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

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FORM 10-K

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|ý                                              |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
|---------------------------------------------- |  | ----------------------------------------------------------------------------------------
|For the Fiscal Period Ended: December 31, 2007
|o                                              |  | 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)

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

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

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

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

|Title of Each Class |  | Name of exchange on which registered
|------------------- |  | ------------------------------------
|None                |  | Nasdaq                              

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

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

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

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

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

|Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | 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 29, 2007 was approximately
$49.9 million (based upon the closing price of $2.67 per common share as quoted on the Nasdaq National Market). The registrant has no outstanding non-voting stock. For purposes of
this computation, it is assumed that the shares of voting stock held by directors and officers would be deemed to be stock held by affiliates. Non-affiliated common stock outstanding at
June 29, 2007 was 18,702,813 shares.

Total
common stock outstanding as of February 15, 2008 was 38,502,987 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, 2007 (the "2008 Proxy Statement") are to be filed with the Securities and Exchange Commission within 120 days after the registrant's fiscal year ended December 31,
2007 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 I                                                                                                                                                                  |  | Page
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Item 1.  |  | Business                                                                                                                                                                |  | 2   
|Item 1A. |  | Risk Factors                                                                                                                                                            |  | 14  
|Item 1B. |  | Unresolved Staff Comments                                                                                                                                               |  | 25  
|Item 2.  |  | Properties                                                                                                                                                              |  | 25  
|Item 3.  |  | Legal Proceedings                                                                                                                                                       |  | 25  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                                                                     |  | 25  
|         |  | PART II                                                                                                                                                                 |  |     
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities                                                             |  | 26  
|Item 6.  |  | Selected Financial Data                                                                                                                                                 |  | 27  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                                   |  | 28  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                              |  | 34  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                                                                             |  | 35  
|         |  | Consolidated Balance Sheets as of December 31, 2007 and December 31, 2006                                                                                               |  | 36  
|         |  | Consolidated Statements of Operations for the years ended December 31, 2007, 2006, 2005 and period from inception (January 1, 1999) through December 31, 2007           |  | 37  
|         |  | Consolidated Statements of Stockholders' Equity for the years ended December 31, 2007, 2006, 2005 and period from inception (January 1, 1999) through December 31, 2007 |  | 38  
|         |  | Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, 2005 and period from inception (January 1, 1999) through December 31, 2007           |  | 39  
|         |  | Notes to Consolidated Financial Statements                                                                                                                              |  | 40  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                                                                                    |  | 55  
|Item 9A. |  | Controls and Procedures                                                                                                                                                 |  | 55  
|Item 9B. |  | Other Information                                                                                                                                                       |  | 56  
|         |  | PART III                                                                                                                                                                |  |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                                                                                                      |  | 57  
|Item 11. |  | Executive Compensation                                                                                                                                                  |  | 57  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                                                                          |  | 57  
|Item 13. |  | Certain Relationships and Related Transactions                                                                                                                          |  | 57  
|Item 14. |  | Principal Accountant Fees and Services                                                                                                                                  |  | 57  
|         |  | PART IV                                                                                                                                                                 |  |     
|Item 15. |  | Exhibits                                                                                                                                                                |  | 58  

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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 to differ materially from those expressed or implied by such forward-looking
statements. All statements other than statements of historical fact that could be deemed forward-looking statements, including any projections of revenue, expenses, earnings or losses from operations,
or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning product research, development and commercialization
timelines; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include risks that are
described in Item 1A "Risk Factors" in this annual report and that are otherwise described from time to time in our Securities and Exchange Commission reports filed after this
report.

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

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel drugs in the areas of infectious disease, oncology and
inflammation. 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 and one-time or limited payments associated with our collaborations
or grants. Our cumulative net loss was $99.6 million as of December 31, 2007, and we do not anticipate generating any revenue from the sale of cethromycin for the next several years. If
we secure a commercial partnership as planned during 2008, milestones received as a result of the agreement could be recognized as revenue in 2008 depending on the underlying nature of the milestones.
Since our inception in 1999, we have financed our operations primarily through public and private equity offerings, loans from our founder and borrowings under our bank line of credit. We will
continue to do so until we are able to generate revenues from our product candidates, if ever.

Our Background

In June 1999, MediChem Life Sciences ("MediChem"), our former parent, exchanged its investment in 100% of the outstanding common stock of ALS Inc. for
nonvoting preferred stock issued by ALS Inc. affecting a spin-off of ALS Inc. Prior to the spin-off, Dr. Michael Flavin, the sole stockholder, owned 100%
of MediChem and ALS Inc., then a wholly-owned subsidiary of MediChem. As a result of the spin-off, Dr. Flavin became the sole common stockholder of ALS Inc. MediChem
holds 100% of the preferred stock of ALS Inc., which was issued in exchange for common stock held at the June 1999 spin-off.

In
August 2005, we completed the initial public offering ("IPO") of common stock in which we sold 6,400,000 shares of common stock to the public at $5.00 per share, resulting in gross
proceeds of $32.0 million. We also completed a concurrent offering of 600,000 shares to Abbott in exchange for a $3.0 million reduction of a milestone payment obligation under our
license agreement with Abbott. In September 2005, our underwriters exercised their option to purchase 100,000 shares to cover 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.

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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.

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 inflammation, and then markets these products directly to healthcare providers including, but not limited to, physicians and hospitals. We
plan to sustain our drug development pipeline through our internal drug discovery capabilities and by opportunistically in-licensing promising compounds that fit into our areas of focus.
Specific key aspects of our strategy include the following:



We currently intend to focus a significant portion of our business efforts on the regulatory approval and commercialization of cethromycin for the treatment of
mild-to-moderate community acquired pneumonia. Human clinical trials have been performed to determine the safety and efficacy of cethromycin in approximately 5,600 human
subjects. We recently completed our pivotal Phase III clinical trials in November 2007 for the treatment of
mild-to-moderate community acquired pneumonia using a 300 mg once-daily dosing regimen. We anticipate that a New Drug Application ("NDA") submission in this
indication will occur in 2008.

In
addition to pursuing an NDA for mild-to-moderate community acquired pneumonia in pivotal Phase III clinical trials, we intend to evaluate opportunities
for cethromycin in the treatment of other respiratory tract infections such as bronchitis, sinusitis, pharyngitis, as well as inhalation anthrax and other bioterror agents.



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



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



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

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

Our Lead Program

In December 2004, Abbott Laboratories granted us an exclusive worldwide license, except in Japan, to commercialize cethromycin, our most advanced product
candidate. Cethromycin is a second generation once-a-day oral antibiotic from the ketolide-class used in the treatment of respiratory tract infections. We are initially
developing cethromycin as a treatment for mild-to-moderate community acquired pneumonia and have recently completed Phase III clinical development in this indication.
Over the last decade, the rapid rise in severe and fatal infections caused by antibiotic-resistant bacteria has posed a serious threat to public health. There is a need to discover new antibiotics
that are effective against resistant bacteria. As a new class of antibiotics, ketolides have shown activity against penicillin- and macrolide-resistant Gram-positive pathogens. Cethromycin
has demonstrated activity toward drug-resistantStreptococcus pneumoniaeandHaemophilus
influenzae,two of the pathogens commonly found in mild-to-moderate community acquired pneumonia, when compared to the published data on antibiotics
currently on the market. Cethromycin has also shownin vitroevidence of an extended post-antibiotic effect, meaning that the suppression of
bacterial growth persists in the absence of measurable antibiotic concentration. Prior to our acquisition of cethromycin, six Phase III clinical trials had been completed by Abbott for the
treatment of respiratory tract infections, and cethromycin demonstrated a clinical cure rate as high as 93% for subjects with mild-to-moderate community acquired pneumonia. We
were able to reproduce similar results in our two pivotal Phase III trials in CAP, which reported per protocol clinical cure rates of 94.0% in trial CL-05 (comparator, Biaxin, was
93.8%) and 91.5% in trial CL-06 (comparator, Biaxin, was 95.9%). Looking at the pooled results, per protocol clinical cure rates were 92.8% for cethromycin and 94.9% for Biaxin. This gives
a confidence interval of [-5.4, +1.2]. Cethromycin was
well-tolerated with the most common adverse events being taste disturbance (cethromycin 9.3%, Biaxin 4.0%), diarrhea (cethromycin 4.7%, Biaxin 4.4%), nausea (cethromycin 3.6%, Biaxin 2.6%)
and headache (cethromycin 2.7%, Biaxin 4.6%). There were no serious drug-related events. These results were well in line with current FDA guidelines for non-inferiority trials
in CAP. A total of 1,106 patients were enrolled in the two studies. In February 2008, we announced the results from Trial CL07-001, a thorough QT study of cethromycin. This study was conducted to
evaluate the cardiac safety of cethromycin. The FDA usually requires thorough QT studies for all new chemical entities because prolongation in QT interval (corrected for changes in heart rate, or QTc)
may signify an increased risk of developing cardiac arrhythmias. Trial CL07-001 evaluated the potential of cethromycin to cause a prolongation in electrocardiographic QT interval in accordance with
FDA and ICH E14 guidance. Trial CL07-001 was a double-blind, randomized, parallel study in which cethromycin, given at a therapeutic dose (300 mg once-daily for 5 days) and supratherapeutic dose (900
mg once daily for 5 days) was compared to placebo and moxifloxacin in 238 healthy adult volunteers. At the therapeutic and supratherapeutic doses, cethromycin showed no signal of any
electrocardiographic effects and hence supported its favorable cardiac safety profile. We are currently aggregating these most recent results into a comprehensive NDA filing which we expect to submit
to the FDA during 2008.



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

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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 mild-to-moderate community acquired pneumonia or hospital
acquired pneumonia, depending upon the setting in which contraction of the bacterial infection occurred. The Textbook of Primary and Acute Care Medicine estimates that, in the United States alone,
there are approximately 5-6 million cases of mild-to-moderate community acquired pneumonia each year.



Until recently, there have been three main classes of antibiotics prescribed for respiratory tract infections such as mild-to-moderate
community acquired pneumonia. These are semi-synthetic penicillins (also known as beta-lactams), such as Augmentin® (amoxicillin and clavulanate potassium) sold by
GlaxoSmithKline; macrolides, such as erythromycin or Zithromax® (azithromycin) sold by Pfizer; and fluoroquinolones, such as Cipro® (ciprofloxacin) sold by Bayer. Penicillins,
macrolides and fluoroquinolones have all been shown to have certain shortcomings with respect to the treatment of respiratory tract infections. Studies have shown that, in the United States,
approximately 26% ofStreptococcus pneumoniaeisolates, the most common pathogens that cause respiratory tract infections such as
mild-to-moderate community acquired pneumonia, are resistant to macrolides. In addition, numerous reports in the medical literature have noted the emergence of
penicillin-resistant pneumococci. The wide use of fluoroquinolones increases the potential for development of bacterial resistance, cross-resistance to the same or other classes of antibiotics as well
as promotesClostridium difficileassociated disease ("CDAD").

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.

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ALS Solution

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

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



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

Abbott Laboratories Collaboration

In December 2004, we entered into an agreement with Abbott Laboratories under which we acquired from Abbott a license to certain patent applications, patents and
proprietary technology relating to cethromycin. Under the terms of the agreement we paid $13.0 million in license fees and milestones and issued 1,722,569 shares of our common stock to Abbott.
We will owe Abbott $10.0 million if we submit an NDA and $30.0 million if and when the FDA approves the NDA. We also agreed to pay to Abbott $2.5 million upon cethromycin reaching
$200 million in aggregate net sales and $5.0 million upon the drug reaching $400 million in aggregate net sales. Finally, we will owe Abbott royalty payments of 19% on the first
$100 million of aggregate net sales of cethromycin, 18% on net sales once aggregate net sales exceed $100 million but are less than $200 million, and 17% on all net sales once
aggregate net sales exceed $200 million.

The
term of the agreement commenced on December 13, 2004 and continues until the expiration of the last patent licensed under the agreement, unless the agreement is otherwise
terminated. The primary patent licensed under the agreement, used by us in connection with cethromycin, expires in the U.S. on September 4, 2016, and in most foreign countries or jurisdictions
on September 2, 2017, all subject to any term restoration that may be granted for the time necessary for regulatory approval in each respective jurisdiction. Upon the expiration of the license
agreement, we maintain a non-exclusive, perpetual and irrevocable license to use Abbott's proprietary technology and other types of information directly related or used in connection with
cethromycin and its manufacture into pharmaceutical products without any further payment obligations to Abbott, except for those payment obligations accruing prior to such expiration. The agreement
may be terminated by either party on 30 days notice if the other party ceases its business operations or if the other party passes a resolution or a court of

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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.

Other Collaborations and License Agreements

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

University of Illinois at Chicago.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 $477,000 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.

Argonne National Laboratory.In 2003, we acquired an exclusive license, under patent rights and know-how
controlled by Argonne National Laboratory, to develop, make, use and sell in the United States and its territories a class of peptides and related compounds to inhibit the formation of amyloid
fibrils. These fibrils are implicated in a number of diseases such as Alzheimer's disease and amyloidosis. In consideration of this license, we agreed to pay royalties to Argonne equal to 4% of net
sales of licensed products by us, our affiliates and sublicensees, as well as 10% of any benchmark or milestone fees we receive from sublicensees. We also agreed to reimburse Argonne for the cost of
ongoing patent prosecution and maintenance. The license is subject to certain reserved rights for the U.S. Government based on Federal statutes, including the Government's right to develop, make, use,
and sell the amyloid inhibiting peptides pursuant to any treaties or agreements with foreign governments that the U.S. Government may enter, and the Government's right to require us to sublicense the
rights granted in certain limited circumstances. We are obligated to provide at least one half-time employee to this project until completion of Phase I clinical trials. Argonne has
the right to terminate the agreement if due diligence requirements, including the devotion of one half-time employee, are not met.

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

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disease,
oncology and inflammation. We currently have exclusive access to 42 issued U.S. and international patents. In addition, 10 U.S. and international patent applications have been filed and are
in various stages of processing.

Key U.S. Patents and Expiration Dates

Drug Candidate

U.S. Patent Number

Expiration DateCethromycin

5866549

9/4/2016ALS-357

5658947

8/19/2014ALS-886

5504111

4/2/2013


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

Competition

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

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

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

Government Regulation

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



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

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



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

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such
as the conduct of the trials as outlined in the IND. In that case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. If these
issues are unresolved, the FDA may not allow the clinical trials to commence.

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

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

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



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

Assuming
successful completion of the required clinical testing, the results of the preclinical studies and of the clinical studies, together with other detailed information, including
information on the manufacture and composition of the product, are submitted to the FDA in the form of an NDA requesting approval to market the product for one or more indications. The FDA reviews an
NDA to determine, among other things, whether a product is safe and effective for its intended use and has a favorable risk/benefit profile.

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

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

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adding
new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval.

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

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



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

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

Pharmaceutical Pricing and Reimbursement

In both domestic and foreign markets, sales of any products for which we receive regulatory approval for commercial sale will depend in part on the availability
of reimbursement from third party payors. Third party payors include government health administrative authorities, managed care providers, private health insurers and other organizations. These third
party payors are increasingly challenging the price and examining the cost-effectiveness of medical products and services. In addition,

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significant
uncertainty exists as to the reimbursement status of newly approved healthcare product candidates. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the
cost-effectiveness of our products. Our product candidates may not be considered cost-effective. Adequate third party reimbursement may not be available to enable us to
maintain price levels sufficient to realize an appropriate return on our investment in product development.

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

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

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

Employees

As of December 31, 2007, we employed 31 people of which there are 14 in research and 17 in administration. Our employees are not represented by any
collective bargaining agreements and we believe our employee relations are good.

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.

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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:

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

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

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

We
anticipate that our ability to generate any significant product revenues in the near future will depend solely on the successful development and commercialization of cethromycin, our
most advanced product candidate. The FDA may not approve in a timely manner, or at all, any NDA that we submit. If we are unable to submit an NDA for cethromycin or any other product candidate, or 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.

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

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a
timely basis or at all. Delays in obtaining or failure to obtain such approvals would adversely affect the marketing of our product candidates and our liquidity and capital resources.

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

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 2007 financial statements related to the uncertainty in our ability to continue
as a going concern. We do not have sufficient cash on-hand or other funding available to meet our obligations if we submit the NDA for cethromycin thereby triggering a $10 million
milestone to Abbott Laboratories. The inability to fund the milestone payment using existing cash reserves raises substantial doubt about our ability to continue as a going concern. Although we
recently completed a private placement providing us with gross proceeds of $20 million and intend to secure a commercial partnership in 2008 that would provide additional capital to fund the
Abbott milestone, there can be no assurance that we will be able to secure a commercial partnership or obtain adequate capital funding in the future to continue operations and implement our strategy,
which would have an adverse effect on our business and operations and likely cause our investors' investment in us to decline.

We are at an early stage of development 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 $99.6 million as of December 31, 2007. 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 and one-time or limited payments associated with our collaborations or grants, and we do not
anticipate generating any significant revenues for at least the next several years, if ever. We expect to increase our operating expenses over the next several years as we plan to:



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

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

Our
operations will require significant additional funding in large part due to our research and development expenses, future preclinical and clinical testing costs, the possibility of
expanding our facilities, and the absence of any meaningful revenues in the near future. We do not know whether additional financing will be available to us on favorable terms or at all. If we cannot
raise additional funds, we may be required to reduce our capital expenditures, scale back product development or programs, reduce our workforce and license to others products or technologies that we
may otherwise be able to commercialize.

To
the extent we raise additional capital by issuing equity securities, our stockholders could experience substantial dilution. Any additional equity securities we issue 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.

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 the University of Illinois at Chicago, Argonne National Laboratory 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 1 of this Annual Report on
Form 10-K for the fiscal year ended December 31, 2007. 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.

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

We
do not currently have product sales and marketing capabilities. If we receive regulatory approval to commence commercial sales of any of our product candidates, we will have to
establish a sales and marketing organization with appropriate technical expertise and distribution capabilities or make arrangements with third parties to perform these services. If we receive
approval to commercialize cethromycin for the treatment of mild-to-moderate community acquired pneumonia, we intend to engage other 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. To the
extent we enter co-promotion or other licensing arrangements; any revenues we receive will depend on the efforts of third parties and will not be under our control. If we are unable to
establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, our ability to generate product revenues, and become profitable, would be severely
limited.

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



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

Our
pivotal Phase III clinical trials for cethromycin were limited to the treatment of mild-to-moderate community acquired pneumonia. We also intend to
pursue opportunities for cethromycin in the treatment of other respiratory tract infections such as bronchitis, sinusitis, pharyngitis and inhalation anthrax. 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

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the
first ketolide antibiotic introduced to the marketplace. Ketek® has been available for sale in Europe since 2002 and in the United States since August 2004. There are additional
ketolide product candidates in preclinical development or in clinical development. If ultimately approved by the FDA, these product candidates may have improved efficacy, ease of administration or
more favorable side effect profiles when compared to cethromycin. The availability of additional ketolide antibiotics may have an adverse affect on our ability to generate product revenues and achieve
profitability.

Our inability to expand cethromycin into indications such as bronchitis, pharyngitis and sinusitis would harm our ability to generate additional revenues in the
future.

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

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

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

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

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



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

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

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

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

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

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

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



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

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of
the protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease and the eligibility criteria for the clinical trial. If we are unable to
enroll a sufficient number of microbiologically evaluable patients, the clinical trials for our product candidates could be delayed until sufficient numbers are achieved.

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

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

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

We
are a development stage company with 31 employees. Most of our competitors, such as Pfizer, GlaxoSmithKline and Bayer, are large pharmaceutical companies with substantially greater
financial, technical and human resources than we have. The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Many of the
drugs that we are attempting to discover or develop will compete with existing therapies if we receive marketing approval. Because of their significant resources, our competitors may be able to use
discovery technologies and techniques, or partnerships with collaborators, in order to develop competing products that are more effective or less costly than the product candidates we develop. This
may render our technology or product candidates obsolete and noncompetitive. Academic institutions, government agencies and other public and private research organizations may seek patent protection
with respect to potentially competitive products or technologies and may establish exclusive collaborative or licensing relationships with our competitors.

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

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

If any of our product candidates receive marketing approval, we will only be permitted to promote the product for the uses indicated on the label cleared by the
FDA. Our pivotal Phase III clinical trials of cethromycin are for the treatment of mild-to-moderate community acquired pneumonia, although we believe that cethromycin
may have other applications in bronchitis, pharyngitis, sinusitis and inhalation anthrax. If we request additional label indications for cethromycin or our other product candidates, the FDA may deny
those requests outright, require extensive clinical data to support any additional

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indications
or impose limitations on the intended use of any approved products as a condition of approval. U.S. Attorneys' offices and other regulators, in addition to the FDA, have recently focused
substantial attention on off-label promotional activities and have initiated civil and criminal investigations related to such practices. If it is determined by these or other regulators
that we have promoted our products for off-label use, we could be subject to fines, legal proceedings, injunctions or other penalties.

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

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



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

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

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

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



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

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

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

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

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

22

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

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

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 31 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. 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

23

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personnel
in the future due to intense competition among biotechnology and pharmaceutical businesses, particularly in the Chicago area. If we are not able to attract and retain the necessary personnel
to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our research and development objectives and our ability to meet the demands of
our collaborators in a timely fashion.

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

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

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

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

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.

24

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

As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the company's internal controls
over financial reporting in their annual reports on Form 10-K. In addition, the public accounting firm auditing the company's financial statements must attest to and report on
management's assessment of the 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, 2008 although the SEC has recently introduced, but not finalized, regulations that would delay the initial auditor attestation report to our fiscal year ending
December 31, 2009. If we are unable to conclude that we have effective internal controls over financial reporting or, if our independent auditors are unable to provide us with an unqualified
report as to the effectiveness of our internal controls over financial reporting as of December 31, 2008 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.

Item 1B.Unresolved Staff Comments.

None.

Item 2.Properties.

Our corporate offices and chemistry and biology laboratories are located in the Advanced Life Sciences Product Development Center in Woodridge, Illinois. The
Product Development Center consists of approximately 15,000 square feet of laboratory and office space. We believe that our current facilities are adequate to meet our needs for the foreseeable
future. Our facilities are leased and our current lease expires in September 2008. We believe that suitable additional or alternative space will be available in the future on commercially reasonable
terms as needed.

Item 3.Legal Proceedings.

None.

Item 4.Submissions of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the quarter ended December 31, 2007.

25

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

2007

High

LowFirst Quarter

$
3.11

$
2.31Second Quarter


3.97


2.24Third Quarter


2.82


1.29Fourth Quarter


2.85


1.552006

High

LowFirst Quarter

$
4.24

$
2.98Second Quarter


3.64


2.31Third Quarter


3.25


2.70Fourth Quarter


3.75


2.13


As
of February 15, 2008, there were approximately 45 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, 2007, cumulative accrued undeclared dividends on our subsidiary's preferred stock totaled
approximately $1.5 million.

Recent Sales of Unregistered Securities

None.

26

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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, 2007 |           
|------------------------------------------------------------------ | ----------------------------------- | - | ----------- | ---------- | - | ----------- | ---------- | - | ---------- | --------- | - | ------------------------------------------------------------ | ----------
|
|
|Statement of Operations Data:                                      |                                     |   |             |            |   |             |            |   |            |           |   |                                                              |           
|Revenue                                                            |                                     | $ |            |            | $ | 39,788      |            | $ | 121,451    |           | $ | 319,780                                                      |           
|Operating expenses                                                 |                                     |   |             |            |   |             |            |   |            |           |   |                                                              |           
|                                                                   | Research and development(1)         |   |             | 25,735,759 |   |             | 17,202,113 |   |            | 3,121,616 |   |                                                              | 25,661,868
|                                                                   | Selling, general and administrative |   |             | 6,839,575  |   |             | 5,457,395  |   |            | 3,237,997 |   |                                                              | 1,649,953 
|                                                                   |                                     |   |             |            |   |             |            |   |            |           |   |                                                              |           
|Loss from operations                                               |                                     |   | (32,575,334 | )          |   | (22,619,720 | )          |   | (6,238,162 | )         |   | (26,992,041                                                  | )         
|Interest income                                                    |                                     |   | (717,884    | )          |   | (1,651,916  | )          |   | (272,216   | )         |   |                                                             |           
|Interest expense                                                   |                                     |   | 466,963     |            |   | 511,884     |            |   | 478,300    |           |   | 194,877                                                      |           
|Gain on disposal(2)                                                |                                     |   |            |            |   | (939,052    | )          |   |           |           |   |                                                             |           
|                                                                   |                                     |   |             |            |   |             |            |   |            |           |   |                                                              |           
|Net other (income) expense                                         |                                     |   | (250,921    | )          |   | (2,079,084  | )          |   | 206,084    |           |   | 194,877                                                      |           
|Net loss                                                           |                                     |   | (32,324,413 | )          |   | (20,540,636 | )          |   | (6,444,246 | )         |   | (27,186,918                                                  | )         
|Less accumulating preferred dividends of subsidiary for the period |                                     |   | 175,000     |            |   | 175,000     |            |   | 175,000    |           |   | 175,000                                                      |           
|                                                                   |                                     |   |             |            |   |             |            |   |            |           |   |                                                              |           
|Net loss allocable to common shareholders                          |                                     | $ | (32,499,413 | )          | $ | (20,715,636 | )          | $ | (6,619,246 | )         | $ | (27,361,918                                                  | )         
|                                                                   |                                     |   |             |            |   |             |            |   |            |           |   |                                                              |           
|Basic and diluted loss per common share(3)                         |                                     | $ | (1.12       | )          | $ | (0.78       | )          | $ | (0.49      | )         | $ | (13.27                                                       | )         
|Weighted average shares outstanding(3)                             |                                     |   | 28,910,041  |            |   | 26,546,785  |            |   | 13,610,694 |           |   | 2,062,351                                                    |           

|
|

|Consolidated Balance Sheet Data:             |  | 2007 |             | 2006 |   | 2005        |   | 2004 |             | 2003 |   |             |  
|-------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | - | ---- | ----------- | ---- | - | ----------- | -
|Cash and cash equivalents                    |  | $    | 18,324,991  |      | $ | 27,054,947  |   | $    | 15,224,932  |      | $ | 194,555     |  
|Total assets                                 |  |      | 19,911,542  |      |   | 30,509,679  |   |      | 16,021,910  |      |   | 1,015,932   |  
|Long-term debt, less current portion         |  |      | 5,915,000   |      |   | 3,923,810   |   |      | 5,905,634   |      |   | 2,027,279   |  
|Total liabilities(4)                         |  |      | 12,250,568  |      |   | 9,115,174   |   |      | 7,726,173   |      |   | 19,289,733  |  
|Deficit accumulated during development stage |  |      | (99,583,588 | )    |   | (67,259,175 | ) |      | (46,718,539 | )    |   | (40,274,293 | )
|Total stockholders equity (deficit)          |  | $    | 7,660,974   |      | $ | 21,394,505  |   | $    | 8,295,737   |      | $ | (18,273,801 | )

---

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

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

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel drugs in the areas of infectious disease, oncology and
inflammation. 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 second generation once-a-day oral antibiotic that recently completed pivotal phase III clinical trials in
community acquired pneumonia ("CAP") and in Phase III clinical development for the treatment of respiratory tract infections. We also have product candidates in earlier stages of development
for the treatment of indications including 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.

Since
our inception, we have incurred net losses each year. Our net loss for the year ended December 31, 2007 was $32.3 million. As of December 31, 2007, we had an
accumulated deficit of $99.6 million. Our operations to date have been funded principally through proceeds from our initial public offering, our private placements in March 2006 and December
2007, debt and capital contributions made principally by our founder and Chief Executive Officer and borrowings under our bank line of credit. We currently do not have sufficient cash or other funding
available to complete our anticipated business activities during 2008 if we submit our cethromycin NDA without securing a commercial partnership that provides additional capital. As a result, there is
significant doubt about our ability to continue as a going concern.

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 and warrants to
purchase 5,095,542 shares of our common stock at $1.96 per share. The exercise price of the warrants is $2.15 per share and they expire in December 2012.

In
December 2005, we initiated two pivotal Phase III clinical trials for cethromycin which compared cethromycin with standard of care therapies for CAP in the United States,
Canada, Europe, South America and South Africa. Each trial sought to demonstrate statistical non-inferiority to a comparator using a 95% confidence interval. Clinical cure rate served as
the primary endpoint in each trial with bacteriological eradication serving as the secondary endpoint.

We
completed the two pivotal Phase III clinical trials during 2007. In each trial, cethromycin achieved non-inferiority in its primary endpoint of per protocol
clinical cure rate compared to Biaxin ® (clarithromycin) in CAP. Cethromycin was evaluated using a 300 mg once-daily dosing regimen compared to 250 mg twice-daily dosing for
Biaxin ®, both over a seven-day course of therapy. No drug-related serious adverse events were observed in any study subject. Liver function tests and
electrocardiogram monitoring demonstrated no significant differences between subjects receiving

28

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cethromycin
and subjects receiving Biaxin ®, consistent with the hepatic and cardiac side effect profile reported in cethromycin's previous clinical trials.

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

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

We
do not expect to receive FDA approval for commercialization of cethromycin until 2009 at the earliest. As of December 31, 2007, we estimate that our cethromycin development
program will require an additional $43.2 million in research and development expenses which includes $40.0 million in additional milestone payments to Abbott, $1.0 million to
complete the cethromycin clinical trials and $2.2 million for the preparation of the cethromycin NDA and other commercialization-related costs. Our $10.0 million and $30.0 million
Abbott milestone payments are triggered upon submitting an NDA and receiving FDA approval, respectively. Development timelines and related costs are difficult to estimate and may vary significantly
from our current estimates.

If
cethromycin is approved for marketing by the FDA, we plan to sell cethromycin using a commercial partner to access the 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, however while discussions with potential commercial
partners are ongoing, we have not yet secured a commercial partnership.

Results of Operations



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

Research and development expense.Research and development expenses increased $8.5 million to $25.7 million for
the twelve months ended December 31, 2007 compared to $17.2 million for the twelve months ended December 31, 2006. Expenses related to our clinical trials, which we completed
during 2007, totaled $15.0 million representing an increase of $3.3 million in 2007 as compared to 2006. As of December 31, 2007, we had paid out $35.0 million of
$42.2 million in executed contracts and expect to incur the remainder of the contractual expenses during the first quarter of 2008. Regulatory activities and studies associated with preparation
of the cethromycin NDA represented an increase in expenses of $3.6 million over 2006. As of December 31, 2007 we had recognized expenses of $39.5 million out of a total of
$42.2 million in executed contracts and expect to incur the remainder in 2008.

29

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Expenses related to our study testing cethromycin's efficacy in treating inhalation anthrax post-exposure for prophylaxis in non-human primates increased $741,000
over the prior year and represented the conclusion of the study. Formulation expenses of our next clinical candidate, ALS-357 increased $108,000, in 2007 as compared to 2006. With the
formulation stage now complete, we intend to initiate a phase I clinical trial during the first half of 2008 that will evaluate the effects of ALS-357 applied topically to tumors of
patients that suffer from Cutaneous Metastatic Melanoma. Salaries and benefits of our research and development staff increased $617,000 in 2007 as compared to 2006. Of this increase, $143,000
represents non-cash compensation costs related to the issuance of stock options. The remainder of the increase is attributable to increases in compensation of our existing staff as well as
several regulatory positions that were added in the last quarter of 2006 and at various points during 2007. These positions will focus on the cethromycin NDA which we plan to submit in 2008.

General and administrative expense.General and administrative expense increased $1.4 million to $6.8 million
for the twelve months ended December 31, 2007 compared to $5.5 million for the twelve months ended December 31, 2006. Salary and benefit expense increased $944,000 and was
comprised of $614,000 of incremental salary and benefit expense and $330,000 in non-cash compensation expense related to stock option issuances. Incremental salary expense was the result
of market adjustments to compensation for existing staff and several new staff positions that focus on Sarbanes-Oxley compliance which were added during the last quarter of 2006 and first quarter of
2007. Marketing expenses related to the branding of cethromycin increased $235,000 over 2006, the result of a larger presence at key scientific meetings throughout the year. Facilities expense
increased $143,000 as compared to 2006 which resulted from our facilities expansion that was completed during the fourth quarter of 2006.

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

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



Revenue.Total revenue decreased by $82,000 to $40,000 for the twelve months ended December 31, 2006 and consisted
entirely of revenue earned from small business innovative research ("SBIR") grants. The majority of this decrease, approximately $61,000, relates to the cessation of our management agreement with
Flavin Ventures in 2005. The remaining decrease is attributable to lower SBIR grant revenue as a result of the completion of a phase I grant in 2006.

Research and development expense.Research and development expense increased $14.1 million to $17.2 million for
the twelve months ended December 31, 2006. Research and development expenses primarily consist of costs to administer our phase III clinical trials for our lead compound cethromycin,
which we administer under contracts with third-parties. In addition, these costs include the salaries and related benefits of our scientific and clinical trial management staff as well as costs
related to the operation of our laboratory facilities. Clinical trial and related costs associated with the development of cethromycin totaled $16.3 million for 2006, representing an increase
of $14.3 million over the previous year. In addition to our cethromycin clinical trials, we initiated a study of cethromycin in non-human primates to determine its efficacy in
treating inhalation anthrax. Expenditures under this program totaled $389,000 in 2006. Research and development expenses incurred to develop our intellectual

30

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property
portfolio, excluding development costs related to the cethromycin and anthrax programs, totaled approximately $530,000 for the year ended December 31, 2006.

General and administrative expense.General and administrative expense increased $2.2 million to $5.5 million
for the twelve months ended December 31, 2006. Incremental costs as we operated as a public company for a full year totaled $1.7 million representing an increase of $1.1 million
over the previous year. Marketing and travel expenses totaled $557,000, an increase of $487,000 over the previous year, the result of a greater presence at key industry conferences held throughout
2006. Compensation and related expenses totaled $2.5 million or an increase of $382,000 the result of hiring additional personnel in our accounting, business development and investor relations
functions. The remaining increase of $231,000 was primarily attributable to overall expenses of additional personnel hired throughout the year as well as higher patent protection costs for our
proprietary portfolio of compounds.

Gain on sale of SMP.In December 2006, we completed the sale of Advanced Life Sciences, Inc. ("ALS Inc") 50% interest
in Sarawak MediChem Pharmaceuticals, Inc. ("SMP"). Under the terms of the stock purchase agreement, ALS Inc. sold 900 shares of SMP common stock, representing its entire interest in
SMP, to its joint venture partner, CRAUN Research Sdn. Bhd., for $1.0 million. A gain of $940,000, net of legal costs incurred directly for the transaction, was recognized as the carrying value
of the investment was zero.

Interest income.Interest income increased $1.4 million to $1.7 million for the twelve months ended
December 31, 2006. Interest income is derived through the investment of our IPO and private placement proceeds in money market funds, until they are used in operations.

Interest expense.Interest expense increased $34,000 to $512,000 for the twelve months ended December 31, 2006.
Interest expense increased due to a 2.0% increase in the prime rate between June 2005 and April 2006 as well as incremental borrowings of $915,000 on our line of credit for the same period. In April
2006, we restructured our line of credit to a fixed rate of 6.75%, which decreased the rate on outstanding borrowings approximately by 1.8%. In May 2006, we paid all outstanding accumulated and
capitalized interest to our Chief Executive Officer in connection with his $2.0 million note, reducing the balance upon which interest is calculated by $837,000, the amount of accumulated and
capitalized interest.

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 for a number of years, if at all. As a result, we have incurred an accumulated deficit of $99.6 million as
of December 31, 2007 and we expect to incur significant and increasing operating losses for the foreseeable future. Our working capital as of December 31, 2007 amounted to
$13.8 million. Cash, cash equivalents and investments were $18.3 million as of December 31, 2007. Since our inception in 1999 to August 2005, we financed our operations primarily
through debt and capital contributions principally from our founder and Chief Executive Officer 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. In March 2006 we completed a private placement in which we raised $33.4 million, net of underwriters
discount and offering costs. In December 2007 we completed a second private placement in which we raised $17.9 million, net of underwriters discount and offering costs.

In
September 2001, our Chief Executive Officer made a $2.0 million loan to us. The loan accrues interest at the rate of 7.75%, and is due and payable on January 5, 2009.
The balance of the loan was $2.0 million as of December 31, 2007.

31

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We
have a $4.0 million line of credit with a local financial institution. As of December 31, 2007, the line of credit had an outstanding balance of $3.9 million
bearing interest of 6.75% per annum. The line of credit is secured by substantially all of our assets, excluding any rights that we may have as result of our license agreement with Abbott Laboratories
for cethromycin. The line of credit is also secured by 2.5 million shares of our common stock held by Flavin Ventures. See Note 5 to the consolidated financial statements. As of
December 31, 2007 the Company had obtained a commitment from its financial institution to extend the maturity of the note to January 1, 2010. Under the new note, the interest rate will
change from a fixed rate of 6.75% per annum to a floating rate based on prime, minus 75 basis points. The rate cannot be lower than 6.25% or exceed 8.0%. The note also changed from a straight line of
credit to a revolving line of credit and all other terms remained unchanged. The note was executed on January 31, 2008.

During
the year ended December 31, 2007, cash used in operating activities totaled $26.5 million. Approximately $19.3 million was used for the development of
cethromycin to treat community acquired pneumonia, $1.0 million for the evaluation of cethromycin to prevent inhalation anthrax in non-human primate study, $587,000 for research
activities related to our proprietary portfolio of compounds and $5.6 million was used for general operations net of $750,000 in interest income. Cash provided from financing activities totaled
$17.9 million during the year ended December 31, 2007, due primarily to the sale of our common stock in our December 2007 private placement.



As of December 31, 2007, the annual amounts of future minimum payments under debt obligations, interest, lease obligations and other long term liabilities
consisting of executed research, development and license agreements are as follows:

|                                 |  | Payments Due by December 31, |           | 
|-------------------------------- |  | ---------------------------- | --------- | 
|
|Notes payable                    |  | $                            |          | 
|Interest                         |  |                              | 412,317   | 
|Cethromycin clincial & NDA costs |  |                              | 6,986,448 | 
|Anthrax efficacy studies         |  |                              | 178,000   | 
|ALS-357 clinical program         |  |                              | 34,000    | 
|Facility development costs       |  |                              | 319,560   | 
|Operating leases                 |  |                              | 160,648   | 
|Capital leases                   |  |                              | 7,259     | 
|                                 |  |                              |           | 
|Total                            |  | $                            | 8,098,232 | 
|                                 |  |                              |           | 

The above table does not include certain potential product based milestones under our license agreement with Abbott. We will owe Abbott
$10.0 million if we submit an NDA for cethromycin and $30.0 million if and when the FDA approves the NDA, which we estimate will occur in 2008 and 2009, respectively. Thereafter, we
would owe Abbott an additional $2.5 million upon reaching $200 million in aggregate net sales of cethromycin and $5.0 million upon reaching $400 million in aggregate net
sales. The periods in which milestone obligations become payable are only estimates due to uncertainties in the regulatory approval process.

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

In
the year ended December 31, 2007, we executed contracts totaling $7.0 million. Of the total contracts executed $3.0 million related to the compilation of our
cethromycin NDA and NDA directed studies and $4.0 million related to our clinical trials. We anticipate executing additional contracts

32

---



totaling
$200,000 related to the cethromycin NDA during the first quarter of 2008. Remaining payments due under all existing and anticipated cethromycin development contracts, including anthrax
studies, total $7.2 million and are expected to be made over the next six months.

We
believe the proceeds received from the 2007 private placement are sufficient to fund our existing and anticipated development commitments, indebtedness and general operating expenses
through the end of 2008, however we do not have sufficient liquidity to make any milestone payments that become due to Abbott upon the filing of an NDA. We anticipate securing a commercial partner(s)
for cethromycin during 2008. We believe such an agreement would include a series of milestones, including up-front milestones, that would fund the Abbott milestone payments due upon filing
the NDA and approval, if any, of the NDA by the FDA. Based upon current market conditions and discussions with potential commercial partners, we believe sufficient funds can be raised in 2008 to
continue our development of cethromycin and fund our other research and corporate expenditures through the expected approval of our cethromycin NDA. Although we believe we can secure a commercial
partnership and obtain sufficient financing, there can be no assurances that such a
partnership and financing will be available in the future at terms acceptable to us. As a result, there is significant doubt about our ability to continue as a going concern.

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



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

33

---



assumptions
or conditions. While our significant accounting policies are described in more detail in the notes to our financial statements included in this Annual Report, we believe the following
accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.



Research and development expenses consist of internal research costs and fees paid for contract research in conjunction with the research and development of our
proprietary product portfolio. All such costs are expensed as incurred. Clinical trial costs incurred by third parties are expensed as the contracted work is performed. We estimate both the total cost
and time period of the trials and the percent completed as of each accounting date. We believe that the estimates made as of December 31, 2007 are reflective of the actual expenses incurred as
of that date.



We account for stock-based awards to employees and non-employees using the accounting provisions of Statement of Financial Accounting Standards
No. 123(R)Share-based Paymentswhich provides for the use of the fair value based method to determine compensation for all arrangements where
shares of stock or equity instruments are issued for compensation. We use the Black-Scholes options-pricing model to determine the fair value of each option grant as of the date of grant for expense
incurred. The Black-Scholes model requires inputs for risk-free interest rate, dividend yield, volatility and expected lives of the options. Since the Company has a limited history of
stock activity, expected volatility is based on historical data from several peer public companies with similar product portfolios to us. 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 forfeits of options based upon historical forfeit rates.

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

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

Our
most liquid assets are cash and cash equivalents. Because of their liquidity, these assets are not directly affected by inflation. We also believe that we have intangible assets in
the value of our intellectual property. In accordance with generally accepted accounting principles, we have not capitalized the value of this intellectual property on our balance sheet. Due to the
nature of this intellectual property, we believe that these intangible assets are not affected by inflation. Because we intend to retain and continue to use our equipment, furniture and fixtures and
leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not materially affect our operations. However, the rate of inflation affects our
expenses, such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources. The fluctuation in the Prime rate could
affect the interest we pay under of line of credit. A hypothetical interest rate increase of one percent, which under the current terms of the line cannot be lower than 6.25% nor can the rate exceed
8.00%, would raise interest expense by $39,000.

34

---



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, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended
December 31, 2007 and for the period from January 1, 1999 (inception) through December 31, 2007. 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, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, and for the period from
January 1, 1999 (inception) to December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the
Company does not have sufficient cash on-hand or other funding available to meet its financial obligation in connection with the filing of the New Drug Application to the U.S. Food and
Drug Administration for cethromycin, which raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also discussed in
Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The
Company is in the development stage at December 31, 2007.

/s/
DELOITTE & TOUCHE LLP

Chicago,
Illinois
February 14, 2008

35

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

|                                                            |                                                                                                                                                                                   | December 31,
2007 |                                      | December 31,
2006 |  
|----------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | ------------------------------------ | ----------------- | -
|ASSETS                                                      |                                                                                                                                                                                   |                   |                                      |                   |  
|CURRENT ASSETS:                                             |                                                                                                                                                                                   |                   |                                      |                   |  
|                                                            | Cash and cash equivalents                                                                                                                                                         |                   | $                                    | 18,324,991        |  
|                                                            | Prepaid insurance                                                                                                                                                                 |                   |                                      | 251,493           |  
|                                                            | Prepaid clinical trial expenses                                                                                                                                                   |                   |                                      | 926,168           |  
|                                                            | Other prepaid expenses and deposits                                                                                                                                               |                   |                                      | 140,359           |  
|                                                            |                                                                                                                                                                                   |                   |                                      |                   |  
|                                                            |                                                                                                                                                                                   |                   | Total current assets                 |                   |  
|                                                            |                                                                                                                                                                                   |                   |                                      |                   |  
|PROPERTY AND EQUIPMENT:                                     |                                                                                                                                                                                   |                   |                                      |                   |  
|                                                            | Furniture and fixtures                                                                                                                                                            |                   |                                      | 221,417           |  
|                                                            | Laboratory equipment                                                                                                                                                              |                   |                                      | 159,186           |  
|                                                            | Computer software and equipment                                                                                                                                                   |                   |                                      | 242,707           |  
|                                                            | Leasehold improvements                                                                                                                                                            |                   |                                      | 177,253           |  
|                                                            |                                                                                                                                                                                   |                   |                                      |                   |  
|                                                            |                                                                                                                                                                                   |                   | Total property and equipmentat cost |                   |  
|                                                            | Less accumulated depreciation                                                                                                                                                     |                   |                                      | (542,032          | )
|                                                            |                                                                                                                                                                                   |                   |                                      |                   |  
|                                                            |                                                                                                                                                                                   |                   | Property and equipmentnet           |                   |  
|                                                            |                                                                                                                                                                                   |                   |                                      |                   |  
|                                                            | Other long-term assets                                                                                                                                                            |                   |                                      | 10,000            |  
|                                                            |                                                                                                                                                                                   |                   |                                      |                   |  
|TOTAL ASSETS                                                |                                                                                                                                                                                   | $                 | 19,911,542                           |                   | $
|                                                            |                                                                                                                                                                                   |                   |                                      |                   |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                        |                                                                                                                                                                                   |                   |                                      |                   |  
|CURRENT LIABILITIES:                                        |                                                                                                                                                                                   |                   |                                      |                   |  
|                                                            | Accounts payable                                                                                                                                                                  |                   | $                                    | 2,685,751         |  
|                                                            | Accrued clinical trial expenses                                                                                                                                                   |                   |                                      | 2,776,543         |  
|                                                            | Other accrued expenses                                                                                                                                                            |                   |                                      | 330,441           |  
|                                                            | Accrued interest payable                                                                                                                                                          |                   |                                      | 22,756            |  
|                                                            | Short-term lease payable                                                                                                                                                          |                   |                                      | 7,259             |  
|                                                            | Short-term grant payable                                                                                                                                                          |                   |                                      |                  |  
|                                                            | Short-term notes payablerelated party                                                                                                                                            |                   |                                      |                  |  
|                                                            |                                                                                                                                                                                   |                   |                                      |                   |  
|                                                            |                                                                                                                                                                                   |                   | Total current liabilities            |                   |  
|Long-term lease payable                                     |                                                                                                                                                                                   |                   | 12,818                               |                   |  
|Long-term grant payable                                     |                                                                                                                                                                                   |                   | 500,000                              |                   |  
|Long-term notes payablerelated party                       |                                                                                                                                                                                   |                   | 2,000,000                            |                   |  
|Notes payablenet of $0 debt discount at December 31, 2007; |                                                                                                                                                                                   |                   |                                      |                   |  
|net of $11,266 debt discount at December 31, 2006           |                                                                                                                                                                                   |                   | 3,915,000                            |                   |  
|                                                            |                                                                                                                                                                                   |                   |                                      |                   |  
|                                                            |                                                                                                                                                                                   |                   | Total liabilities                    |                   |  
|                                                            |                                                                                                                                                                                   |                   |                                      |                   |  
|COMMITMENTS AND CONTINGENCIES                               |                                                                                                                                                                                   |                   |                                      |                   |  
|MINORITY INTEREST                                           |                                                                                                                                                                                   |                   |                                     |                   |  
|STOCKHOLDERS' EQUITY:                                       |                                                                                                                                                                                   |                   |                                      |                   |  
|                                                            | Common stock, $0.01 par value60,000,000 shares authorized; 38,502,987 issued and outstanding at December 31, 2007; 28,282,677 shares issued and outstanding at December 31, 2006 |                   |                                      | 385,030           |  
|                                                            | Additional paid-in capital                                                                                                                                                        |                   |                                      | 106,859,532       |  
|                                                            | Deficit accumulated during the development stage                                                                                                                                  |                   |                                      | (99,583,588       | )
|                                                            |                                                                                                                                                                                   |                   |                                      |                   |  
|                                                            |                                                                                                                                                                                   |                   | Total stockholders' equity           |                   |  
|                                                            |                                                                                                                                                                                   |                   |                                      |                   |  
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                  |                                                                                                                                                                                   | $                 | 19,911,542                           |                   | $
|                                                            |                                                                                                                                                                                   |                   |                                      |                   |  

See notes to consolidated financial statements.

36

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

|                                                                           |                                                   |   |                |            |   |             |            | Period From
Inception
(January 1, 1999)
Through
December 31, 2007 |           
|-------------------------------------------------------------------------- | ------------------------------------------------- | - | -------------- | ---------- | - | ----------- | ---------- | ----------------------------------------------------------------- | ----------
|
|
|Revenue:                                                                   |                                                   |   |                |            |   |             |            |                                                                   |           
|                                                                           | Management fees                                   |   | $              |           |   | $           |           |                                                                   | $         
|                                                                           | Grants                                            |   |                |           |   |             | 39,788     |                                                                   |           
|                                                                           | Royaltyrelated party                             |   |                |           |   |             |           |                                                                   |           
|                                                                           |                                                   |   |                |            |   |             |            |                                                                   |           
|                                                                           |                                                   |   | Total revenue  |            |   |            |            |                                                                   | 39,788    
|                                                                           |                                                   |   |                |            |   |             |            |                                                                   |           
|Expenses:                                                                  |                                                   |   |                |            |   |             |            |                                                                   |           
|                                                                           | Research and development                          |   |                | 25,735,759 |   |             | 17,202,113 |                                                                   |           
|                                                                           | Contracted research and developmentrelated party |   |                |           |   |             |           |                                                                   |           
|                                                                           | Selling, general and administrative               |   |                | 6,839,575  |   |             | 5,457,395  |                                                                   |           
|                                                                           |                                                   |   |                |            |   |             |            |                                                                   |           
|                                                                           |                                                   |   | Total expenses |            |   | 32,575,334  |            |                                                                   | 22,659,508
|                                                                           |                                                   |   |                |            |   |             |            |                                                                   |           
|Loss from operations                                                       |                                                   |   | (32,575,334    | )          |   | (22,619,720 | )          |                                                                   | (6,238,162
|Other (income) expense:                                                    |                                                   |   |                |            |   |             |            |                                                                   |           
|Interest Income                                                            |                                                   |   | (717,884       | )          |   | (1,651,916  | )          |                                                                   | (272,216  
|Interest expense                                                           |                                                   |   | 466,963        |            |   | 511,884     |            |                                                                   | 478,300   
|Gain on sale of interest in Sarawak Medichem Pharmaceuticals joint venture |                                                   |   |               |            |   | (939,052    | )          |                                                                   |          
|                                                                           |                                                   |   |                |            |   |             |            |                                                                   |           
|Net other (income) expense                                                 |                                                   |   | (250,921       | )          |   | (2,079,084  | )          |                                                                   | 206,084   
|                                                                           |                                                   |   |                |            |   |             |            |                                                                   |           
|Net loss                                                                   |                                                   |   | (32,324,413    | )          |   | (20,540,636 | )          |                                                                   | (6,444,246
|                                                                           |                                                   |   |                |            |   |             |            |                                                                   |           
|Less accumulated preferred stock dividends of subsidiary for the period    |                                                   |   | 175,000        |            |   | 175,000     |            |                                                                   | 175,000   
|                                                                           |                                                   |   |                |            |   |             |            |                                                                   |           
|Net loss available to common shareholders                                  |                                                   | $ | (32,499,413    | )          | $ | (20,715,636 | )          | $                                                                 | (6,619,246
|                                                                           |                                                   |   |                |            |   |             |            |                                                                   |           
|Net loss per share available to common shareholdersbasic and diluted      |                                                   | $ | (1.12          | )          | $ | (0.78       | )          | $                                                                 | (0.49     
|                                                                           |                                                   |   |                |            |   |             |            |                                                                   |           
|Weighted average shares outstanding- basic and diluted                     |                                                   |   | 28,910,041     |            |   | 26,546,785  |            |                                                                   | 13,610,694

See
notes to consolidated financial statements.

37

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

|                                    |                                                                                        |            |            |   |         |          |   | Deficit
Accumulated
During the
Development
Stage |            |   |            
|----------------------------------- | -------------------------------------------------------------------------------------- | ---------- | ---------- | - | ------- | -------- | - | ------------------------------------------------ | ---------- | - | -----------
|
|
|
|BALANCEJanuary 1, 1999 (inception) |                                                                                        |           |            | $ |        |          | $ |                                                 |            | $ |           
|                                    | Issuance of stock (at inception)                                                       |            | 1,588,000  |   |         | 250,000  |   |                                                  |           |   |            
|                                    | Issuance of stock related to option exercises                                          |            | 41,685     |   |         | 6,563    |   |                                                  |            |   |            
|                                    | Compensation expense related to stock options (December 2004)                          |            |           |   |         |         |   |                                                  | 20,701     |   |            
|                                    | Exchange of shares under recapitalization (December 2004)                              |            | (1,629,685 | ) |         | (256,563 | ) |                                                  |           |   |            
|                                    | Issuance of shares under recapitalization (December 2004)                              |            | 9,482,015  |   |         | 94,820   |   |                                                  | 161,743    |   |            
|                                    | Capital contributions (December 2004)                                                  |            |           |   |         |         |   |                                                  | 12,711,330 |   |            
|                                    | Issuance of 14,887 warrants (December 2004)                                            |            |           |   |         |         |   |                                                  | 11,898     |   |            
|                                    | Issuance of common stock in exchange for licenses (December 2004)                      |            | 1,122,569  |   |         | 11,226   |   |                                                  | 8,988,774  |   |            
|                                    | Net loss (since inception)                                                             |            |           |   |         |         |   |                                                  |           |   |            
|                                    |                                                                                        |            |            |   |         |          |   |                                                  |            |   |            
|BALANCEDecember 31, 2004           |                                                                                        | 10,604,584 |            |   | 106,046 |          |   | 21,894,446                                       |            |   | (40,274,293
|                                    | Issuance of common stock, net of offering costs (August 2005)                          |            | 6,721,814  |   |         | 67,218   |   |                                                  | 29,210,558 |   |            
|                                    | Issuance of stock related to option exercises                                          |            | 63,924     |   |         | 639      |   |                                                  | 14,240     |   |            
|                                    | Compensation expense related to stock options                                          |            |           |   |         |         |   |                                                  | 696,204    |   |            
|                                    | Issuance of common stock in exchange for reduction of milestones payable (August 2005) |            | 600,000    |   |         | 6,000    |   |                                                  | 3,000,000  |   |            
|                                    | Modification of 14,887 warrants (August 2005)                                          |            |           |   |         |         |   |                                                  | 18,925     |   |            
|                                    | Net loss                                                                               |            |           |   |         |         |   |                                                  |           |   |            
|                                    |                                                                                        |            |            |   |         |          |   |                                                  |            |   |            
|BALANCEDecember 31, 2005           |                                                                                        | 17,990,322 |            |   | 179,903 |          |   | 54,834,373                                       |            |   | (46,718,539
|                                    | Issuance of common stock, net of offering costs (March 2006)                           |            | 10,233,464 |   |         | 102,335  |   |                                                  | 33,266,653 |   |            
|                                    | Issuance of stock related to option exercises                                          |            | 58,891     |   |         | 589      |   |                                                  | 8,656      |   |            
|                                    | Compensation expense related to stock options                                          |            |           |   |         |         |   |                                                  | 261,171    |   |            
|                                    | Net loss                                                                               |            |           |   |         |         |   |                                                  |           |   |            
|                                    |                                                                                        |            |            |   |         |          |   |                                                  |            |   |            
|BALANCEDecember 31, 2006           |                                                                                        | 28,282,677 |            | $ | 282,827 |          | $ | 88,370,853                                       |            | $ | (67,259,175
|                                    |                                                                                        |            |            |   |         |          |   |                                                  |            |   |            
|                                    | Issuance of common stock, net of offering costs (December 2007)                        |            | 10,191,083 |   |         | 101,911  |   |                                                  | 17,750,327 |   |            
|                                    | Issuance of stock related to option exercises                                          |            | 29,227     |   |         | 292      |   |                                                  | 4,296      |   |            
|                                    | Compensation expense related to stock options                                          |            |           |   |         |         |   |                                                  | 734,056    |   |            
|                                    | Net loss                                                                               |            |           |   |         |         |   |                                                  |           |   |            
|                                    |                                                                                        |            |            |   |         |          |   |                                                  |            |   |            
|BALANCEDecember 31, 2007           |                                                                                        | 38,502,987 |            | $ | 385,030 |          | $ | 106,859,532                                      |            | $ | (99,583,588
|                                    |                                                                                        |            |            |   |         |          |   |                                                  |            |   |            

See notes to consolidated financial statements.

38

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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, |        
|------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ---------------------------------- | ------------------------------------------------ | -------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:             |                                                                                   |                                                                    |                                    |                                                  |        
|                                                  | Net loss                                                                          |                                                                    | $                                  | (32,324,413                                      | )      
|                                                  | Adjustments to reconcile net loss to net cash flows used in operating activities: |                                                                    |                                    |                                                  |        
|                                                  |                                                                                   | Depreciation and amortization                                      |                                    |                                                  | 206,755
|                                                  |                                                                                   | Non-cash interest expense                                          |                                    |                                                  | 37,768 
|                                                  |                                                                                   | Stock compensation expense                                         |                                    |                                                  | 734,056
|                                                  |                                                                                   | Non-cash research and development                                  |                                    |                                                  |       
|                                                  |                                                                                   | Non-cash settlement of milestone payment                           |                                    |                                                  |       
|                                                  |                                                                                   | Gain on sale of interest in Sarawak Medichem Pharmaceuticals (SMP) |                                    |                                                  |       
|                                                  |                                                                                   | Loss on disposal                                                   |                                    |                                                  | 1,761  
|                                                  |                                                                                   | Changes in operating assets and liabilities:                       |                                    |                                                  |        
|                                                  |                                                                                   |                                                                    | Clinical supplies                  |                                                  |        
|                                                  |                                                                                   |                                                                    | Accounts receivable, related party |                                                  |        
|                                                  |                                                                                   |                                                                    | Prepaid expenses                   |                                                  |        
|                                                  |                                                                                   |                                                                    | Other assets                       |                                                  |        
|                                                  |                                                                                   |                                                                    | Accounts payable                   |                                                  |        
|                                                  |                                                                                   |                                                                    | Accrued expenses                   |                                                  |        
|                                                  |                                                                                   |                                                                    | Licenses payable                   |                                                  |        
|                                                  |                                                                                   |                                                                    | Accrued interest on debt           |                                                  |        
|                                                  |                                                                                   |                                                                    |                                    |                                                  |        
|                                                  |                                                                                   |                                                                    |                                    | Net cash flows from operating activities         |        
|                                                  |                                                                                   |                                                                    |                                    |                                                  |        
|CASH FLOWS FROM INVESTING ACTIVITIES:             |                                                                                   |                                                                    |                                    |                                                  |        
|                                                  | Purchase of property and equipment                                                |                                                                    |                                    | (58,436                                          | )      
|                                                  | Proceeds from the sale of SMP                                                     |                                                                    |                                    |                                                 |        
|                                                  | Proceeds from the sales of investments                                            |                                                                    |                                    |                                                 |        
|                                                  | Purchase of investments                                                           |                                                                    |                                    |                                                 |        
|                                                  |                                                                                   |                                                                    |                                    |                                                  |        
|                                                  |                                                                                   |                                                                    |                                    | Net cash flows from investing activities         |        
|                                                  |                                                                                   |                                                                    |                                    |                                                  |        
|CASH FLOWS FROM FINANCING ACTIVITIES:             |                                                                                   |                                                                    |                                    |                                                  |        
|                                                  | Proceeds from issuance of common stock and capital contributions                  |                                                                    |                                    | 17,852,238                                       |        
|                                                  | Proceeds from issuance of notes payable                                           |                                                                    |                                    |                                                 |        
|                                                  | Payments on notes payable                                                         |                                                                    |                                    |                                                 |        
|                                                  | Proceeds from grants                                                              |                                                                    |                                    |                                                 |        
|                                                  | Proceeds from stock options exercised                                             |                                                                    |                                    | 4,588                                            |        
|                                                  | Payments on capital leases                                                        |                                                                    |                                    | (19,436                                          | )      
|                                                  |                                                                                   |                                                                    |                                    |                                                  |        
|                                                  |                                                                                   |                                                                    |                                    | Net cash flows from financing activities         |        
|                                                  |                                                                                   |                                                                    |                                    |                                                  |        
|NET (DECREASE) INCREASE IN CASH                   |                                                                                   |                                                                    | (8,729,956                         | )                                                |        
|CASHBeginning of year/period                     |                                                                                   |                                                                    | 27,054,947                         |                                                  |        
|                                                  |                                                                                   |                                                                    |                                    |                                                  |        
|CASHEnd of year/period                           |                                                                                   | $                                                                  | 18,324,991                         |                                                  | $      
|                                                  |                                                                                   |                                                                    |                                    |                                                  |        
|SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION: |                                                                                   |                                                                    |                                    |                                                  |        
|                                                  | Cash paid during the period for interest                                          |                                                                    | $                                  | 416,583                                          |        
|                                                  |                                                                                   |                                                                    |                                    |                                                  |        
|SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS   |                                                                                   |                                                                    |                                    |                                                  |        
|                                                  | Noncash investment activity:                                                      |                                                                    |                                    |                                                  |        
|                                                  | Purchase of property and equipment under capital leases                           |                                                                    | $                                  |                                                 |        
|                                                  | Capital expenses included in accounts payable                                     |                                                                    |                                    |                                                 |        
|                                                  | Noncash financing activity:                                                       |                                                                    |                                    |                                                  |        
|                                                  | Issuance of common shares for licenses                                            |                                                                    |                                    |                                                 |        
|                                                  | Issuance of common shares for reduction of milestone payment                      |                                                                    |                                    |                                                 |        
|                                                  | Debt discount                                                                     |                                                                    |                                    |                                                 |        
|                                                  | Deferred financing costs                                                          |                                                                    | $                                  |                                                 |        
|                                                  |                                                                                   |                                                                    |                                    |                                                  |        

See notes to consolidated financial statements.

39

---





ADVANCED LIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY  (A Development Stage Company)        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 AND
FOR THE PERIOD  FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, 2007

1.    Nature of Business

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

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

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

In
April 2005, we filed a registration statement with the Securities and Exchange Commission ("the SEC") covering the proposed sale by the Company of its common stock to the public. In
June 2005, the Board approved the amendment and restatement of the Company's Articles of Incorporation to provide for an increase in the number of authorized shares of common stock and preferred stock
to 60,000,000 shares and 5,000,000 shares, respectively, and a 3.97-for-1 stock split of the Company's common stock. All references in the consolidated financial statements to
shares of common stock, common stock options, common stock prices and per share of common stock amounts have been adjusted retroactively for all periods presented to reflect this stock split. In
August 2005, the Company completed the initial public offering of its common stock in which the Company sold 6,400,000 shares of common stock to the public at $5.00 per share, resulting in gross
proceeds of $32.0 million. The Company also completed a concurrent offering of 600,000 shares to an existing stockholder in exchange for a $3.0 million reduction of a milestone payment
obligation under its license agreement with the stockholder. In September 2005, the Company's underwriters exercised their option to purchase 100,000 shares to cover over-allotments
resulting in additional gross proceeds of $500,000. In connection with these offerings, the Company paid approximately $2.3 million in underwriting discounts and incurred other offering
expenses of approximately $1.5 million. The net cash proceeds from the offerings were approximately $28.7 million.

In
March 2006, the Company raised approximately $33.4 million, net of underwriting discounts and offering expenses, in connection with the issuance of 10,233,464 shares of its
common stock at a price 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

40

---



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 AND FOR THE PERIOD
FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, 2007

1.    Nature of Business (Continued)

the
purchase price of $1 million. The parties mutually agree to waive any future legal claims otherwise arising out of the SMP joint venture.

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

The
Company's principal business activity is to conduct new drug research and development in the fields of infectious disease, oncology and inflammation. Since inception, the Company has
devoted substantially all of its efforts to activities such as financial planning, capital raising and product development, and has not derived significant revenues from its primary business activity.
Accordingly, the Company is in the development stage, as defined by Statement of Financial Accounting Standards ("SFAS") No. 7,Accounting and Reporting by Development
Stage Enterprises.

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. The Company does not have sufficient cash on-hand or other funding available to meet its obligations if it submits an NDA for cethromycin
thereby triggering a $10.0 million milestone payment to Abbott Laboratories. Given this uncertainty, there is significant doubt as to the Company's ability to continue as a going concern

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

The
Company has incurred losses since its incorporation in January 1999 and has funded its operations to date primarily from debt financings and capital contributions from its founder
and Chief Executive Officer, proceeds of the IPO and the subsequent private placements. The Company will not be generating any product-based revenues or realizing cash flows from operations in the
near term, and will require additional financing to meet its milestone obligation that are trigged upon filing the NDA for cethromycin. The Company is involved in active discussions with several
potential commercial partners and anticipates securing a partner during 2008. The Company believes, based upon current market conditions, a commercial partnership agreement would include a series of
milestone payments, including up-front milestones, that would fund the Abbott milestone payments due upon filing the NDA and approval, if any, of the NDA by the FDA. Although management
believes the Company could secure a commercial partnership, there can be no assurances that such partnership will be available at terms acceptable to the Company, if at all. The accompanying financial
statements do not include any adjustments that might result from the outcome of this uncertainty.

41

---



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 AND FOR THE PERIOD
FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, 2007

2.    Summary of Significant Accounting Policies

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

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

InvestmentsThe Company has, at times, invested in marketable debt securities which were classified as
available-for-sale, the fair value of which was determined using currently available market prices. The Company reviews the carrying value of
investments each quarter to determine whether an other than temporary decline in market value exists. If such a decline is deemed to have occurred, the investment is written-down with a
charge to other (income) expense, net. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a component of
stockholders' equity in accumulated other comprehensive loss. Marketable securities available for current operations are classified in the balance sheet as current assets; marketable securities held
for long-term purposes are classified as noncurrent assets. Interest income and realized gains and losses on securities are included in "Interest income" in the statements of operations.
As of December 31, 2007 and 2006, the Company had no marketable securities and therefore no unrealized holding gains or losses were recognized in the statements of operations and stockholders
equity.

Property and EquipmentProperty and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful life of three to five years. Assets under capital leases were recorded at the present value of the minimum lease payments and are amortized
over the shorter of their estimated useful lives or the term of the respective leases using the straight-line method. Maintenance and repair costs are expensed as incurred. Fixed assets
capitalized under capital leases amounted to $30,000 and $71,000 as of December 31, 2007 and 2006, net of accumulated depreciation of $12,000 and $34,000, as of December 31, 2007 and
2006, respectively.

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.

Fair Value MeasurementsIn September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157,Fair Value Measurements("SFAS 157"). SFAS 157 provides a definition of fair value, establishes acceptable methods of
measuring fair value and expands disclosures for fair value measurements. The principles apply under accounting pronouncements which require measurement of fair value. SFAS 157 is effective for
fiscal years beginning after November 15, 2007. Early adoption is permitted. The Company does not expect the adoption of SFAS 157 to have a material impact on its statements of financial
position, results of operations and cash flows.

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities("SFAS 159"). SFAS 159 permits an entity to irrevocably elect fair value on a

42

---



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 AND FOR THE PERIOD
FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, 2007

2.    Summary of Significant Accounting Policies (Continued)

contract-by-contract
basis as the initial and subsequent measurement attribute for many financial assets and liabilities and certain other items including insurance contracts.
Entities electing the fair value option would be required to recognize changes in fair value in earnings and to expense upfront cost and fees associated with the item for which the fair value option
is elected. FAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before
November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157,Fair Value Measurements.The Company does not
expect the adoption of SFAS 159 to have a material impact on its statements of financial position, results of operations and cash flows.

Research and Development ExpensesResearch and development expenses consist of internal research costs
and fees paid for contract research in conjunction with the research and development of the Company's proprietary product portfolio. All such costs are expensed as incurred including
in-process research and development. Clinical trial costs incurred by third parties are expensed as the contracted work is performed. The Company estimates both the total cost and time
period of the trials and the percent completed as of that accounting date. Research and development expenses resulting from contracts that require payments based upon the progress towards completion
of certain milestones are estimated based upon the percentage of completion method. The Company believes that the estimates made as of December 31, 2007 are reflective of the actual expenses
incurred as of that date.

The
company recognizes in-process research and development in accordance with FASB Interpretation No. 4,Applicability of FASB Statement
No. 2 to Business Combinations Accounted for by the Purchase Methodand the AICPA Technical Practice Aid,Assets Acquired in a Business
Combination to be used in Research and Development activities: A Focus on Software, Electronic Devices, and Pharmaceutical Industries.Assets to be used in research and
development activities, specifically, compounds that have yet to receive new drug approval from the FDA and would have no alternative use should approval not be given, are immediately charged to
expense when acquired.

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Small Business Innovation Research grant revenue 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 amount of the Company's financial instruments, which
include cash equivalents, investments, accounts payable and long-term obligations, approximate their fair values.

Income TaxesDeferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are

43

---



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 AND FOR THE PERIOD
FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, 2007

2.    Summary of Significant Accounting Policies (Continued)

expected
to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company
has determined that the deferred tax asset does not meet the "more likely than not" criteria under SFAS No. 109,Accounting for Income Taxes,and, accordingly, a valuation allowance has been recorded to reduce the net deferred tax asset to zero.

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

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

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

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

In
December 2007, the FASB issued SFAS No. 141 (revised 2007) ("SFAS 141R"), "Business Combinations" and SFAS No. 160 ("SFAS 160"), "Noncontrolling Interests
in Consolidated Financial Statements, an amendment of Accounting Research Bulleting No. 51." SFAS 141R will change how business acquisitions are accounted for and will impact financial
statements both on the acquisition date and in subsequent periods. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling
interest and classified as a component of equity. SFAS 141R and SFAS 160 are effective beginning the first fiscal quarter of 2010. Early adoption is not permitted. The Company does not
expect the adoption of either SFAS 141R or SFAS 160 will have a material impact on its statements of financial position, results of operations and cash flows.

44

---



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 AND FOR THE PERIOD
FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, 2007

3.    Joint Venture

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

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

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

4.    Related Party Transactions

In January 2004, the Company initiated a management services agreement with Flavin Ventures whereby the Company provides administrative management services to
Flavin Ventures and its subsidiaries Shamrock Structures, BioStart Property Group and Molecular Formulations. The agreement also requires Flavin Ventures and its related subsidiaries to reimburse the
Company for rent and related facility costs based upon the actual square footage occupied by each of the companies. Fee income recognized related to this agreement for the year ended
December 31, 2007, 2006 and 2005 totaled approximately $0, $0 and $61,000, respectively. In December 2005, the Company was notified that the management services provided under this agreement
would no longer be required

The
Company's Chief Executive Officer, Michael T. Flavin, loaned $2.0 million to the Company in 2001 (see Note 5). Interest expense of $155,000 $175,000 and $199,000 was
recorded related to the note, for the twelve months ended December 31, 2007, 2006 and 2005, respectively.

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

The
Company leases facilities from the BioStart Property Group ("BioStart"), a subsidiary of Flavin Ventures. Lease payments totaled approximately $272,000, $263,000 and $286,000 for the
years ended December 31, 2007, 2006 and 2005, respectively (see Note 11). In April 2006, the Company

45

---



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 AND FOR THE PERIOD
FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, 2007

4.    Related Party Transactions (Continued)

amended
its lease agreement with BioStart. Under the terms of the amendment, the Company may reduce its required rental and common area maintenance payments to BioStart to offset for any shared
expenses between the Company and other tenants in the building. In 2007 and 2006, such rental and common area maintenance reductions totaled $3,000 and $2,800 and $9,700 and $9,100, respectively.

5.    Long Term Obligations

In September 2001, the Company entered into a $2.0 million promissory note with the Chief Executive Officer of the Company which bears interest at 7.75%.
Principal plus unpaid accrued interest was due in a lump sum on December 31, 2007. On December 21, 2007 the note was extended to January 5, 2009, all other terms remain unchanged
and in effect. As of December 31, 2007 and 2006, the Company had $2.0 million, including accrued interest, outstanding under the note.

The
Company had a $4.0 million straight line of credit with a financial institution with a fixed interest rate of 6.75% per annum and a maturity date of January 1, 2008. On
December 21, 2007, the Company reached an agreement to restructure the line by extending the maturity date to January 1, 2010, changing the form of the line to a revolving line of credit
and changing the fixed interest rate to a floating rate indexed to the Prime rate. Borrowings under the line will bear interest at the prevailing Prime rate, less 75 basis points. The interest rate
cannot be lower than 6.25% nor can the rate exceed 8.00%. The new note was executed on January 31, 2008. 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 Laboratories 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. As of December 31, 2007 and 2006, the Company had $3.9 million outstanding under the note.

6.    Stockholders' Equity

Authorized CapitalAs of December 31, 2007, the authorized capital stock of the Company
consists of 60,000,000 shares of voting common stock authorized for issuance with a par value of $0.01 and 5,000,000 shares of undesignated preferred stock which may be issued from time to time in one
or more series The Company has not issued any preferred stock as of December 31, 2007.

7.    Minority Interest

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

As
of December 31, 2007, 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

46

---



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 AND FOR THE PERIOD
FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, 2007

7.    Minority Interest (Continued)

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, 2007 and 2006 are approximately $4.0 million and $3.8 million respectively, including approximately
$1.5 million and $1.3 million of unpaid dividends.

8.    Incentive Stock Plan

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

In
April 2005, our board of directors adopted the 2005 Stock Incentive Plan. The 2005 Stock Incentive Plan permits awards of non-qualified stock options, incentive stock
options, stock appreciation rights, restricted stock, restricted stock units and performance shares. In addition, the plan provides an opportunity for the deferral of salary and bonuses into
restricted stock units and the deferrals of gains or payments due upon the vesting or exercise of awards under our stock incentive plan. As of December 31, 2007, only non-qualified
stock options have been issued under this plan.

47

---



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 AND FOR THE PERIOD
FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, 2007

8.    Incentive Stock Plan (Continued)

The maximum number of shares of common stock that may be subject to awards under our incentive plans is 2,786,107. 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, 2007, 743,880 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 $734,000, $261,000 and $700,000 for 2007, 2006 and 2005, 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 years ended December 31, 2007, 2006 and 2005:

|Options                                  |  | Shares    |   | Weighted
Average
Exercise
Price |      | Weighted
Average
Remaining
Term |     | Aggregate
Intrinsic
Value
|---------------------------------------- |  | --------- | - | ------------------------------- | ---- | ------------------------------- | --- | -------------------------
|Outstanding at January 1, 2007           |  | 1,162,460 |   | $                               | 2.36 |                                 | 7.2 |                          
|Granted                                  |  | 739,300   |   | $                               | 2.64 |                                 |     |                          
|Exercised                                |  | (29,227   | ) | $                               | 0.16 |                                 |     |                          
|Expired                                  |  |          |   |                                 |      |                                 |     |                          
|Forfeited                                |  | (24,033   | ) | $                               | 3.00 |                                 |     |                          
|                                         |  |           |   |                                 |      |                                 |     |                          
|Outstanding at December 31, 2007         |  | 1,848,500 |   | $                               | 2.50 |                                 | 7.3 |                          
|                                         |  |           |   |                                 |      |                                 |     |                          
|Options exercisable at December 31, 2007 |  | 1,162,398 |   | $                               | 2.32 |                                 | 7.3 |                          
|                                         |  |           |   |                                 |      |                                 |     |                          

The
weighted-average grant-date fair value of options granted during the years 2007, 2006 and 2005 was approximately $1.42, $1.38 and $0.83, respectively. The fair value of
options vested during the years 2007, 2006 and 2005 was approximately $676,000, $244,000 and $456,000, respectively. The total intrinsic value of options exercised during the years ended
December 31, 2007, 2006 and 2005 was approximately $62,000, $174,000 and $336,000, respectively.

As
of December 31, 2007, there was approximately $1.2 million 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, 2007, 2006 and 2005 was approximately $4,600, $9,000 and $15,000, respectively. The Company
issues new shares of common stock as a result of stock option exercises. No tax benefits have been recognized in connection with the stock option exercises due to the Company's net operating losses
and full valuation allowance on its deferred tax assets.

48

---



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 AND FOR THE PERIOD
FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, 2007

8.    Incentive Stock Plan (Continued)

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

2007

2006

2005Expected volatility

62%  66%

61%  66%

54%  64%Weighted-average volatility

65.5%

61.9%

61.0%Expected dividends

0.0%

0.0%

0.0%Expected term (in years)

6.5

6.5

5.0  6.5Risk-free rate

4.63%  4.65%

4.60%  4.78%

3.7%  4.9%


Due
to the limited data available of the Company's historical stock price volatility, expected volatility is computed based upon historical volatilities of peer companies with similar
product portfolios. The expected term of options granted is derived from the average of the vesting period and the term of the option as defined in the Plans, following the guidance in SEC Staff
Accounting Bulletin Nos. 107 and 110.

9.    Income Taxes

Net deferred tax assets consist primarily of net operating loss ("NOL") carryforwards. Realization of future tax benefits related to deferred tax
assets is dependent on many factors, including the Company's ability to generate future taxable income in the near term. Due to the uncertainty of future earnings, management is unable to predict
whether these net deferred tax assets will be realized and, accordingly, has recorded a full valuation allowance against these assets.

NOL
carryforwards of approximately $72.3 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 $1.8 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 $4.1 million in a year, $52.5 million of the unaffected NOL carryforwards are available. If some or all of the
$4.1 million NOL is not utilized in a tax year, the excess carries forward. This excess increases the $4.1 million available in the succeeding year. Tax credits have been similarly
limited.

The
Financial Accounting Standards Board issued Interpretation No. 48Accounting for Uncertainty in Income Taxesan Interpretation of FASB
Statement No. 109("FIN 48") which requires reporting of taxes based on tax positions which meet a more likely than not standard and which are measured at the
amount that is more likely than not to be realized. Differences between financial and tax reporting which do not meet this threshold are required to be recorded as unrecognized tax benefits.
FIN 48 also provides guidance on the presentation of tax matters and the recognition of potential IRS interest and penalties. The provisions of FIN 48 were adopted by the Company on
January 1, 2007, and had no

49

---



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 AND FOR THE PERIOD
FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, 2007

9.    Income Taxes (Continued)

effect
on the Company's financial position, cash flows or results of operations upon adoption as the Company does not have any unrecognized tax benefits. The Company also evaluated its tax positions
as of December 31, 2007 and reached the same conclusion.

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

The
Company files tax returns in the US, and in the state of Illinois. The tax years 2004 through 2007 remain open to examination by the major taxing jurisdictions to which the Company
is subject. The Company has not made any cash payments for income taxes since its inception.

The
following is a summary of the significant components of the Company's deferred tax assets as of December 31, 2007 and 2006:

2007

2006Deferred tax assets:Net operating losses

$
28,209,928

$
15,169,067Stock based compensation


663,532


372,328Depreciation


64,965


28,209In-process research and development


7,094,998


7,890,699Other accruals and reserves


305,178


255,028Less valuation allowance


(36,338,601
)

(23,715,331
)Deferred tax assetnet

$


$



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

Years ended December 31,2007

2006Tax provision at the statutory federal rate

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

5
%
5
%Valuation allowance

-39
%
-39
%Effective tax rate

0
%
0
%


10.    Employee Benefit Plan

The Company has established a 401(k) plan that covers all employees who meet minimum eligibility requirements. Eligible persons can defer a portion of their
annual compensation into the 401(k) plan subject to certain limitations imposed by the Internal Revenue Code. Employees' elective deferrals are immediately vested upon contribution to the 401
(k) plan. The company matches employee contributions at a rate of 50% up to 6% of the employee's annual salary. Company

50

---



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 AND FOR THE PERIOD
FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, 2007

10.    Employee Benefit Plan (Continued)

contributions
vest 25% per year after the first year of service has been completed. Approximately $72,000, $55,000 and $38,000 were recognized as expense in 2007, 2006 and 2005, respectively.

11.    Commitments

Lease ObligationsThe Company leases facilities under an operating lease with the BioStart Property
Group, a subsidiary of Flavin Ventures. The lease has a five-year term commencing on September 1, 2003 and may be renewed in writing 60 days prior to the lease termination
date. The minimum monthly rental payment is $20,000 with an additional amount based on the Company's proportionate share of the variable building costs. Additionally, the Company leases capital
equipment of approximately $30,000 under a capital lease.

Minimum
annual payments under operating leases and the present value of minimum capital lease payments as of December 31, 2007 are as follows:

Operating
Leases

Capital lease
ObligationsYear ending December 31,2008


160,648


10,1012009





10,1412010





4,6552011





2012





Total

$
160,648


24,897Less amount representing interest





4,820Present value of minimum lease payments




$
20,077


Rental
expense relating to the Flavin Ventures lease totaled approximately $230,000, $207,000 and $224,000 in 2007, 2006 and 2005, respectively.

Common
area maintenance expense totaled approximately $41,000, $45,000 and $48,000 in 2007, 2006 and 2005, 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 development program largely under contracts
with third parties. To date, contracts totaling $42.2 million have been executed related to the cethromycin program, principally related to the pivotal phase III cethromycin clinical
trials, but also includes anthrax related studies. The remaining balance of $7.2 million is expected to be paid over the next six months.

51

---



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 AND FOR THE PERIOD
FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, 2007

11.    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, IL. Under the terms of the grant, the Company is to utilize or obligate the funds for construction costs associated with expanding its
corporate headquarters between January 31, 2005 and December 31, 2007 ("construction period") and create 100 full-time jobs at the same location between January 31,
2005 and December 31, 2010 ("grant period"). Funds that are not expended in a manner consistent with the grant award are to be repaid at the end of the construction period. In addition, 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. As of December 31, 2007, the entire grant had been spent or obligated and therefore the $500,000 has been classified as a long-term liability as the Company
must create and maintain positions created during the grant period through January 31, 2010. If the Company does not create and maintain the 100 positions, it will owe the State of Illinois
grant proceeds equal to a pro-rata share of the positions that were created and retained as compared to the total created during the grant period. Through December 31, 2007, sixteen
new jobs have been created and retained since the grant was awarded.

12.    Research and Development Alliances

Abbott LaboratoriesIn December 2004, the Company entered into an agreement with Abbott Laboratories
under which it acquired from Abbott a license to certain patent applications, patents and proprietary technology relating to cethromycin. Under the terms of the initial agreement which was
subsequently modified on August 1, 2005, the Company paid $13.0 million in license fees and milestones and issued 1,722,569 shares of its common stock to Abbott. The Company will owe
Abbott $10.0 million if it submits an NDA and $30.0 million if and when the FDA approves the NDA. The Company also agreed to pay Abbott $2.5 million upon cethromycin reaching
$200 million in aggregate net sales and $5.0 million upon the drug reaching $400 million in aggregate net sales. Finally, the Company will owe Abbott royalty payments of 19.0% on
the first $100 million of aggregate net sales of cethromycin, 18.0% on net sales once aggregate net sales exceed $100 million but are less than $200 million, and 17.0% on all net
sales once aggregate net sales exceed $200 million.

University of Illinois at ChicagoOn December 2, 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 $41,000, $114,000 and $47,000 in 2007, 2006 and 2005,
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.

52

---



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 AND FOR THE PERIOD
FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, 2007

12.    Research and Development Alliances (Continued)

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.

Argonne National LaboratoryIn 2003, the Company acquired an exclusive license, under patent rights
and know-how controlled by Argonne National Laboratory, to develop, make, use and sell in the United States and its territories a class of peptides and related compounds to inhibit the
formation of amyloid fibrils. These fibrils are implicated in a number of diseases such as Alzheimer's disease and amyloidosis. In consideration of this license, the Company agreed to pay royalties to
Argonne equal to 4% of net sales of licensed products by the Company, its affiliates and
sublicensees, as well as 10% of any benchmark or milestone fees it receives from sublicensees. The Company also agreed to reimburse Argonne for the cost of ongoing patent prosecution and maintenance.
The license is subject to certain reserved rights for the U.S. Government based on Federal statutes, including the Government's right to develop, make, use, and sell the amyloid inhibiting peptides
pursuant to any treaties or agreements with foreign governments that the U.S. Government may enter, and the Government's right to require the Company to sublicense the rights granted in certain
limited circumstances. The Company is obligated to provide at least one half-time employee to this project until completion of Phase I clinical trials. Argonne has the right to
terminate the agreement if due diligence requirements, including the devotion of one half-time employee, are not met.

13.    Net Loss Per Share Available to Common Shareholders

Basic loss per share available to common shareholders is computed by dividing net loss available to common shareholders by the number of weighted average common
shares outstanding during the reporting period. Diluted loss per share available to common shareholders is calculated to give effect to all potentially dilutive common shares that were outstanding
during the reporting period. The computation of diluted shares outstanding for the periods ended December 31, 2007, 2006 and 2005 excludes incremental shares of 12,075,661, 6,294,079 and
950,721 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, 2007, 2006 and 2005.

53

---



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 AND FOR THE PERIOD
FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, 2007

14.    Unaudited Quarterly Financial Data

Selected quarterly data for 2007 and 2006 is as follows:

|                                                 |                   | 2007 |            
|------------------------------------------------ | ----------------- | ---- | -----------
|
|Revenue                                          |                   | $    |           
|Research and development expenses                |                   |      | 9,050,912  
|Selling, general and administrative expenses     |                   |      | 1,548,163  
|Operating loss                                   |                   |      | (10,599,075
|Net loss available to common shareholders        |                   |      | (10,452,690
|Loss per share available to common shareholders: |                   |      |            
|                                                 | Basic and Diluted |      | $          

|
|

|                                                 |                   | 2006 |           
|------------------------------------------------ | ----------------- | ---- | ----------
|
|Revenue                                          |                   | $    | 35,127    
|Research and development expenses                |                   |      | 2,260,378 
|Selling, general and administrative expenses     |                   |      | 1,149,170 
|Operating loss                                   |                   |      | (3,374,421
|Net loss available to common shareholders(1)     |                   |      | (3,282,183
|Loss per share available to common shareholders: |                   |      |           
|                                                 | Basic and Diluted |      | $         

---

******

54

---





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

None.

Item 9A.Controls and Procedures.

Disclosure Controls and Proceedures

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 SEC Rules 13a-15(e) and15d-15(e) as of the end of the period covered by this report. Based upon
that evaluation, management has concluded that our disclosure controls and procedures are effectively designed to ensure that information we are required to disclose in reports that we file or submit
under the Securities Exchange Act of 1934 ("Exchange Act") is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure and is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

Management Report on Internal Control over Financial Reporting

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



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

Our
management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2007. 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, 2007, our internal control over financial reporting is effective based on those criteria.

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

55

---



of
the Securities and Exchange Commission that permit the Company to provide only management's report in this Annual Report.

Changes in Internal Control

During the period covered by this report, there were no significant 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.

56

---





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 "2008 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 2008
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 2008 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)
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | ----------------------------------------------------------------------------------------------------------------------------------------
|
|Equity compensation plans approved by security holders     |  | 12,075,661                                                                                  |  | $                                                                           | 2.91 |                                                                                                                                         
|Equity compensation plans not approved by security holders |  |                                                                                            |  |                                                                             |     |                                                                                                                                         
|                                                           |  |                                                                                             |  |                                                                             |      |                                                                                                                                         
|Total                                                      |  | 12,075,661                                                                                  |  | $                                                                           | 2.91 |                                                                                                                                         

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 2008
Proxy Statement.

Item 14.Principal Accountant Fees and Services.

The information required by this item is incorporated by reference to the information set forth in the section entitled "Fees of Independent Registered Public
Accounting Firm and Audit Committee Report" within the 2008 Proxy Statement.

57

---



PART IV

Item 15.Exhibits and Financial Statement Schedules.

(a)    (1)    Financial Statements



(b)    Exhibits:



58

---





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 19th day of February, 2008.

| |  | ADVANCED LIFE SCIENCES HOLDINGS, INC.
| |  | -------------------------------------
| |  | By:                                  
| |  | Name:                                
| |  | Title:                               
| |  | By:                                  
| |  | Name:                                
| |  | Title:                               

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)                                |  | February 19, 2008
|/s/JOHN L. FLAVINJohn L. Flavin                       |  | President and Director                                                                            |  | February 19, 2008
|/s/R. RICHARD WIELAND IIR. Richard Wieland II         |  | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |  | February 19, 2008
|/s/SCOTT F. MEADOWScott F. Meadow                     |  | Director                                                                                          |  | February 19, 2008
|/s/TERRY W. OSBORN, PH.D.Terry W. Osborn, Ph.D.       |  | Director                                                                                          |  | February 19, 2008
|/s/THERON E. ODLAUG, PH.D.Theron E. Odlaug, Ph.D.     |  | Director                                                                                          |  | February 19, 2008

59

---



|/s/RICHARD A. RECKRichard A. Reck                         |  | Director |  | February 19, 2008
|--------------------------------------------------------- |  | -------- |  | -----------------
|/s/ISRAEL RUBINSTEIN, M.D.Israel Rubinstein, M.D.         |  | Director |  | February 19, 2008
|/s/ROSALIE SAGRAVES, PHARM. D.Rosalie Sagraves, Pharm. D. |  | Director |  | February 19, 2008
|/s/THOMAS V. THORNTONThomas V. Thornton                   |  | Director |  | February 19, 2008

60

---





EXHIBIT INDEX

|      |    |                                                                                                                                                                                                                                                                           
|----- | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1   |    | Amended and Restated Certificate of Incorporation of Advanced Life Sciences Holdings, Inc. (as filed in our Registration Statement on Form S-1/A as exhibit 3.2 on July 1, 2005)                                                                                          
|3.2   |    | Certificate of Incorporation of Advanced Life Sciences, Inc. (as filed in our Amended Registration Statement on Form S-1/A as exhibit 3.1 on June 3, 2005)                                                                                                                
|3.3   | *  | Amended By-laws of Advanced Life Sciences Holdings, Inc. (as filed in our Current Report on Form 8-K as exhibit 3.1 on December 14, 2007)                                                                                                                                 
|4.1   |    | 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)                                                                                           
|4.2   |    | Form of Warrant to Purchase Shares of Common Stock of Advanced Life Sciences Holdings, Inc. Stock. (as filed in our Current Report on Form 8-K as exhibit 4.2 on December 12, 2007)                                                                                       
|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 R. Richard Wieland II. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.3 on
November 14, 2007)                                                  
|10.4  | ** | 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)                                                 
|10.5  | ** | 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)                                                         
|10.6  | ** | Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and Patrick W. Flavin. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.6 on
November 14, 2007)                                                      
|10.7  | ** | 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)                                                  
|10.8  | ** | Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and Michael J. Cogan. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.8 on
November 14, 2007)                                                       
|10.9  | ** | 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)
|10.10 | ** | Advanced Life Sciences Holdings, Inc. 2005 Stock Incentive Plan. (as filed in our Registration Statement on Form S-1 as exhibit 10.19 on April 28, 2005)                                                                                                                  
|10.11 | ** | Form of option agreement                                                                                                                                                                                                                                                  
|10.12 | ** | 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)                                                                                                                                   
|10.13 |    | Business Loan Amendment dated December 21, 2007, between Advanced Life Sciences Holdings, Inc. and Leaders Bank.(as filed in our Current Report on Form 8-K as exhibit 10.1 on December 26,
2007)                                                                         

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|10.14 |   | Amended and Restated Promissory Note Loan Amendment dated December 21, 2007, between Advanced Life Sciences Holdings, Inc. and Michael T. Flavin. (as filed in our Current Report on Form 8-K as
exhibit 10.2 on December 26, 2007)                                      
|----- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.15 |   | 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)                                           
|10.16 |   | 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)                                                                                 
|10.17 |   | 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)
|10.18 |   | Four 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)                                                                                   
|10.19 |   | 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)                  
|10.20 |   | 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)                         
|10.21 |   | 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)                                                                
|21.1  |   | Subsidiaries of Advanced Life Sciences Holdings, Inc. (as filed in our Registration Statement on Form S-1 as exhibit 21.1 on April 28, 2005)                                                                                                                             
|21.2  |   | Form of Indemnification Agreement (as filed in our Amended Registration Statement on Form S-1/A as exhibit 10.21 on June 3, 2005)                                                                                                                                        
|23.1  | * | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                         
|31.1  | * | Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                     
|31.2  | * | Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                     
|32.1  | * | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 and Exchange Act Rule 13a-14(a)                                                                                                                                                          
|32.2  | * | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 and Exchange Act Rule 13a-14(a)                                                                                                                                                          

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