering expenses, representing
approximately 4.9% of our total then outstanding shares.

Other Collaborations and License Agreements

In addition to our collaborations with Abbott Laboratories and Pfizer, 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 $529,000 for patent reimbursement. In addition, we agreed to pay royalties equal to 6% of net sales to UIC based on sales of licensed products by us,
our affiliates and sublicensees, as well as a percentage of all other income we receive from sublicensees, but in any event, a minimum royalty of $5,000 annually once commercial sales commence.

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

Intellectual Property



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

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Key U.S. Patents and Expiration Dates

Drug Candidate

U.S. Patent Number

Expiration DateCethromycin


5866549


9/4/2016ALS-357


5658947


8/19/2014ALS-886


5504111


4/2/2013


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

Competition

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

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our
product candidates are likely to be their efficacy, safety, price and convenience. See "Risk FactorsWe will face significant competition from other biotechnology and pharmaceutical
companies, and our operating results will suffer if we fail to compete effectively."

Government Regulation

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



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

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



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.

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

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



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

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

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

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

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to
the FDA, to provide updated safety and efficacy information and to comply with requirements concerning advertising and promotional labeling for their products. Also, quality control and
manufacturing procedures must continue to conform to cGMP after approval. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP, which imposes numerous procedural and
documentation requirements. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other
regulations.

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



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



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

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

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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 downward 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, 2009, we employed 19 people of which there are 7 in research and 12 in administration. Our employees are not
represented by any collective bargaining agreements and we believe our employee relations are good.

On
February 6, 2009, we committed to a restructuring plan that resulted in the reduction of 30% of our workforce. In connection with the restructuring plan, we will focus our
resources on the cethromycin program. In the first quarter ended March 31, 2009, we incurred restructuring charges of approximately $60,000, primarily associated with personnel-related
termination costs. In addition, we discontinued our laboratory operations and recorded a non-cash charge of approximately $10,000 to retire laboratory equipment.

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Available Information

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

Item 1A.Risk Factors.

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

Risks Related to Our Industry and Business

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

Our independent registered public accounting firm included an explanatory paragraph in the report on our 2009 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. We will not be generating any product-based revenues or realizing cash flows from operations in the near term, if at
all. We believe we will have cash and cash equivalents sufficient to fund our existing and anticipated development commitments, indebtedness and general operating expenses through the first quarter of
2010. We may not have sufficient cash or other funding available to complete our anticipated business activities for the remainder of 2010. In order to address our working capital shortfall we intend
to raise additional capital by accessing the capital markets and licensing our lead product candidate, cethromycin, to commercial partners. There can be no assurances that we will be successful in
accessing the capital markets on terms acceptable to us, if at all, or that such partnerships will be available on terms acceptable to us, if at all.

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

We have not received approval for any of our product candidates from the FDA. Any compounds that we discover or in-license
will require extensive and costly development, preclinical testing and/or clinical trials prior to seeking regulatory approval for commercial sales. Our most advanced product candidate, cethromycin,
and any other compounds we discover, develop or in-license, may never be approved for commercial sale. The time required to attain product sales and profitability is lengthy and highly
uncertain, and we cannot assure you that we will be able to achieve or maintain product sales.

We
expect our net operating losses to continue for at least several years, and we are unable to predict the extent of future losses or when we will become profitable, if ever.

We
have incurred significant net losses since our formation in 1999. We have incurred an accumulated deficit of $131.6 million as of December 31, 2009. Our operating losses
are due in large part to the significant research and development costs required to identify, validate and license potential product candidates, conduct preclinical studies and conduct clinical trials
of our more advanced product candidates. To date, we have generated only limited revenues, consisting of management fees, one-time or limited payments associated with our collaborations
and government

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grant
awards, 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 due to the absence of any meaningful revenues in the near future. We do not
know whether additional financing will be available to us on favorable terms or at all. At our 2010 annual meeting of stockholders, we intend to request a significant increase in the number of shares
of common stock that we may issue under our certificate of incorporation. If we do not receive this approval from our stockholders, then our ability to raise sufficient funds through equity financing
will be significantly harmed. If we cannot raise additional funds because of this or any other reason, then 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 are likely to experience substantial dilution. Any additional equity securities we issue may have rights, preferences or privileges
senior to those of existing holders of stock. To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our
technologies or product candidates, or grant licenses on terms that are not favorable to us.

Any
shares of our common stock that we sell pursuant to the SEDA will have a dilutive impact on our stockholders. The SEDA terms provide that YA SPV may promptly resell the shares we
issue to them under the SEDA, and such resales 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 SPV 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. As of February 26,
2010, we have issued an aggregate of 55,821,085 shares, which includes 393,339 shares issued as an initial commitment fee to YA Global and received an aggregate of $15.1 million in
proceeds through the usage of our SEDA facilities. 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 substantial doubt about our ability to continue as a going concern.

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

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

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



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

Our ability to generate any significant product revenues in the near future will depend solely on the successful development and
commercialization of cethromycin, our most advanced product candidate. The FDA may not approve in a timely manner, or at all, any NDA that we submit. If any NDA we submit is not approved by the FDA,
we will be unable to commercialize that product in the United States and our business will be materially harmed. The FDA can and does reject NDAs, and often requires additional clinical trials, even
when product candidates performed well or achieved favorable results in large-scale Phase III clinical trials. The FDA imposes substantial requirements on the introduction of pharmaceutical
products through lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Satisfaction of these requirements
typically takes several years and may vary substantially based upon the type and complexity of the pharmaceutical product. A number of our product candidates are novel compounds, which may further
increase the period of time required for satisfactory testing procedures.

In
July 2009, we received a complete response letter from the FDA regarding the NDA for cethromycin for the outpatient treatment of adults with CAP. In its letter, the FDA indicated that
they cannot approve the application for cethromycin in its current form and that, to gain approval,

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additional
clinical data is required to demonstrate efficacy. We are engaged in ongoing discussions with the FDA to identify the scope and protocol design for the additional clinical data that would
be required to satisfy the FDA's request for additional efficacy information and to complete the CABP clinical development program for successful approval in the future. We are working closely with
the Agency to identify the scope and protocol design for the additional clinical data needed under a Special Protocol Assessment.

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 Pfizer, the University of Illinois at Chicago and Baxter International. A description of our agreements with collaborators
can be found under the headings "BusinessAbbott Laboratories Collaboration" and "BusinessOther
Collaborations and License Agreements" 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 Pfizer 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

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with
third parties to perform these services in other jurisdictions. If we receive approval to commercialize cethromycin for the treatment of CABP, we intend to engage additional pharmaceutical or
health care companies with existing distribution systems and direct sales organizations to assist us in North America and abroad. We may not be able to negotiate favorable distribution partnering
arrangements, if at all. With respect to the Pfizer 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:



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
CAP. 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.

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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 CABP, our failure to expand cethromycin into other indications would harm our ability to generate additional revenues in the future.

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

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

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

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



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

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to
be a potential competitive distinction from currently marketed compounds. Even if we receive FDA approval to market cethromycin, resistance may emerge that will substantially harm our ability to
generate revenues from its sale.

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

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

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

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

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

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



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.

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

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

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

We are a development stage company with 19 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 CABP, although we believe that cethromycin may have other applications in bronchitis,
pharyngitis, sinusitis, inhalation anthrax, plague and tularemia, and skin and skin structure infections. If we request additional label indications for cethromycin or our other product candidates,
the FDA may deny those requests outright, require extensive clinical data to support any additional indications or impose limitations on the intended use of any approved products as a condition of
approval. U.S. Attorneys' offices and other regulators, in addition to the FDA, have recently focused substantial attention on off-label promotional activities and have initiated civil and
criminal investigations related to such practices. If it is determined by these or other regulators that we

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have
promoted our products for off-label use, we could be subject to fines, legal proceedings, injunctions or other penalties.

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

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



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

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

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

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



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

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

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

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

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

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

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(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.

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 19 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.

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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.

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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 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 Master SPV Ltd. 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 SEDA with YA SPV Ltd. in June 2009. The terms of the SEDA are described in
Item 1.01 of our Current Report filed on form 8-K on June 19, 2009.

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The
sale of shares of our common stock pursuant to the SEDA will have a dilutive impact on our stockholders. We believe YA SPV 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 SPV 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.

Due to the delisting of our common stock from Nasdaq, you may have difficulty trading our securities and our securities may trade at a lower market price than they otherwise
would.

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

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

Approximately 9,756,064 shares of our common stock and options to purchase 1,816,303 shares of our common stock which are exercisable
(or will be exercisable within sixty days of December 31, 2009) 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
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, 2009, Flavin Ventures, LLC controlled approximately 11.3% 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

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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 Securities and Exchange Commission ("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 the 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, 2010. 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, 2010 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.

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

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

Item 1B.Unresolved Staff Comments.

None.

Item 2.Properties.

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

Item 3.Legal Proceedings.

None.

Item 4.Reserved.

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PART II

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

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

2009

High

LowFirst Quarter

$
0.45

$
0.14Second Quarter


1.62


0.24Third Quarter


0.82


0.18Fourth Quarter


0.30


0.17




2008

High

LowFirst Quarter

$
1.79

$
0.67Second Quarter


1.66


0.88Third Quarter


1.45


0.67Fourth Quarter


0.87


0.15


As
of February 26, 2010, there were approximately 26 registered shareholders of record of our common stock.

Dividends

We have neither declared nor paid dividends on our common stock or the preferred stock of our subsidiary, Advanced Life
Sciences, Inc., since our inception and do not plan to pay dividends in the foreseeable future. Any determination in the future to pay cash dividends will depend on our financial condition,
capital requirements, result of operations, contractual limitations and other factors deemed relevant by our Board of Directors. As of December 31, 2009, cumulative accrued undeclared dividends
on our subsidiary's preferred stock totaled approximately $1.8 million.

Recent Sales of Unregistered Securities

None.

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Item 6.Selected Financial Data.

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

Period from
Inception
(January 1, 1999)
to
December 31, 2009Years ended December 31,2009

2008

2007

2006

2005Statement of Operations Data:Revenue

$
2,793,191

$
240,830

$


$
39,788

$
121,451

$
5,276,010Operating expensesResearch and development


4,462,281


15,709,293


25,735,759


17,202,113


3,121,616


103,022,981Selling, general and administrative


6,322,849


7,116,549


6,839,575


5,457,395


3,237,997


33,371,486Loss from operations


(7,991,939
)

(22,585,012
)

(32,575,334
)

(22,619,720
)

(6,238,162
)

(131,118,457
)Interest income


(11,561
)

(306,846
)

(717,884
)

(1,651,916
)

(272,216
)

(2,960,423
)Interest expense


1,036,762


525,703


466,963


511,884


478,300


4,185,615Other (income) expense, net


146,092














146,092Gain on disposal(1)











(939,052
)




(939,052
)Net other (income) expense


1,171,293


218,857


(250,921
)

(2,079,084
)

206,084


432,232Net loss


(9,163,232
)

(22,803,869
)

(32,324,413
)

(20,540,636
)

(6,444,246
)

(131,550,689
)Less net loss attributable to the non-controlling interest in subsidiary

















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


(9,163,232
)

(22,803,869
)

(32,324,413
)

(20,540,636
)

(6,444,246
)

(131,550,689
)Less accumulated preferred stock dividends of subsidiary for the period


175,000


175,000


175,000


175,000


175,000


1,844,792Net loss available to common shareholders

$
(9,338,232
)
$
(22,978,869
)
$
(32,499,413
)
$
(20,715,636
)
$
(6,619,246
)
$
(133,395,481
)Basic and diluted loss per common share

$
(0.16
)
$
(0.59
)
$
(1.12
)
$
(0.78
)
$
(0.49
)Weighted average shares outstanding


57,781,126


39,098,943


28,910,041


26,546,785


13,610,694


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2009

2008

2007

2006

2005Consolidated Balance Sheet Data:Cash and cash equivalents

$
2,841,801

$
1,527,108

$
18,324,991

$
27,054,947

$
15,224,932Total assets


6,427,771


2,820,053


19,911,542


30,509,679


16,021,910Long-term debt, less current portion


12,000,000


11,915,000


5,915,000


3,923,810


5,905,634Total liabilities


14,507,818


15,197,594


12,250,568


9,115,174


7,726,173Deficit accumulated during development stage


(131,550,689
)

(122,387,457
)

(99,583,588
)

(67,259,175
)

(46,718,539
)Total stockholders equity (deficit)

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

$
21,394,505

$
8,295,737


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


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

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

Overview

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

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

Development UpdateCethromycin CABP Program

On July 31, 2009 we received a complete response letter from the FDA regarding the cethromycin NDA for the outpatient treatment
of adults with CAP. In its letter, the FDA indicated that they cannot approve the application for cethromycin in its current form and that, to gain approval, additional clinical data is required to
demonstrate efficacy with defined statistical methodology in CABP population. We submitted the NDA in September, 2008 based on the results of 53 clinical studies including 2 pivotal Phase III
studies in CAP and a safety database of over 5,000 patients.

On
June 2, 2009, the FDA AIDAC reviewed the cethromycin NDA. The AIDAC voted that cethromycin demonstrated safety for the outpatient treatment of adults with
mild-to-moderate CAP, but voted that cethromycin did not demonstrate efficacy in the treatment of CAP. The committee's negative

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vote
on the drug candidate's efficacy followed a discussion that the cethromycin NDA included data on patients with mild-to-moderate disease and that the new draft guidance for
developing treatments for CABP, released in March, 2009, requires the enrollment of more severe CAP patients for approval in the outpatient CAP indication. Our pivotal Phase III program
included in the NDA was designed and conducted under prior FDA guidance and before the new draft guidance was released.

We
are engaged in ongoing discussions with the FDA to identify the scope and protocol design for the additional clinical data that would be required to satisfy the FDA's request for
additional efficacy information and to complete the CABP clinical development program for successful approval in the future. We are working closely with the FDA to identify the scope and protocol
design for the additional clinical data needed under a Special Protocol Assessment. We are working collaboratively on these clinical plans with Pfizer, our development and commercialization partner in
the Asia Pacific region (excluding Japan). In parallel, we will continue to advance cethromycin as a biodefense agent against anthrax, plague and tularemia.

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. In September 2008, we entered into a development and
commercialization agreement for cethromycin with Pfizer, in the Asia Pacific region (excluding Japan). We will retain exclusive rights to cethromycin in the rest of the world (excluding Japan),
including North America and Europe. 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 Pfizer to develop additional clinical data in the Asia Pacific region to support regulatory filings in that region. Discussions with other
potential commercial partners focused on other geographical markets such as the European Union and the United States are ongoing.

In
August 2008, we signed a letter of intent with DSM Pharma Chemicals North America, Inc. ("DSM") 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. In 2009, we acquired approximately $2.8 million of raw materials.

Development UpdateCethromycin Biodefense Program

In December 2009, we announced positive top-line results from a pivotal, non-human primate study involving
cethromycin against an inhaled lethal dose of tularemia. A 14-day course of cethromycin achieved a 100% survival rate at the doses tested. All of the ten animals in the study that received
16 mg/kg once-a-day of cethromycin (approximate to a human dose of 300 mg) within 24 hours after exposure to a lethal dose of inhaled tularemia survived while only one
of the ten animals that received placebo survived.

In
September 2009, we announced positive top-line results from a pivotal, non-human primate study involving cethromycin demonstrating statistical significance at
a 90% survival rate against an inhaled lethal dose of plague. The study tested cethromycin's protective efficacy at various doses up to 64 mg/kg, where nine out of ten animals in the study that
received a 14-day course of cethromycin initiated within 24 hours after exposure to a lethal dose of plague survived while only one out of ten of the animals that received placebo
survived. In weaponized form, plague could be engineered to resist

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antibiotic
intervention and to be widely spread through human transmission.Yersinia pestis, the causative agent of plague, is classified by the Centers
for Disease Control as a Category A Bioterrorism Agent and is prioritized by the Department of Defense ("DoD") and Department of Health and Human Services ("HHS") as one of the most serious
biological weapons, along with anthrax and tularemia. Unlike anthrax, there is no FDA-approved vaccine available to protect against plague, and the only antibiotic treatments currently
available for improving survival in the event of a plague outbreak are older agents, such as tetracycline and doxycycline.

In
September 2009, the FDA granted Orphan Drug Designation to cethromycin for the prophylactic treatment of plague and tularemia. Both tularemia and plague are classified by the Centers
for Disease Control as Category A Bioterrorism Agents, which is the highest priority classification. High-priority agents include organisms that pose a risk to national security
because they can be easily disseminated or transmitted, result in high mortality rates and have the potential for major public health impact, might cause public panic and social disruption, and
require special action for public health preparedness.

In
August 2009, we announced positive results from an animal study involving cethromycin that was conducted to measure cethromycin's therapeutic efficacy in treating inhalation anthrax
after symptoms of infection had developed. The results of the placebo-controlled non-human primate study showed that a 14-day course of cethromycin achieved up to a 60%
survival rate when administered after animals demonstrated clinical symptoms of anthrax infection as a result of an
inhaled dose of aerosolized anthrax spores that was 200 times the median lethal dose of anthrax. None of the animals that received placebo survived. Due to the extreme lethality of anthrax infection
once symptoms appear, cethromycin's ability to achieve a 60% survival rate is clinically and statistically significant. The study was supported by the National Institute of Allergy and Infectious
Diseases ("NIAID"), an institute of the National Institutes of Health ("NIH"), which is a component of the HHS. The results of this pivotal study complement previously reported (see below) efficacy
results from two non-human primate studies showing that cethromycin is highly effective in protecting animals from death after being infected with inhalation anthrax
(post-exposure prophylaxis before the onset of symptoms).

We
are developing cethromycin for the post-exposure prophylactic treatment of inhalation anthrax to help protect against human infection from anthrax. In June 2009, we
announced that a second non-human primate study involving cethromycin, showed that a 14-day course of cethromycin achieved a 100% survival rate against an inhaled lethal dose
of anthrax. All of the animals in the study that received 16 mg/kg once-a-day (the human equivalent dose of 300 mg) of cethromycin within 24 hours after exposure to
anthrax survived while none of the animals that received placebo survived. The study was also supported by the NIAID.

In
studies conducted by the U.S. Army Medical Research Institute of Infectious Diseases ("USAMRIID"), cethromycin was shown to be highly activein
vitroagainst 30 strains of anthrax. In May 2007, a non-human primate study showed that a 30-day course of oral cethromycin was 100% protective against
a lethal dose of inhaled anthrax as compared to the standard of care, Cipro® (ciprofloxacin), which demonstrated 90% protection. The FDA has designated cethromycin as an orphan drug for
the post-exposure prophylactic treatment of inhalation anthrax, but the FDA has not yet approved the drug for marketing in this or any other indication.

In
August 2008, we announced that the DTRA of the DoD awarded us a two-year contract worth up to $3.8 million to further study cethromycin as a potential
broad-spectrum medical countermeasure. 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).

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Financial Update

Since our inception, we have incurred net losses each year. Our net loss for the year ended December 31, 2009 was
$9.2 million. As of December 31, 2009, we had an accumulated deficit of $131.6 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 Pfizer and borrowings under our bank line of credit. In addition, we executed Standby Equity Distribution Agreements which allow us to sell our common stock to an
accredited investor pursuant to the terms of the agreements (see below).

In
April 2009, our shareholders approved an amendment to our articles of incorporation to increase the number of authorized shares from 65,000,000 to 125,000,000 including an increase in
the number of authorized shares of common stock from 60,000,000 to 120,000,000. As of February 26, 2010, 96,366,619 shares of common stock were issued and outstanding and 14,571,464 shares are
reserved for issuance under options and warrants. Accordingly, out of the 120,000,000 shares of common stock authorized, 9,061,917 remain available for future issuance. Shareholder approval would be
required to increase the number of authorized shares so that additional common shares could be issued. The availability of additional shares of common stock for issuance will afford us flexibility in
acting upon financing transactions to strengthen our financial position and/or commercial partnership opportunities that may arise as we advance our cethromycin commercialization program.

In
April 2009, we filed a shelf registration statement on Form S-3 with the SEC and the shelf registration was subsequently declared effective by the SEC. The shelf
registration allowed us to raise capital from time to time through the sale of common stock under our SEDA facility. This S-3 registration statement will no longer be effective with the
filing of this report. In order to continue to raise additional capital through the sale of common stock, preferred stock and/or equity warrants under our SEDA facility or through other methods of
raising capital, we will be required to file a registration statement and have it declared effective by the SEC.

We
received a notice on April 28, 2009 from the Nasdaq Listing Qualifications Panel (the "Panel") that the Panel had determined to delist our common stock from The Nasdaq Capital
Market. The Panel's decision was based on our inability to evidence compliance with the $2.5 million shareholders' equity requirement or the $35.0 million market value of listed
securities requirement of the Nasdaq Capital Market. The trading of our common stock on The Nasdaq Capital Market was suspended at the open of trading on May 5, 2009. Our common stock began
trading on the OTCBB on May 6, 2009. Trading on the OTCBB still allows us to sell shares of common stock under our SEDA facility. On August 20, 2009, the Nasdaq Stock Market filed a
Form 25 with the SEC to complete the delisting.

In
June 2009, we entered into a SEDA with YA SPV, 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. 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 SPV at a discount to the current market price of 5%. The
amount of each advance under the SEDA is limited to the greater of $600,000 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, nor does the agreement prohibit the Company from entering into any other
financing arrangements. We entered into the SEDA with the consent of our lender under our credit facility, which requires us to maintain availability under the SEDA of at least $6.0 million at
all times unless the bank otherwise consents. From the inception of the SEDA through December 31, 2009, we issued 34,102,143 shares to YA SPV and received proceeds of approximately
$9.4 million. In addition, between the period of January 1, 2010 and February 26, 2010, we raised approximately $1.8 million and issued

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11,441,609
shares through the usage of the SEDA facility. Shares of common stock sold under the SEDA in excess of $9.0 million were sold with the consent of our lender under our credit
facility.

In
June 2009, prior to entering into the SEDA, the Company and YA Global, an affiliate of Yorkville Advisors, agreed to terminate a Former SEDA dated as of September 29, 2008. For
the period of January 1, 2009 through the end of the Former SEDA, we issued 9,883,994 shares to YA Global and received approximately $3.9 million. In addition, in September 2008, we paid
YA Global a commitment fee of $300,000 by issuing 393,339 shares of our common stock.

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

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

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

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

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

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

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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 contract award of $3.8 million is over a two year period which began in August 2008.

Research and development expense.Research and development expense decreased $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 in 2007. Data from the second of two pivotal Phase III clinical trials was
released in November of 2007 effectively bringing the trials to their natural 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 2007. 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 2007. 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 in 2007.
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 line of credit and a higher interest rate.

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
$131.6 million as of December 31, 2009 and we expect to incur significant operating losses for the foreseeable future. As of December 31, 2009 we had working capital of
$1.6 million. Cash and cash equivalents were $2.8 million as of December 31, 2009. Since our inception in 1999 to August 2005, we financed our operations primarily through debt
and capital contributions from our founder and controlling stockholder and borrowings under our bank line of credit. In August 2005 we completed our initial public offering in which we raised
$28.7 million, net of underwriters discount and offering costs. Since that time, we have completed three private
placements in which we raised $52.8 million, net of underwriters' discounts and offering costs and raised additional debt financing through our $10.0 million bank line of credit.

In
June 2009, we entered into a SEDA with YA SPV, for the sale of up to $15.0 million of shares of our common stock over a two-year commitment period. 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 SPV at a discount

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to
the current market price of 5%. The amount of each advance under the SEDA is limited to the greater of $600,000 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, nor does the agreement prohibit the
Company from entering into any other financing arrangements. We entered into the SEDA with the consent of our lender under our credit facility, which requires us to maintain availability under the
SEDA of at least $6.0 million at all times unless the bank otherwise consents. From the inception of the SEDA through December 31, 2009, we issued 34,102,143 shares to YA SPV and
received proceeds of approximately $9.4 million. In addition, between the period of January 1, 2010 and February 26, 2010, we raised approximately $1.8 million and issued
11,441,609 shares through the usage of the SEDA facility. Shares of common stock sold under the SEDA in excess of $9.0 million were sold with the consent of our lender under our credit
facility.

In
June 2009, prior to entering into the SEDA, the Company and YA Global, agreed to terminate a Former SEDA dated as of September 29, 2008. For the period of January 1,
2009 through the end of the Former SEDA, we issued 9,883,994 shares to YA Global and received approximately $3.9 million. In addition, in September 2008, we paid YA Global a commitment fee of
$300,000 by issuing 393,339 shares of our common stock.

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, 2010. On January 4, 2010, the note was extended to January 5, 2012, all other terms remained unchanged and in effect.

We
have a $10.0 million revolving line of credit with a financial institution with a maturity date of January 1, 2011, and 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. We entered into the SEDA with the consent of our lender under our credit facility, which requires us to maintain availability
under the SEDA of at least $6.0 million at all times unless the bank otherwise consents. In October 2008, we issued warrants to the lender as a closing fee for the purchase of 65,000 shares of
common stock at an exercise price of $1.00 per share. The warrants became
exercisable upon issuance and will expire five years from the date of the grant. As of December 31, 2009 the line of credit had an outstanding balance of $10.0 million.

Net
cash used in operating activities was $11.9 million in 2009 compared to $24.1 million in 2008. Approximately $6.1 million of cash was used for in our cethromycin
programs in 2009, compared to $18.7 million in 2008. These amounts are net of DTRA grant award funds, which reimburse us for certain research and development expenses associated with the grant.
The decrease in net cash used is primarily the result of a $10.0 million milestone payment to Abbott in 2008. Cash used for general corporate purposes was $5.8 million in 2009 compared
to $5.4 million in 2008. This reflects an increase in interest paid in 2009 as a result of borrowing an additional $6.0 million on our line of credit in October 2008 to partially fund
the $10.0 million milestone payment to Abbott.

Cash
provided from financing activities was $13.3 million in 2009 compared to $7.6 million in 2008. In 2009, we received approximately $13.2 million, net of offering
expenses, for the sale of 43,986,137 shares to YA Global and YA SPV through the SEDA facilities. In 2008, 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 Pfizer.

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Contractual Obligations

As of December 31, 2009, the annual amounts of future minimum payments under debt obligations, interest, lease obligations and
other long term liabilities consisting of executed research and development, and license agreements are as follows:

Payments Due by December 31,2010

2011

2012

2013

2014

TotalNotes payable and bank line of credit

$


$
10,000,000

$
2,000,000

$


$


$
12,000,000Interest


1,006,500


155,000


1,722








1,163,222CABP program related costs


105,844














105,844ALS-357 clinical program


338,930


422,550


105,638








867,118Biodefense program related costs


1,556,660














1,556,660Grant payable





500,000











500,000Operating leases


99,740


102,360


78,485








280,585Capital leases


4,350














4,350Total

$
3,112,024

$
11,179,910

$
2,185,845

$


$


$
16,477,779


The
above table does not include the potential $30.0 million product based milestone payment under our license agreement with Abbott which we will owe Abbott if cethromycin is
approved for marketing by the FDA. Under the terms of the amended license agreement (see Note 11 to the consolidated financial statements), $20.0 million is payable within 20 business
days after receipt of U.S. regulatory approval, $5.0 million is payable within 6 months of U.S. regulatory approval and $5.0 million is payable within 12 months of U.S.
regulatory approval. Thereafter, we would owe Abbott an additional $2.5 million upon reaching $200.0 million in aggregate net sales of cethromycin and $5.0 million upon reaching
$400.0 million in aggregate net sales. The periods in which milestone obligations become payable, if at all, are only estimates due to uncertainties associated with the completion or
achievement of the milestone.

In
the third quarter of 2008, we signed a letter of intent with DSM to procure raw materials to be used to produce commercial quantities of cethromycin. The lead times for acquiring
these raw materials needed to be used to complete production are lengthy. As of December 31, 2009 the cost of raw materials actually purchased was approximately $2.8 million. The
agreement allows for us to purchase additional raw materials at a later time.

We
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 pursuant to the terms of the lease and pending agreement on a lease renewal, the Company leased the facilities on a month-to-month basis. In October 2009, the Company
renewed its lease with BioStart. Because of the ownership interest in BioStart held by Flavin Ventures, our audit committee, acting on behalf of the board, has overseen all lease negotiations on our
behalf and the board has approved the final terms of our lease renewal. The lease, which commenced on October 1, 2009, is for a term of three years and provides us with 9,440 square feet of
space at a rental rate of $10.50 per square foot.

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This
rate is comparable with market rates for similar office space in the surrounding area. The rental rate increases by 2.5% for the second year and by 3.0% in the final year of the lease term. The
lease has a provision allowing us to negotiate an amendment to lease additional laboratory and office space should the need arise.

In
August 2008, we announced that the DTRA of the DoD awarded us a two-year contract worth up to $3.8 million to further study cethromycin as a potential
broad-spectrum medical countermeasure. Under the terms of the contract, $1.8 million of DTRA funds were available over a nine-month base period beginning in August 2008 and the
remaining $2.0 million were available to be awarded over the ensuing 15 months to complete the project. In March 2009, we received notice from the DoD that it has exercised its option to
award us the additional $2.0 million under the previously announced contract. 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 which began in
August 2008.

We
will not be generating any product-based revenues or realizing cash flows from operations in the near term, if at all. We believe we will have cash and cash equivalents sufficient to
fund our existing and anticipated development commitments, indebtedness and general operating expenses through the first quarter of 2010. In order to continue our business activities during 2010, we
intend to raise additional capital through the issuance of equity securities and 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. We have executed Standby Equity
Distribution Agreements which allow us to sell our common stock to an accredited investor pursuant to the terms of the agreements (see Note 1 to the consolidated financial statements). In April
2009, we filed a shelf registration statement on Form S-3 with the SEC and the shelf registration was subsequently declared effective by the SEC. The shelf registration allowed us
to raise capital from time to time through the sale of common stock under our SEDA facility. This S-3 registration statement will no longer be effective with the filing of this report. In
order to continue to raise additional capital through the sale of common stock, preferred stock and/or equity warrants under our SEDA facility or through other methods of raising capital, we will be
required to file a registration statement and have it declared effective by the SEC. Furthermore, as of February 26, 2010, 9,061,917 shares of authorized common stock remains available
for future issuance. In order to issue additional shares of common stock, shareholder approval would be required to increase the number of authorized shares. If we raise additional capital by issuing
equity securities, our shareholders could experience substantial dilution. As a result of these uncertainties, there is substantial 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:



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

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

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



We account for stock-based awards to employees and non-employees using 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-Merton options-pricing model to determine the fair value of each
option grant as of the date of grant for expense incurred. The Black-Scholes-Merton 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.

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.

We
are subject to foreign currency exchange rate risk primarily due certain contract manufacturing agreements. Our exchange loss for the year ended December 31, 2009 was $146,000,
which is included in other expense. As of December 31, 2009, we have no outstanding obligations or commitments denominated in foreign currencies. To date, we have not entered into any foreign
currency forward exchange contracts or other derivative financial instruments to hedge the effects of fluctuations in foreign currency exchange rates.

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Item 8.Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited the accompanying consolidated balance sheets of Advanced Life Sciences Holdings, Inc. (a Delaware corporation in the development stage) and its subsidiary (the
"Company") as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended
December 31, 2009 and for the period from January 1, 1999 (inception) through December 31, 2009. 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, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, and for the period from
January 1, 1999 (inception) to December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

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

The
Company is in the development stage at December 31, 2009.

/s/
DELOITTE & TOUCHE LLP

Chicago,
Illinois
March 10, 2010

43

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Table of Contents



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

CONSOLIDATED BALANCE SHEETS

December 31,
2009

December 31,
2008ASSETSCURRENT ASSETS:Cash and cash equivalents

$
2,841,801

$
1,527,108Grant receivable


530,219


63,444Prepaid insurance


111,761


227,313Other prepaid expenses and deposits


88,535


143,808Total current assets


3,572,316


1,961,673PROPERTY AND EQUIPMENT:Furniture and fixtures


244,072


244,072Laboratory equipment





159,186Computer software and equipment


258,786


258,786Leasehold improvements


177,253


505,804Total property and equipmentat cost


680,111


1,167,848Less accumulated depreciation


(624,158
)

(760,329
)Property and equipmentnet


55,953


407,519OTHER ASSETS:Commercial launch materials


2,760,936


Deferred offering and financing costs


13,566


450,861Other long-term assets


25,000


Total other assets


2,799,502


450,861TOTAL ASSETS

$
6,427,771

$
2,820,053LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT LIABILITIES:Accounts payable

$
604,334

$
1,379,941Accrued clinical trial and NDA expenses





458,260Accrued payroll


664,436


506,537Other accrued expenses


661,504


352,466Accrued interest payable


73,194


72,572Short-term lease payable


4,350


8,468Total current liabilities


2,007,818


2,778,244Long-term lease payable





4,350Long-term grant payable


500,000


500,000Long-term notes payablerelated party


2,000,000


2,000,000Line of credit


10,000,000


9,915,000Total liabilities


14,507,818


15,197,594COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS' EQUITY (DEFICIT):Common stock, $0.01 par value120,000,000 shares authorized;
84,925,010 issued and outstanding at December 31, 2009; 40,810,932 shares issued and outstanding at December 31, 2008


849,250


408,109Additional paid-in capital


122,621,392


109,601,807Deficit accumulated during the development stage


(131,550,689
)

(122,387,457
)Noncontrolling interest in subsidiary





Total equity (deficit)


(8,080,047
)

(12,377,541
)TOTAL LIABILITIES AND EQUITY (DEFICIT)

$
6,427,771

$
2,820,053


See notes to consolidated financial statements.

44

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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, 2009Year ended December 31,2009

2008

2007Revenue:Management fees

$


$


$


$
1,161,180Grants


2,793,191


240,830





4,069,592Royaltyrelated party











45,238Total revenue


2,793,191


240,830





5,276,010Expenses:Research and development


4,462,281


15,709,293


25,735,759


95,042,682Contracted research and developmentrelated party











7,980,299Selling, general and administrative


6,322,849


7,116,549


6,839,575


33,371,486Total expenses


10,785,130


22,825,842


32,575,334


136,394,467Loss from operations


(7,991,939
)

(22,585,012
)

(32,575,334
)

(131,118,457
)Net other (income) expense:Interest income


(11,561
)

(306,846
)

(717,884
)

(2,960,423
)Interest expense


1,036,762


525,703


466,963


4,185,615Other (income) expense, net


146,092








146,092Gain on sale of interest in Sarawak Medichem Pharmaceuticals joint venture











(939,052
)Net other (income) expense


1,171,293


218,857


(250,921
)

432,232Net loss


(9,163,232
)

(22,803,869
)

(32,324,413
)

(131,550,689
)Less net loss attributable to the noncontrolling interest in subsidiary











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


(9,163,232
)

(22,803,869
)

(32,324,413
)

(131,550,689
)Less accumulated preferred stock dividends of subsidiary for the period


175,000


175,000


175,000


1,844,792Net loss available to common shareholders

$
(9,338,232
)
$
(22,978,869
)
$
(32,499,413
)
$
(133,395,481
)Net loss per share available to common shareholdersbasic and diluted

$
(0.16
)
$
(0.59
)
$
(1.12
)Weighted average shares outstandingbasic and diluted


57,781,126


39,098,943


28,910,041


See
notes to consolidated financial statements.

45

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Table of Contents



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

CONSOLIDATED STATEMENTS OF TOTAL EQUITY (DEFICIT)

Deficit
Accumulated
During the
Development
StageCommon StockAdditional
Paid-in
Capital

Noncontrolling
Interest
in SubsidiaryShares

Amount

TotalBALANCEJanuary 1, 1999 (inception)




$


$


$


$


$
Issuance of stock (at inception)


1,588,000


250,000











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


6,721,814


67,218


29,210,558








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


10,233,464


102,335


33,266,653








33,368,988Exchange 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








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


164,500


7,791


22,896








30,687Compensation expense related to stock options (since inception)








978,076








978,076Net loss (since inception)











(67,259,175
)




(67,259,175
)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
)
$


$
7,660,974Adjustment 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








850,889Net loss











(22,803,869
)




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


40,810,932

$
408,109

$
109,601,807

$
(122,387,457
)
$


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


43,986,137


439,862


12,475,173








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


127,941


1,279


18,855








20,134Compensation expense related to stock options








525,557








525,557Net loss











(9,163,232
)




(9,163,232
)BALANCEDecember 31, 2009


84,925,010

$
849,250

$
122,621,392

$
(131,550,689
)
$


$
(8,080,047
)


See notes to consolidated financial statements.

46

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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, 20092009

2008

2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(9,163,232
)
$
(22,803,869
)
$
(32,324,413
)
$
(131,550,689
)Adjustments to reconcile net loss to net cash flowsused in operating activities:Depreciation and amortization


106,907


218,796


206,755


948,477Non-cash interest expense


13,867


8,050


37,768


122,740Stock compensation expense


525,557


850,889


734,056


3,088,578Non-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
)Loss on disposal


244,659


35


1,761


257,988Changes in operating assets and liabilities:Clinical supplies











533,333Accounts receivable


(466,775
)

(63,444
)




(530,219
)Prepaid expenses


170,825


946,899


1,691,599


(208,844
)Commercial launch materials


(2,760,936
)







(2,760,936
)Other assets


(25,000
)

10,000





(16,452
)Accounts payable


(616,900
)

(1,464,517
)

1,674,355


604,334Accrued expenses


33,679


(1,814,721
)

1,469,209


1,325,942Licenses payable











(11,000,000
)Accrued interest on debt


622


49,816





651,257Net cash flows from operating activities


(11,936,727
)

(24,062,066
)

(26,508,910
)

(115,000,876
)CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment


(5,466
)

(362,353
)

(58,436
)

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











939,052Proceeds from the sales of investments











31,557,158Purchase of investments











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


(5,466
)

(362,353
)

(58,436
)

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


13,178,259


1,664,713


17,852,238


102,551,549Proceeds from issuance of note payable and line of credit


85,000


6,000,000





15,103,691Proceeds from grants











500,000Proceeds from stock options exercised


20,134


4,082


4,588


59,491Payments for financing fees


(18,039
)

(35,000
)




(53,039
)Payments on capital leases


(8,468
)

(7,259
)

(19,436
)

(159,900
)Net cash flows from financing activities


13,256,886


7,626,536


17,837,390


118,001,792NET (DECREASE) INCREASE IN CASH


1,314,693


(16,797,883
)

(8,729,956
)

2,841,801CASHBeginning of period


1,527,108


18,324,991


27,054,947


CASHEnd of period

$
2,841,801

$
1,527,108

$
18,324,991

$
2,841,801SUPPLEMENTAL DISCLOSURE OFCASH FLOW INFORMATION:Cash paid during the period for interest

$
1,023,530

$
477,835

$
416,583

$
3,414,171SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONSNoncash investment activity:Purchase of property and equipment under capital leases











164,249Capital expenses included in accounts payable





5,466





Noncash financing activity:Issuance of common shares for licenses











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











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





61,775





Debt discount











30,823SEDA and financing related costs





423,911





337,445


See notes to consolidated financial statements.

47

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Table of Contents



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

1. Nature of Business

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

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

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

In
June 1999, MediChem exchanged its investment in 100% of the outstanding common stock of ALS Inc. for nonvoting preferred stock issued by ALS Inc. effecting a
spin-off of ALS Inc. Prior to the spin-off, Dr. Michael Flavin, the sole stockholder, owned 100% of MediChem and ALS Inc., then a wholly-owned subsidiary
of MediChem. As a result of the spin-off, Dr. Flavin became the sole common stockholder of ALS Inc. MediChem 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, the Company filed a registration statement with the Securities and Exchange Commission ("SEC") covering the proposed sale by the Company of its common stock to the public.
In June 2005, the Board approved the amendment and restatement of the Company's Articles of Incorporation to provide for an increase in the number of authorized shares of common stock and preferred
stock to 60,000,000 shares and 5,000,000 shares, respectively, and a 3.97-for-1 stock split of the Company's common stock. All references in the consolidated financial
statements to shares of common stock, common stock options, common stock prices and per share of common stock amounts have been adjusted retroactively for all periods presented to reflect this stock
split. In August 2005, the Company completed the initial public offering of its common stock in which the Company sold 6,400,000 shares of common stock to the public at $5.00 per share, resulting in
gross proceeds of $32.0 million. The Company also completed a concurrent offering of 600,000 shares to an existing stockholder in exchange for a $3.0 million reduction of a milestone
payment obligation under its license agreement with the stockholder. In September 2005, the Company's underwriters exercised their option 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

48

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

1. Nature of Business (Continued)

discounts
and incurred other offering expenses of approximately $1.5 million. The net cash proceeds from the offerings were approximately $28.7 million.

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

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

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

In
September 2008, the Company and Wyeth (Wyeth was subsequently acquired by Pfizer and as a result will be referred to as "Pfizer" throughout these financial statements) entered into a
development and commercialization agreement for cethromycin (Restanza) 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 Pfizer will collaborate
to develop additional clinical data in the Asia Pacific region to support regulatory filings in that region. It is not anticipated that Pfizer would file for regulatory approval in the Asia Pacific
region prior to the Company obtaining U.S. approval for cethromycin from the United States 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 Pfizer. Under the terms of the
agreement, Pfizer made an up-front investment in the Company by purchasing 1,888,606 shares of its common stock at a price of $0.908 per share for approximately $1.7 million, net of
offering expenses, representing approximately 4.9% of the Company's total then outstanding shares.

In
April 2009, the Company's shareholders approved an amendment to its articles of incorporation to increase the number of authorized shares from 65,000,000 to 125,000,000 including an
increase in the number of authorized shares of common stock from 60,000,000 to 120,000,000.

49

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

1. Nature of Business (Continued)

In
April 2009, the Company filed a shelf registration statement on Form S-3 with the SEC which was subsequently declared effective by the SEC. The shelf registration
allows the Company to raise capital from time to time through the sale of common stock, preferred stock and/or equity warrants.

The
Company received a notice on April 28, 2009 from the Nasdaq Listing Qualifications Panel (the "Panel") that the Panel had determined to delist the Company's common stock from
The Nasdaq Capital Market. The Panel's decision was based on the Company's inability to evidence compliance with the $2.5 million shareholders' equity requirement or the $35.0 million
market value of listed securities requirement of the Nasdaq Capital Market. The Company's common stock on The Nasdaq Capital Market was suspended at the open of trading on May 5, 2009. The
Company's common stock began trading on the OTC Bulletin Board ("OTCBB") on May 6, 2009. Trading on the OTCBB still allows the Company to sell shares of common stock under its Standby Equity
Distribution Agreement ("SEDA") facility (see below). On August 20, 2009, the Nasdaq Stock Market filed a Form 25 with the SEC to complete the delisting.

In
June 2009, the Company entered into a SEDA with YA Global Master SPV Ltd. ("YA SPV"), an affiliate of Yorkville Advisors, for the sale of up to $15.0 million of shares
of the Company's common
stock over a two-year commitment period. 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 SPV at a
discount to the current market price of 5%. The amount of each advance under the SEDA is limited to the greater of $600,000 or the average trading volume for the five trading days prior to 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, nor does the agreement
prohibit the Company from entering into any other financing arrangements. The Company entered into the SEDA with the consent of its lender under the Company's credit facility, which requires the
Company to maintain availability under the SEDA of at least $6.0 million at all times unless the bank otherwise consents. From the inception of the SEDA through December 31, 2009, the
Company issued 34,102,143 shares to YA SPV and received proceeds of approximately $9.4 million. In addition, between the period of January 1, 2010 and February 26, 2010, the
Company raised approximately $1.8 million and issued 11,441,609 shares through the usage of the SEDA facility. Shares of common stock sold under the SEDA in excess of $9.0 million were
sold with the consent of the Company's lender under the Company's credit facility.

In
June 2009, prior to entering into the SEDA, the Company and YA Global Investments, L.P. ("YA Global"), an affiliate of Yorkville Advisors, agreed to terminate a prior Standby
Equity Distribution Agreement dated as of September 29, 2008 ("Former SEDA"). For the period of January 1, 2009 through the end of the Former SEDA, the Company issued 9,883,994 shares to
YA Global and received approximately $3.9 million. In addition, in September 2008, the Company paid YA Global a commitment fee of $300,000 by issuing 393,339 shares of the
Company's common stock.

The
consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations and the realization of assets and liquidation of
liabilities in the ordinary course of business. Given this uncertainty, there is substantial doubt as to the Company's ability to continue as a going concern

50

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

1. Nature of Business (Continued)

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, including issuances of common stock under the SEDA and the Former SEDA. The Company will not be generating any
product-based revenues or realizing cash flows from operations in the near term, if at all. Based on management's best estimates, the Company has resources to fund operations through the first quarter
of 2010. Throughout 2009, the Company has raised capital through issuance of common stock under the SEDA and the Former SEDA. The Company's shelf registration statement filed in April 2009, allowed it
to raise capital from time to time through the sale of common stock under its SEDA facility. This S-3 registration statement will no longer be effective with the filing of this report. In
order to continue to raise additional capital through the sale of common stock, preferred stock and/or equity warrants under the Company's SEDA facility or through other methods of raising capital,
the Company will be required to file a registration statement and have it declared effective by the SEC.
Furthermore, as of February 26, 2010, 9,061,917 shares of authorized common stock remains available for future issuance. In order to issue additional shares of common stock, shareholder
approval would be required to increase the number of authorized shares. If the Company raises additional capital by issuing equity securities, its shareholders could experience substantial dilution.
In addition, as a result of the Company's continued losses and current cash and financing position, realization of assets or liquidation of liabilities, without substantial adjustments is uncertain.
The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties. Given this uncertainty, there is substantial doubt as to the Company's
ability to continue as a going concern.

In
order to continue its business activities during 2010, the Company intends to raise additional capital by issuing additional common shares, assuming the shareholders' approval of
additional authorized common shares and 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 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.

2. Summary of Significant Accounting Policies

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

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

Property and EquipmentProperty and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful
life of three to five years. Assets under capital leases were recorded at the present value of the minimum lease payments and are amortized over the shorter

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

2. Summary of Significant Accounting Policies (Continued)

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 as of December 31, 2009 and 2008, and accumulated depreciation of $26,000 and $19,000, as of December 31, 2009 and 2008, 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 Former SEDA (see Note 1). These costs, which are attributable to a proposed offering of securities, were
deferred and ratably allocated against the gross proceeds of future offerings under the SEDA. Deferred financing costs were incurred as a result of the Company restructuring its line of credit (see
Note 4). 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. During 2009, the Company incurred foreign exchange losses
associated with certain purchases that had been denominated in foreign currencies.

Commercial Launch MaterialsThe Company may scale-up and make commercial quantities of its product candidates prior to the date when such
products will receive final FDA approval. The scale-up and production of commercial launch materials involves the risk that such products may not be approved for marketing by the FDA on a
timely basis, if at all. This risk notwithstanding, the Company plans to continue to scale-up and build commercial launch materials of certain products that have not yet received final
governmental approval when the Company believes that such action is appropriate in relation to the commercial value of the product launch opportunity. The cost of these commercial launch materials,
which are not intended to be used in future research and development activities, are capitalized as a non-current asset until the Company receives FDA approval, at which time the materials
would be classified as inventory.

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

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

2. Summary of Significant Accounting Policies (Continued)

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, 2009 are reflective of the actual expenses incurred as of that
date.

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

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

Revenue Recognition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 4) are based on assumptions concerning the amount and
timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk. The Company estimates that the fair value of its $10.0 million (carrying value) revolving
line of credit is approximately $9.6 million and that the fair value of its $2.0 million (carrying value) promissory note is approximately $1.9 million.

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

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

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

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

2. Summary of Significant Accounting Policies (Continued)

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

Recent Accounting PronouncementsIn June 2009, the FASB issued "The FASB Accounting Standards Codification ("ASC") and the Hierarchy of GAAP"
which
became the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities. The provisions are included in ASC subtopic 105 and are effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The principal effect of this guidance is a change in the referencing of accounting standards and pronouncements from FASB
Statements, FASB Interpretations, EITF Abstracts and other sources of official accounting standards to the new codified standards. The adoption of the provisions did not have a material impact on the
Company's statements of financial position, results of operations and cash flows.

In
May, 2009, the FASB issued guidance related to subsequent events, which is included in ASC subtopic 855, "Subsequent Events." The provisions require Company management to evaluate
events or transactions occurring subsequent to the balance sheet date but prior to the issuance of the financial statements for potential recognition or disclosure in the financial statements and to
disclose the results of management's findings in the financial statements. In addition, the provisions identify the circumstances under which an entity shall recognize events or transactions occurring
after the balance sheet date in its financial statements and the required disclosures of such events. This statement is effective for interim or annual periods ending after June 15, 2009. The
adoption of the provisions 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 new accounting guidance related to the accounting for noncontrolling interests in consolidated financial statements, which are included in ASC subtopic
810, "Noncontrolling Interests in Consolidated Financial Statements". This guidance changes the accounting and reporting for minority interests, which includes retrospective adjustments to
recharacterize noncontrolling interests and classification as a component of equity. The Company's only noncontrolling interest is the ownership, by deCODE Genetics, of the preferred stock of
ALS, Inc. The new guidance was effective beginning the first fiscal quarter of 2009. The adoption of this guidance did
not have a material impact on the Company's statements of financial position, results of operations and cash flows.

3. Related Party Transactions

The Company's Chief Executive Officer, Michael T. Flavin Ph.D., loaned $2.0 million to the Company in 2001 (see Note 4). Interest expense related to the note of $158,000,
$155,000 and $155,000 was recorded and paid, for the years ended December 31, 2009, 2008 and 2007, respectively.

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

3. Related Party Transactions (Continued)

The
Company's line of credit with a financial institution 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 4), 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 pursuant to the terms of the lease and pending agreement on a lease renewal, the Company leased the facilities on a
month-to-month basis. In October 2009, the Company renewed its lease with BioStart. Because of the ownership interest in BioStart held by Flavin Ventures, the Company's audit
committee, acting on behalf of the board, oversaw all lease negotiations on behalf of the Company and the board approved the final terms of the Company's lease renewal. The lease, which commenced on
October 1, 2009, is for a term of three years and provides the Company with 9,440 square feet of space at a rental rate of $10.50 per square foot. This rate is comparable with market rates for
similar office space in the surrounding area. The rental
rate increases by 2.5% for the second year and by 3.0% in the final year of the lease term. The lease has a provision allowing the Company to negotiate an amendment to lease additional laboratory and
office space should the need arise. Lease payments totaled approximately $235,000, $284,000 and $272,000 for the years ended December 31, 2009, 2008 and 2007, respectively (see Note 10).

In
connection with its lease renewal with BioStart, the Company discontinued the rental of the laboratory and certain office space. In the third quarter of 2009, the Company recorded a
non-cash charge of approximately $234,000 to expense capitalized leasehold improvements related to the space no longer leased.

4. Long Term Obligations

In September 2001, the Company incurred indebtedness under a $2.0 million promissory note with the Chief Executive Officer of the Company, which bears interest at 7.75%. Principal
plus any accrued interest was due in a lump sum on January 5, 2010. On January 4, 2010, the note was extended to January 5, 2012 and is therefore classified as a
long-term liability in the financial statements. All other terms remained unchanged and in effect. As of December 31, 2009 and December 31, 2008, the Company had
$2.0 million outstanding under the note.

The
Company has a $10.0 million revolving line of credit with a financial institution with a maturity date of January 1, 2011, and 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 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 Company entered into the SEDA with the consent of its lender under the Company's
credit facility, which requires the Company to maintain availability under the SEDA of at least $6.0 million at all times unless the bank otherwise consents. In

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

4. Long Term Obligations (Continued)

October
2008, the Company issued to the lender as a closing fee warrants for the purchase of 65,000 shares of its common stock at an exercise price of $1.00 per share. The warrants became exercisable
upon issuance and will expire five years from the date of the grant. As of December 31, 2009 and 2008, the Company had outstanding under the note $10.0 million and $9.9 million,
respectively.

5. Stockholders' Equity (Deficit)

Authorized CapitalAs of December 31, 2009, the authorized capital stock of the Company consists of 120,000,000 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, 2009.

6. Noncontrolling Interest

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

As
of December 31, 2009, 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, 2009 and 2008 are approximately $4.3 million and $4.2 million respectively, including approximately
$1.8 million and $1.7 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.

7. 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

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

7. Incentive Stock Plan (Continued)

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, 2009, 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, 2009, 897,597 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 $526,000, $851,000 and $734,000 for 2009, 2008 and 2007, 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, 2009.

Options

Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Term

Aggregate
Intrinsic
ValueOutstanding at January 1, 2009


3,123,259

$
1.62


7.7

$
Granted


673,200

$
0.69Exercised


(127,941
)
$
0.16Expired


(53,520
)
$
0.16Forfeited


(233,292
)
$
1.09Outstanding at December 31, 2009


3,381,706

$
1.55


7.5

$
Options exercisable at December 31, 2009


2,204,181

$
2.05


6.8

$



The
weighted-average grant-date fair value of options granted during the years 2009, 2008 and 2007 was approximately $0.56, $0.19 and $1.42, respectively. The fair value of
options vested during the years 2009, 2008 and 2007 was approximately $573,000, $688,000 and $676,000, respectively. The total intrinsic value of options exercised during the years ended
December 31, 2009, 2008 and 2007 was approximately $14,000, $21,000 and $62,000, respectively.

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

7. Incentive Stock Plan (Continued)

As
of December 31, 2009, there was approximately $480,000 of total unrecognized compensation cost related to unvested stock options granted under the Plans; that cost is expected
to be recognized over a period of 3 years.

Cash
received from options exercises under the Plans for the years ended December 31, 2009, 2008 and 2007 was approximately $20,100, $4,100 and $4,600, respectively. The Company
issues new shares of common stock as a result of stock option exercises. No tax benefits have been recognized in connection
with the stock option exercises due to the Company's net operating losses and full valuation allowance on its deferred tax assets.

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

2009

2008

2007Expected volatility


104.0
%
71% - 81%

62% - 66%Weighted-average volatility


104.0
%
76.5%

65.5%Expected dividends


0.0
%
0.0%

0.0%Expected term (in years)


6.0

6.0 - 6.5

6.5Risk-free rate


2.33
%
2.79% - 3.34%

4.63% - 4.65%


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

8. Income Taxes

Net deferred tax assets consist primarily of net operating loss ("NOL") carryforwards. Realization of future tax benefits related to deferred tax assets is dependent on
many factors, including the Company's ability to generate future taxable income in the near term. The Company establishes a valuation allowance for deferred tax assets in accordance with GAAP when it
is more-likely-than-not that the deferred tax asset will not be realized through future reversals of existing taxable temporary differences and, to a lesser extent,
future taxable income. Due to the uncertainty of future earnings, management is unable to predict whether its net deferred tax assets will be realized and, accordingly, has recorded a full valuation
allowance against these assets.

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

8. Income Taxes (Continued)

NOL carryforwards of approximately $98.3 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 $2.5 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 $4.0 million in a year, $78.4 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 Company is in the process of assessing whether the issuances of common stock during 2009 affected this Section 382 limitation and the amount of NOL carryforward available to be
used annually in the future; however, as the Company has a full valuation allowance on its deferred tax assets, the outcome of the assessment will not affect the amounts recorded in the financial
statements.

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

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

The
following is a summary of the significant components of the Company's deferred tax assets as of December 31, 2009 and 2008:

2009

2008Deferred tax assets:Net operating losses

$
38,328,035

$
33,745,721Stock based compensation


1,236,255


993,113Depreciation


91,437


112,370In-process research and development


8,794,221


10,077,422Other accruals and reserves


361,096


308,758Less valuation allowance


(48,811,044
)

(45,237,384
)Deferred tax assetnet

$


$



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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

8. Income Taxes (Continued)

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

Years ended
December 31,2009

2008Tax 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
%


9. Employee Benefit Plan

The Company has established a 401(k) plan that covers all employees who meet minimum eligibility requirements. Eligible persons can defer a portion of their annual compensation into the
401(k) plan subject to certain limitations imposed by the Internal Revenue Code. Employees' elective deferrals are immediately vested upon contribution to the 401 (k) plan. The company matches
employee contributions at a rate of 50% up to 6% of the employee's annual salary. Company contributions vest 25% per year after the first year of service has been completed. Approximately $74,000,
$83,000 and $72,000 were recognized as expense in 2009, 2008 and 2007, respectively.

10. Commitments

Lease ObligationsThe Company leases facilities from the BioStart, a wholly-owned subsidiary of Flavin Ventures, which is owned by the Company's
Chief
Executive Officer. The operating lease expired in September of 2008 and pursuant to the terms of the lease and pending agreement on a lease renewal, the Company leased the facilities on a
month-to-month
basis. In October 2009, the Company renewed its lease with BioStart as discussed further in Note 3. Additionally, the Company leases certain capital equipment under a capital lease.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

10. Commitments (Continued)

Minimum
annual payments under operating leases and the present value of minimum capital lease payments as of December 31, 2009 are as follows:

Operating
Leases

Capital lease
ObligationsYear ending December 31,2010

$
99,740

$
4,6552011


102,360


2012


78,485


2013





2014





Total

$
280,585


4,655Less amount representing interest





304Present value of minimum lease payments




$
4,351


Rental
expense relating to the lease with BioStart totaled approximately $194,000, $241,000 and $230,000 in 2009, 2008 and 2007, respectively. Common area maintenance expense totaled
approximately $41,000, $43,000 and $41,000 in 2009, 2008 and 2007, 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, 2009,
contracts totaling $46.9 million have been executed related to the cethromycin program, which includes the development, commercialization, regulatory review and pre-launch
activities associated with cethromycin as well as anthrax-related studies. To date the Company has paid $46.8 million under these contracts and the remaining balance of $0.1 million is
expected to be paid in the first quarter of 2010. Subcontractor arrangements in connection with the DTRA award grant are expected to be approximately $3.1 million over a two-year
period which began in August 2008. Through December 31, 2009 the Company has paid $1.5 million related to these agreements. In addition, to date the Company has executed
$1.2 million in contracts related to the ALS-357 program. Through December 31, 2009 the Company has paid $0.3 million related to these contracts and the remaining
balance of $0.9 million would be paid over the life of the program which the Company estimates to be two to three years. The commencement of clinical trials to study ALS-357 as a
topical treatment for patients with metastatic melanoma 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.

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

10. Commitments (Continued)

Grant PayableIn April 2005, the Company was awarded a $500,000 grant from the State of Illinois to fund expansion of its corporate headquarters
in
Woodridge, Illinois. Under the terms of the grant, the Company is to create 100 full-time jobs at its corporate headquarters between January 31, 2005 and December 31, 2010
("grant period"). Under the current terms of the agreement, if the Company does not create the specified number of full-time jobs, it is required to repay the grant proceeds on a
pro-rata basis of actual jobs created compared to the total defined in the grant within 45 days of the expiration or termination of the agreement. The entire grant has been spent
and therefore the $500,000 has been classified as a long-term liability as the Company must create and maintain positions created during
the grant period through December 31, 2010. Through December 31, 2009, four new jobs have been created and retained since the grant was awarded.

11. 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.

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

PfizerIn September 2008, the Company entered into a development and commercialization agreement with Pfizer 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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

11. Research and Development Alliances (Continued)

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 Pfizer. Under the terms of agreement, Pfizer
made an up-front investment in the Company by purchasing 1,888,606 shares of its common stock at a price of $0.908 per share for approximately $1.7 million, net of offering
expenses, representing approximately 4.9% of the Company's total then outstanding shares.

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 $18,000, $54,000 and $41,000 in 2009, 2008 and 2007, respectively. In addition, the Company must pay royalties equal
to 6% of net sales to UIC based on sales of the licensed compound by the Company or its affiliates or sublicensees, as well as a percentage of all other income the Company receives from sublicensees,
but in any event, a minimum royalty of $5,000 annually once commercial sales commence.

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

12. Net Loss Per Share Available to Common Shareholders

Basic loss per share available to common shareholders is computed by dividing net loss available to common shareholders by the number of weighted average common shares outstanding during
the reporting period. Diluted loss per share available to common shareholders is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period.
The computation of diluted shares outstanding for the periods ended December 31, 2009, 2008 and 2007 excludes incremental shares of 13,673,867, 13,415,420 and 12,075,661 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, 2009, 2008 and 2007.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 1, 1999) THROUGH DECEMBER 31, 2009

13. Unaudited Quarterly Financial Data

Selected quarterly data for 2009 and 2008 is as follows:

2009First

Second

Third

FourthRevenue

$
411,485

$
706,814

$
616,940

$
1,057,952Research and development expenses


934,769


1,309,050


916,241


1,302,221Selling, general and administrative expenses


1,508,953


1,690,505


2,201,684


921,706Operating loss


(2,032,237
)

(2,292,741
)

(2,500,985
)

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


(2,326,973
)

(2,612,558
)

(2,901,996
)

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

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




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
)


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

******

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

None.

Item 9A.Controls and Procedures.

Disclosure Controls and Procedures

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

Management Report on Internal Control over Financial Reporting

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



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

Our
management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2009. 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, 2009, our internal control over financial reporting is effective, at a reasonable assurance level, based on those criteria.

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

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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 "2010 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 2010 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 2010 Proxy Statement.

Equity Compensation Plan Information

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

Plan Category

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

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

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

(b)

(c)Equity compensation plans approved by security holders


13,673,867

$
2.62


897,597Equity compensation plans not approved by security holders








Total


13,673,867

$
2.62


897,597


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 2010 Proxy Statement.

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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 2010 Proxy Statement.

PART IV

Item 15.Exhibits and Financial Statement Schedules.

(a)   (1)    Financial Statements



Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets at December 31, 2009 and 2008Consolidated Statements of Operations for the years ended December 31, 2009, 2008, 2007 and period from inception (January 1, 1999) through December 31, 2009Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2009, 2008, 2007 and period from inception (January 1, 1999) through December 31,
2009Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008, 2007 and period from inception (January 1, 1999) through December 31, 2009Notes to the Consolidated Financial Statements








(b)   Exhibits:

See Item 15(a)(3) above.

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, State of Illinois, on the 10th day of March, 2010.

ADVANCED LIFE SCIENCES HOLDINGS, INC.By:

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

Michael T. Flavin, Ph.D.Title:

Chairman and Chief Executive OfficerBy:

/s/ JOHN L. FLAVINName:

John L. FlavinTitle:

Chief Financial Officer


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

Signature

Title

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

Chairman and Chief Executive Officer (Principal Executive Officer)

March 10, 2010/s/ JOHN L. FLAVIN John L. Flavin

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

March 10, 2010/s/ SCOTT F. MEADOW Scott F. Meadow

Director

March 10, 2010/s/ THERON E. ODLAUG, PH.D. Theron E. Odlaug, Ph. D.

Director

March 10, 2010/s/ TERRY W. OSBORN, PH.D. Terry W. Osborn, Ph. D.

Director

March 10, 2010/s/ RICHARD A. RECK Richard A. Reck

Director

March 10, 2010


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Table of Contents

Signature

Title

Date/s/ ISRAEL RUBINSTEIN, M.D. Israel Rubinstein, M.D.

Director

March 10, 2010/s/ ROSALIE SAGRAVES, PHARM. D. Rosalie Sagraves, Pharm. D.

Director

March 10, 2010/s/ THOMAS V. THORNTON Thomas V. Thornton

Director

March 10, 2010


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EXHIBIT INDEX

Exhibit No.

Description3.1

Second Amended and Restated Certificate of Incorporation of Advanced Life Sciences Holdings, Inc. (as filed in our Registration Statement on Form S-3 as exhibit 4.1 on April 8, 2009)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 June 19, 2009, by and between Advanced Life Sciences Holdings, Inc. and YA Global Master SPV Ltd. (as filed in our Current Report on Form 8-K as
exhibit 4.1 on June 19, 2009)4.2

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)4.3

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 March 2, 2006)4.4

Form of Warrant to Purchase Shares of Common Stock of Advanced Life Sciences Holdings, Inc. Stock. (as filed in our Current Report on Form 8-K as exhibit 4.2 on December 12, 2007)4.5

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)4.6

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)


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Exhibit No.

Description10.6
**
Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and David Eiznhamer, Ph.D. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.7 on
November 14, 2007)10.7
**
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 Pfizer (formerly Wyeth) acting through its Pfizer (formerly 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)


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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

Binding Term Sheet, dated September 30, 2009, by and between Abbott Laboratories and Advanced Life Sciences Holdings, Inc. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.1 on
November 10, 2009)10.32

New Lease Agreement, dated October 29, 2009, by and between Advanced Life Sciences, Inc. and BioStart Property Group, LLC (as filed in our Current Report on Form 8-K as exhibit 10.1 on
November 2, 2009)10.33

Amended and Restated Promissory Note Loan Amendment dated January 4, 2010, 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 4, 2010)


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Exhibit No.

Description21.1

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

Form of Indemnification Agreement (as filed in our Amended Registration Statement on Form S-1/A as exhibit 10.21 on June 3, 2005)23.1
*
Consent of Deloitte & Touche LLP23.2

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.(**)Compensatory
plan or arrangement.


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