Use these links to rapidly review the document ~~TABLE~~Table OFof ~~CONTENTS~~Contents PART IV

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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, 2009
For the Fiscal Period Ended: December 31, 2010
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)


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

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

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

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

Title of Each Class		Name of exchange on which registered
Title of each Class		Name of exchange on which registered
None		None

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

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

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

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

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

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company ý

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

The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, ~~2009~~2010 was approximately $215.04 million (based upon the closing price of $0.5106 per common share as quoted on the OTC Bulletin Board). The registrant has no outstanding non-voting stock. For purposes of this computation, it is assumed that the shares of voting stock held by directors and officers would be deemed to be stock held by affiliates. Non-affiliated common stock outstanding at June 30, ~~2009~~2010 was 4190,~~107~~616,~~062~~003 shares.

Total common stock outstanding as of ~~February 26~~March 23, ~~2010~~2011 was 96323,~~366~~627,~~619~~533 shares.

Documents incorporated by reference

Certain sections of the Registrant's Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders for the year ended December 31, ~~2009~~2010 (the "~~2010~~2011 Proxy Statement") are to be filed with the Securities and Exchange Commission within 120 days after the registrant's fiscal year ended December 31, ~~2009~~2010 and are incorporated by reference into Part III of this Report.

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ADVANCED LIFE SCIENCES HOLDINGS, INC
INDEX
Form 10-K

~~PART I~~			PART I
~~Item 1.~~	Item 1.	~~Business~~	Business	1	1
~~Item 1A.~~	Item 1A.	~~Risk Factors~~	Risk Factors	15	16
~~Item 1B.~~	Item 1B.	~~Unresolved Staff Comments~~	Unresolved Staff Comments	30	31
~~Item 2.~~	Item 2.	~~Properties~~	Properties	30	31
~~Item 3.~~	Item 3.	~~Legal Proceedings~~	Legal Proceedings	30	31
~~Item 4.~~	Item 4.	~~Reserved~~	Reserved	30	31
~~PART II~~			PART II
~~Item 5.~~	Item 5.	~~Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities~~	Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31	32
~~Item 6.~~	Item 6.	~~Selected Financial Data~~	Selected Financial Data	32	33
~~Item 7.~~	Item 7.	~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~	Management's Discussion and Analysis of Financial Condition and Results of Operations	33	34
~~Item 7A.~~	Item 7A.	~~Quantitative and Qualitative Disclosures About Market Risk~~	Quantitative and Qualitative Disclosures About Market Risk	42	45
~~Item 8.~~	Item 8.	~~Financial Statements and Supplementary Data~~	Financial Statements and Supplementary Data	43	46
		Consolidated Balance Sheets as of December 31, 2009 and December 31, 2008		44
			Consolidated Balance Sheets as of December 31, 2010 and December 31, 2009		47
		Consolidated Statements of Operations for the years ended December 31, 2009, 2008, 2007 and period from inception (January 1, 1999) through December 31, 2009		45
			Consolidated Statements of Operations for the years ended December 31, 2010, 2009, 2008 and period from inception (January 1, 1999) through December 31, 2010		48
		Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2009, 2008, 2007 and period from inception (January 1, 1999) through December 31, 2009		46
			Consolidated Statements of Total Equity (Deficit) for the years ended December 31, 2010, 2009, 2008 and period from inception (January 1, 1999) through December 31, 2010		49
		Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008, 2007 and period from inception (January 1, 1999) through December 31, 2009		47
			Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009, 2008 and period from inception (January 1, 1999) through December 31, 2010		50
		~~Notes to Consolidated Financial Statements~~	Notes to Consolidated Financial Statements	48	51
~~Item 9.~~	Item 9.	~~Changes in and Disagreements with Accountants on Accounting and Financial Disclosure~~	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	65	70
~~Item 9A.~~	Item 9A.	~~Controls and Procedures~~	Controls and Procedures	65	70
~~Item 9B.~~	Item 9B.	~~Other Information~~	Other Information	66	71
~~PART III~~			PART III
~~Item 10.~~	Item 10.	~~Directors and Executive Officers of the Registrant~~	Directors and Executive Officers of the Registrant	66	71
~~Item 11.~~	Item 11.	~~Executive Compensation~~	Executive Compensation	66	71
~~Item 12.~~	Item 12.	~~Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters~~	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	66	71
~~Item 13.~~	Item 13.	~~Certain Relationships and Related Transactions~~	Certain Relationships and Related Transactions	66	71
~~Item 14.~~	Item 14.	~~Principal Accountant Fees and Services~~	Principal Accountant Fees and Services	67	71
~~PART IV~~			PART IV
~~Item 15.~~	Item 15.	~~Exhibits~~	Exhibits	67	72

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PART I

Item 1. Business.

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

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

Overview

•: Infectious Disease—Respiratory Tract Infections. We have an exclusive worldwide license (excluding Japan) from Abbott Laboratories ("Abbott") to develop and commercialize cethromycin (Restanza^TM), a second generation, once-a-day antibiotic for the treatment of respiratory tract infections. In December 2005, we initiated our pivotal Phase III clinical program for the treatment of mild-to-moderate community acquired bacterial pneumonia ("CABP"), the indication for which we are seeking Food and Drug Administration ("FDA") approval. In 2007, we successfully completed these two pivotal Phase III clinical trials. Cethromycin has been tested in approximately 5,600 human subjects in clinical trials to date. In September 2008, we submitted a New Drug Application ("NDA") for the use of cethromycin in CABP. In July 2009, we received a complete response letter from the FDA regarding cethromycin NDA for the outpatient treatment of adults with CABP. In its letter, the FDA indicated that they cannot approve the application for cethromycin in its current form and that, to gain approval, additional clinical data is required to demonstrate efficacy with defined statistical methodology. In August 2010, we reached an agreement with the FDA under the Special Protocol Assessment ("SPA") process, on the design of our planned Phase III study of cethromycin to treat CABP.
•: Infectious Disease—Biodefense. Along with our clinical work in the treatment of CABP, we are collaborating with several groups within the U.S. Government to evaluate cethromycin's potential in preventing inhalation anthrax and other high-priority bioterror agents. In March 2007, the FDA designated cethromycin an Orphan Drug for the prophylactic treatment of patients exposed to inhalation anthrax and in May 2007, cethromycin was shown to be 100%

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protective against a lethal dose of inhaled anthrax in non-human primates. In August 2008, we announced that the Defense Threat Reduction Agency ("DTRA") of the U.S. Department of Defense awarded us a two-year contract worth up to $3.8 million to fund NDA-enabling studies evaluating cethromycin's efficacy in combating Category A and B bioterror agents such as Fransicella tularensis (tularemia), Yersinia pestis (plague) and Burkholderia pseudomallei (melioidosis). In June 2009, we announced that a second non-human primate study involving cethromycin showed that a 14-day course of cethromycin achieved a 100% survival rate against an inhaled lethal dose of anthrax. In August 2009, we announced positive results from an animal study that was conducted to measure cethromycin's therapeutic efficacy in treating inhalation anthrax after symptoms of infection had developed. In September 2009, the FDA granted Orphan Drug Designation to cethromycin for the prophylactic treatment of plague and tularemia. Also in September 2009, we announced positive top-line results from a pivotal, non-human primate study involving cethromycin demonstrating statistical significance at a 90% survival rate against an inhaled lethal dose of plague. In December 2009, we announced positive top-line results from a pivotal, non-human primate study involving cethromycin against an inhaled lethal dose of tularemia. A 14-day course of cethromycin achieved a 100% survival rate at the doses tested. In March 2010, we announced that we received notice from the Biomedical Advanced Research and Development Authority ("BARDA") of the U.S. Department of Health and Human Services that it has completed its initial technical evaluation of our funding proposal for advanced development of cethromycin as a biodefense countermeasure and identified it as a scientifically and technically sound proposal important to program goals and objectives that may require further development and may be recommended for acceptance subject to funds availability. We were invited to submit additional information to allow BARDA to make a final determination on the appropriateness of the proposal to enter into contract negotiations. We are engaged in ongoing discussions with BARDA in light of recent amendments to the Broad Agency Announcement that would fund the development of cethromycin, if awarded. We also gained clarity from the FDA on the biodefense regulatory package required for submission in light of recent Anti-Infective Drugs Advisory Committee ("AIDAC") meetings discussing the use of the FDA's Animal Rule for approval of biodefense therapeutics. As anticipated, the FDA recommended that, in parallel with pivotal animal studies demonstrating efficacy under FDA's Animal Rule, we should complete the CABP clinical program and gain market approval to the CABP NDA prior to submitting an amended NDA for the biodefense indications.

•: Oncology. ALS-357 is a compound that has shown evidence of anti-tumor activity against malignant melanoma in preclinical studies. Currently available therapies have not had significant success at prolonging survival for patients with melanoma that has spread beyond the primary growth site. We believe that ALS-357 has the potential for either a topical or systemic formulation. We have established an open investigational new drug application (IND) for ALS-357 with the FDA. In August 2007, the FDA designated ALS-357 an Orphan Drug for the topical treatment of metastatic melanoma. In addition to the lead compound, we also have a preclinical analogue program underway and are generating new compounds under our medicinal chemistry platform. The ALS-357 program would require a partner to assist in the funding and advancement of this program.
•: Respiratory Disease. ALS-886 is a novel therapeutic in preclinical development for the treatment of inflammation-related tissue damage, including tissue damage associated with acute respiratory distress syndrome ("ARDS"). Patients suffering from ARDS have a high fatality rate, and there are currently only limited treatment options available. We have established an IND application for ALS-886 with the FDA. We expect that the first clinical study will involve approximately 40 patients to determine the safety profile of the compound in human subjects. In July 2008, we began a collaboration with the United Kingdom's Defence Science and Technology Laboratory

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

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("Dstl") to evaluate ALS-886 as a treatment for chemically induced lung injury. The ALS-886 program would require a partner to assist in the funding and advancement of this program.

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

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

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

Our Background

In June 1999, MediChem Life Sciences ("MediChem"), our former parent, exchanged its investment in 100% of the outstanding common stock of Advanced Life Sciences, Inc. ("ALS Inc.") for nonvoting preferred stock issued by ALS Inc. affecting a spin-off of ALS Inc. Prior to the spin-off, Dr. Michael Flavin, the sole stockholder, owned 100% of MediChem and ALS Inc., then a wholly-owned subsidiary of MediChem. As a result of the spin-off, Dr. Flavin became the sole common stockholder of ALS Inc. MediChem holds 100% of the preferred stock of our subsidiary, ALS Inc., which was issued in exchange for common stock held at the June 1999 spin-off. In 2004, Advanced Life Sciences Holdings, Inc. ("ADLS") was created as part of a recapitalization, and ALS, Inc. became a subsidiary of ADLS. ADLS has no preferred shares outstanding as of December 31, ~~2009~~2010.

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~~ 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~~ license agreement with Abbott. In September 2005, our underwriters exercised their option to purchase 100,000 shares to cover over-allotments resulting in additional gross proceeds of $500,000. In connection with these offerings, we paid approximately $2.3 million in underwriting discounts and incurred other offering expenses of approximately $1.5 million. The net cash proceeds from the offerings were approximately $28.7 million.

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

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

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

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

In ~~June~~September ~~2009~~2008, we entered into a Standby Equity Distribution Agreement (the "2008 SEDA") with YA Global ~~Master SPV~~Investments, ~~Ltd~~L.P. ("YA ~~SPV~~Global"), an affiliate of Yorkville Advisors, for the sale of up to $15.0 million of shares of our common stock over a two-year commitment period. ~~From~~For the ~~inception~~period of ~~the~~January ~~SEDA~~2009 through ~~December 31,~~the ~~2009~~end of the 2008 SEDA, we issued 34 9,~~102~~883,~~143~~994 shares to YA ~~SPV~~Global and received ~~proceeds of~~ approximately $93.49 million. In addition, ~~between~~in ~~the~~September ~~period of January 1~~2008, ~~2010~~we ~~and~~paid ~~February 26,~~YA ~~2010,~~Global wea ~~raised~~commitment ~~approximately~~fee of $~~1.8 million~~300,000 ~~and~~by ~~issued~~issuing 11393,~~441,609~~339 shares ~~through~~ ~~the usage~~ of ~~the~~our ~~SEDA facility. Shares of~~ common stock. ~~sold~~The ~~under~~Company ~~the~~and ~~SEDA~~YA inGlobal ~~excess~~agreed ofto ~~$9.0 million~~terminate ~~were sold with~~ the ~~consent~~2008 ofSEDA ~~our~~in ~~lender~~June ~~under our credit facility~~2009.

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

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

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~~Distribution~~placement ~~Agreement~~agent ~~dated~~for asthe ~~of September 29, 2008 ("Former SEDA")~~offering. ~~For~~In ~~the~~addition ~~period~~to ofcash ~~January 1,~~placement ~~2009~~agent ~~through the end of the Former SEDA~~fees, we issued ~~9,883,994 shares~~ to YADawson ~~Global~~James ~~and received~~a ~~approximately~~compensation ~~$3.9 million.~~warrant Into ~~addition,~~purchase ~~in September 2008~~1,516,752 weshares ~~paid~~of YAcommon ~~Global~~stock aat ~~commitment~~an ~~fee~~exercise ofprice of $~~300,000~~0.0672 byper ~~issuing 393,339 shares of the Company's common stock~~share.

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

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

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

Our Strategy

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

Maximize the Commercial Potential of Cethromycin

We currently intend to focus a significant portion of our business efforts on the regulatory approval and commercialization of cethromycin for the treatment of ~~community~~CABP. ~~acquired~~This ~~bacterial~~includes ~~pneumonia~~a ~~("CABP")~~plan to evaluate strategic alternatives, including a possible sale of the Company, with the goal of maximizing shareholder value. Human clinical trials have been performed to determine the safety and efficacy of cethromycin in approximately 5,600 human subjects. In November 2007, we completed our pivotal Phase III clinical trials for the treatment of mild-to-moderate ~~CAP~~CABP using a 300 mg once-daily dosing regimen. In September 2008 we submitted an NDA for the use of cethromycin in mild-to-moderate ~~CAP~~CABP. In June 2009, the FDA ~~Anti-Infective Drugs Advisory Committee ("~~AIDAC") reviewed the cethromycin NDA. The AIDAC voted that cethromycin demonstrated safety for the outpatient treatment of adults with mild-to-moderate ~~CAP~~CABP, but voted that cethromycin did not demonstrate efficacy in the treatment of ~~CAP~~CABP. The committee's negative vote on the drug candidate's efficacy followed a discussion that the cethromycin NDA included data on patients with mild-to-moderate disease and that the new draft guidance for developing treatments for CABP, released in March 2009, requires the enrollment of more severe CAP patients for approval in the outpatient CAP indication. Our pivotal Phase III program included in the NDA was designed and conducted under prior FDA guidance and before the new draft guidance was released. In July 2009, we received a complete response letter from the FDA regarding cethromycin NDA for the outpatient treatment of adults with CAP. In its letter, the FDA indicated that they cannot approve the application for cethromycin in its current form and that, to gain approval, additional clinical data is required to demonstrate efficacy with defined statistical methodology. We are working closely with the FDA to identify the scope and protocol design for the additional clinical data needed under a Special Protocol Assessment. We are working collaboratively on these clinical plans with Pfizer, our development and commercialization partner in the Asia Pacific region (excluding Japan).

In addition to pursuing regulatory approval and commercialization of cethromycin for the treatment of CABP, we intend to evaluate opportunities for cethromycin in the treatment of other respiratory tract infections. 5

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

Advance our Biodefense Program

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

Advance the Development of our Oncology and Respiratory Disease Product Candidates as Funds are Available or Through a Partnership

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

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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.

Leverage our Drug Discovery and Development Capabilities

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.

Continue to Develop Strategic Collaborations

We plan to continue developing relationships with key pharmaceutical and biotechnology companies, governmental institutions and academic laboratories in order to in-license promising compounds that are not core to their strategy but fit closely with our corporate strengths. We also intend to identify co-development partners for the out-licensing of certain product candidates. Further, we may choose to establish collaborative partnerships through which certain of our clinical candidates can be marketed and commercialized. ~~As part of this strategy, we signed a development and commercialization agreement with Pfizer in September 2008 for cethromycin in the Asia Pacific region excluding Japan.~~

Advance Commercial Strategy and Marketing Efforts

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

Our Lead Program

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

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

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

Market Overview

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

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

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

Current Treatment Options and Limitations

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

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

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is fostered ~~difficile~~through ~~associated~~the ~~disease~~erroneous ~~("CDAD").~~prescription ~~Further,~~of inantibiotics ~~July~~for ~~2008,~~non-bacterial ~~the~~infections. ~~FDA~~The ~~requested~~lack ~~manufacturers~~ of ~~fluoroquinolones~~full topatient ~~include~~compliance awith ~~black~~prescribed ~~box~~courses ~~warning~~of ~~for~~therapies ~~tendon~~has ~~damage.~~further ~~In March~~contributed ~~2009,~~to ~~Tygacil®~~bacterial ~~(tigecycline),~~resistance aagainst ~~tetracycline~~currently ~~derivative~~marketed ~~sold~~antibiotics. byPatients ~~Pfizer,~~will ~~was~~frequently ~~approved~~discontinue bya ~~the~~prescribed ~~FDA~~dosing ~~for~~regimen ~~the~~after ~~in-patient~~symptoms ~~treatment of community-acquired bacterial pneumonia. In addition~~subside, ~~Zyvox®~~but ~~(linezolid),~~bacteria anthat ~~oxazolidinone~~are ~~analogue~~not ~~sold~~entirely byeradicated may ~~Pfizer,~~re-emerge isin ~~marked~~resistant ~~to treat nosocomial pneumonia~~forms.

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

ALS Solution

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

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

•: cethromycin has shown higher in vitro potency and a broader range of activity than macrolides against Gram-positive bacteria associated with respiratory tract infections;
•: cethromycin appears to be effective against penicillin-, macrolide- and fluoroquinolone-resistant bacteria;
•: cethromycin has a mechanism of action, unique to ketolides, that may slow the onset of future resistance;
•: cethromycin has shown specific activity against Gram-positive pathogens, unlike fluoroquinolones, while leaving normally-present Gram-negative bacteria undisturbed;
•: cethromycin has shown in vitro evidence of extended post-antibiotic effects against the pathogens commonly seen in respiratory tract infections;
•: cethromycin, unlike Ketek®, has not demonstrated visual disturbance side effects in clinical trials;
•: cethromycin exhibits promising activity against the USA300 strain of community-associated methicillin-resistant Staphylococcus aureus (CA-MRSA), which has been implicated in recent outbreaks in the USA and is resistant to many currently marketed antimicrobial agents;
•: cethromycin has demonstrated potent activity against serotype 19A of S. pneumoniae strains, which has recently emerged, due to widespread use of the 7-valent protein-conjugated pneumococcal vaccine (PCV-7), to cause invasive pneumococcal disease and are resistant to many antibiotics; and
•: cethromycin has shown in vitro activities against multiple CDC Category A and B bioterror agents such as Bacillus anthracis, Fransicella tularensis, Yersinia pestis and Burkholderia pseudomallei and has demonstrated 100% protection of anthrax assault in the post-exposure prophylactic monkey model.

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pseudomallei and has demonstrated 100% protection of anthrax assault in the post-exposure prophylactic monkey model.

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

Abbott Laboratories Collaboration

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

As previously disclosed in a Form 8-K filed with the SEC on March 30, 2009, we alleged in a notice of dispute delivered to Abbott Laboratories that Abbott had breached its obligations under the license agreement for cethromycin entered into between ADLS and Abbott on December 13, 2004. Subsequent to delivering the notice of dispute, we initiated arbitration proceedings against Abbott under the alternative dispute resolution provisions of the license agreement. On September 30, 2009, prior to the completion of arbitration proceedings, ADLS and Abbott entered into a binding term sheet in settlement of the dispute. The binding term sheet provides for certain amendments to the license agreement. The license agreement was amended to restructure the $30.0 million lump sum milestone payment due from ADLS to Abbott upon U.S. regulatory approval of cethromycin, such that $20.0 million is payable within twenty days of U.S. regulatory approval, $5.0 million is payable within 6 months of U.S. regulatory approval and $5.0 million is payable within 12 months of U.S. regulatory approval. In addition, the license agreement was amended to reduce the royalty due from ADLS to Abbott by two percentage points per tier such that we will owe Abbott royalty payments of 17% on the first $100.0 million of aggregate net sales of cethromycin, 16% on net sales once aggregate net sales exceed $100.0 million but are less than $200.0 million, and 15% on all net sales once aggregate net sales exceed $200.0 million. Finally, the terms to pay to Abbott $2.5 million upon cethromycin reaching $200.0 million in aggregate net sales and $5.0 million upon the drug reaching $400.0 million in aggregate net sales was unchanged. 9

Pfizer Collaboration

In September 2008, we entered into a development and commercialization agreement with Pfizer for cethromycin in the Asia Pacific region excluding Japan. We will retain exclusive rights to cethromycin in the rest of the world, including North America and Europe excluding Japan. In addition to future royalty payments, we would receive milestone and regulatory payments based on successful

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

InAs ~~connection~~previously disclosed in a Form 8-K filed with ~~our~~the ~~entry~~SEC ~~into~~on March 30, 2009, we alleged in a ~~development~~notice ~~and~~of ~~commercialization~~dispute delivered to Abbott Laboratories that Abbott had breached its obligations under the license agreement, wefor cethromycin entered into abetween ~~stock~~ADLS ~~purchase~~and ~~agreement~~Abbott ~~with~~on ~~Pfizer~~December 13, 2004. ~~Under~~Subsequent to delivering the ~~terms~~notice of dispute, we initiated arbitration proceedings against Abbott under the alternative dispute resolution provisions of the license agreement. On September 30, ~~Pfizer~~2009, ~~made~~prior anto the completion of arbitration proceedings, ~~up-front~~ADLS ~~investment~~and Abbott entered into a binding term sheet in settlement of the dispute. The binding term sheet provides for certain amendments to the license agreement. The license agreement was amended to restructure the $30.0 million lump sum milestone payment due from ADLS byto ~~purchasing~~Abbott 1upon U.S. regulatory approval of cethromycin,~~888,606~~ ~~shares~~such that $20.0 million is payable within twenty days of U.S. ~~its~~regulatory ~~common~~approval, ~~stock~~$5.0 million atis apayable ~~price~~within 6 months of U.S. regulatory approval and $5.0 million is payable within 12 months of U.~~908~~S. regulatory approval. In addition, the license agreement was amended to reduce the royalty due from ADLS to Abbott by two percentage points per ~~share~~tier ~~for~~such ~~approximately~~that we will owe Abbott royalty payments of 17% on the first $1100.70 million, of aggregate net sales of ~~offering~~cethromycin, ~~expenses~~16% on net sales once aggregate net sales exceed $100.0 million but are less than $200.0 million, ~~representing~~and 15% on all net sales ~~approximately~~once 4aggregate net sales exceed $200.9%0 million. ofFinally, ~~our~~the ~~total~~terms ~~then~~to ~~outstanding~~pay ~~shares~~to Abbott $2.5 million upon cethromycin reaching $200.0 million in aggregate net sales and $5.0 million upon the drug reaching $400.0 million in aggregate net sales was unchanged.

Other Collaborations and License Agreements

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

University of Illinois at Chicago ("UIC"). In 1999, we acquired an exclusive worldwide license, under patent rights and know-how controlled by UIC, to develop, make, use and sell ALS-357 and related compounds to treat melanoma and other forms of cancer. In consideration for this license, we paid an upfront license fee of $15,000 upon the execution of the agreement. We are also obligated to make up to $135,000 in aggregate milestone payments upon the achievement of various development and commercialization milestones for each of ALS-357 and any other compound developed by us under the licensed technology. To date, we have paid $10,000 in milestone payments which resulted from an IND for ALS-357 filed with the FDA in December 2004. Under the terms of the agreement, we are obligated to reimburse UIC for past patent preparation, filing and prosecution expenses, and have agreed to reimburse UIC for similar expenses related to foreign patents throughout the term of the ~~agreement.~~ To date we have paid UIC approximately $529,000 for patent reimbursement. In addition, we agreed to pay royalties equal to 6% of net sales to UIC based on sales of licensed products by us, our affiliates and sublicensees, as well as a percentage of all other income we receive from sublicensees, but in any event, a minimum royalty of $5,000 annually once commercial sales commence.

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

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

Intellectual Property

Patents and Trade Secrets

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

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Key U.S. Patents and Expiration Dates

Drug Candidate

Cethromycin	5866549	9/4/2016
ALS-357	5658947	8/19/2014
ALS-886	5504111	4/2/2013

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

Competition

The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. We face competition from many different sources, including commercial pharmaceutical and biotechnology enterprises, ~~academic institutions, government agencies and private and public research institutions. We believe that our most significant competitors are Aventis, Pfizer, GlaxoSmithKline and Johnson & Johnson.~~

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

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

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

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

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

Government Regulation

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

U.S. Government Regulation

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

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

•: preclinical laboratory tests, animal studies and formulation studies under the FDA's good laboratory practices regulations;
•: submission to the FDA of an IND application for human clinical testing, which must become effective before human clinical trials may begin;

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•: adequate and well-controlled clinical trials in accordance with FDA good clinical practice regulations, to establish the safety and efficacy of the product for each indication;
•: submission to the FDA of an NDA;
•: satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current good manufacturing practices, ("cGMP"); and
•: FDA review and approval of the NDA.

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

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

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

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

•: evaluate dosage tolerance and appropriate dosage;
•: identify possible adverse effects and safety risks; and
•: evaluate preliminarily the efficacy of the drug for specific indications.

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

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

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

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

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

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

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

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

FDA's "Animal Efficacy Rule"

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

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Foreign Regulation

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

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

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Pharmaceutical Pricing and Reimbursement

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

~~In 2003~~Political, economic ~~the~~and ~~United~~regulatory ~~States~~influences ~~government~~are ~~enacted~~subjecting ~~legislation~~the ~~providing~~healthcare aindustry ~~partial~~in ~~prescription~~the ~~drug~~United ~~benefit~~States ~~for~~to ~~Medicare~~fundamental ~~recipients,~~changes. ~~beginning~~There inhave ~~2006.~~been, ~~Government~~and ~~payment~~we ~~for~~expect ~~some~~there ofwill ~~the~~continue to ~~costs~~be, ofa ~~prescription~~number ~~drugs~~of ~~may~~legislative ~~increase~~and ~~demand~~regulatory ~~for~~proposals ~~any~~and ~~products~~enactments ~~for~~to ~~which~~change wethe ~~receive~~healthcare ~~marketing~~system ~~approval.~~in ~~However,~~ways tothat ~~obtain~~could ~~payments~~significantly ~~under~~affect ~~this~~our ~~program~~business, wesuch ~~would~~as bethe ~~required~~Patient toProtection ~~sell~~and ~~products to~~Affordable ~~Medicare~~Care ~~recipients~~Act, ~~through~~as ~~drug~~amended ~~procurement~~by ~~organizations~~the ~~operating~~Health ~~pursuant~~Care toand ~~this~~Education ~~legislation.~~Reconciliation ~~These~~Act ~~organizations~~of ~~would~~2010 ~~negotiate~~signed ~~prices~~into ~~for~~law ~~our~~in ~~products,~~March ~~which~~2010. ~~are~~We ~~likely~~anticipate tothat ~~be lower than we might otherwise obtain. Federal~~Congress, state, legislatures and ~~local governments in~~ the ~~United~~private ~~States~~sector will continue to consider ~~legislation~~and tomay ~~limit~~adopt ~~the growth of~~ healthcare ~~costs,~~policies ~~including~~intended ~~the~~to ~~cost~~curb ofrising ~~prescription~~healthcare ~~drugs~~costs. ~~Future~~ ~~legislation~~These ~~could~~cost ~~limit~~containment ~~payments~~measures ~~for~~include: ~~pharmaceuticals such as the product candidates that we are developing.~~

•: controls on government funded reimbursement for medical products and services;
•: controls on healthcare providers;
•: challenges to the pricing of medical products and services or limits or prohibitions on reimbursement for specific products and therapies through other means;
•: reform of drug importation laws; and
•: expansion of use of managed care systems in which healthcare providers contract to provide comprehensive healthcare for a fixed cost per person.

The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third party payors fail to provide adequate coverage and reimbursement. In addition, an increasing emphasis on managed care in the United States has increased and will continue to increase the downward pressure on pharmaceutical pricing. 15

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

Employees

As of December 31, 2009, we employed 19 people of which there are 7 in research and 12 in administration. Our employees are not represented by any collective bargaining agreements and we believe our employee relations are good.

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

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

Employees

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

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

Available Information

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

Item 1A. Risk Factors.

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

Risks Related to Our Industry and Business

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

Our independent registered public accounting firm included an explanatory paragraph in the report on our ~~2009~~2010 financial statements related to the uncertainty in our ability to continue as a going concern. The paragraph stated that we are in default on our line of credit, do not have sufficient cash on-hand or other funding available to meet our obligations and sustain our operations, which raises substantial doubt about our ability to continue as a going concern. We will not be generating any product-based revenues or realizing cash flows from operations in the near term, if at all. We ~~believe~~may wenot ~~will~~ have sufficient cash ~~and~~or ~~cash~~other ~~equivalents~~funding ~~sufficient~~available to complete ~~fund~~ our ~~existing and~~ anticipated ~~development~~business ~~commitments,~~activities ~~indebtedness~~for ~~and~~the ~~general~~remainder ~~operating~~of ~~expenses~~2011. ~~through~~In ~~the~~further ~~first~~recognition ~~quarter~~ of ~~2010.~~ Weour ~~may~~current ~~not~~financial ~~have~~situation, ~~sufficient~~on ~~cash~~January 3, or2011, ~~other~~we ~~funding~~publicly ~~available~~announced tothat ~~complete~~with the oversight of our ~~anticipated~~Board ~~business~~of ~~activities~~Directors ~~for~~we ~~the~~intend ~~remainder~~to evaluate strategic alternatives, including a possible sale of ~~2010~~the company. In order to address our working capital shortfall we intend to raise additional capital by accessing the capital markets ~~and licensing our lead product candidate, cethromycin, to commercial partners~~. There can be no assurances that we will be successful in accessing the capital markets on terms acceptable to us, if at all~~, or that such partnerships will be available on terms acceptable to us, if at all~~.

In order Weto ~~are~~provide aaccess ~~development~~to ~~stage~~needed ~~company~~capital, ~~and~~we ~~may~~executed ~~never~~an ~~attain~~Investment ~~product~~Agreement ~~sales~~that allows us to sell shares of our common stock to an accredited investor, Dutchess, subject to certain terms and conditions. Any shares of our common stock that we sell pursuant to the Investment Agreement will

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. 16

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

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

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

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

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

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

•: conduct additional Phase III clinical trials and prepare for the commercial launch of cethromycin;
•: continue the preclinical development and commence the clinical development of our other product candidates, such as ALS-357 and ALS-886;
•: expand our research and development activities;
•: acquire or in-license new technologies and product candidates; and
•: increase our required corporate infrastructure and overhead.

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.~~ 17

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

Any shares of our common stock that we sell pursuant to the SEDA will have a dilutive impact on our stockholders. The SEDA terms provide that YA SPV may promptly resell the shares we issue to them under the SEDA, and such resales could cause the market price of our common stock to decline significantly with advances under the SEDA. To the extent of any such decline, any subsequent advances would require us to issue a greater number of shares of common stock to YA SPV in exchange for each dollar of the advance. Under these circumstances our existing stockholders would experience greater dilution. The sale of our common stock under the SEDA could encourage short sales by third parties, which could contribute to the further decline of our stock price. As of February 26, 2010, we have issued an aggregate of 55,821,085 shares, which includes 393,339 shares issued as an initial commitment fee to YA Global and received an aggregate of $15.1 million in proceeds through the usage of our SEDA facilities. There can be no assurance that we will be able to obtain adequate capital funding in the future, under the SEDA or otherwise, to continue operations and implement our strategy. As a result of these uncertainties, there is substantial doubt about our ability to continue as a going concern.

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

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

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

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

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

•: regulators or institutional review boards may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective trial site;
•: we may decide, or regulators may require us, to conduct additional clinical trials, or we may abandon projects that we expect to be promising, if our clinical trials or animal efficacy studies produce negative or inconclusive results;
•: we might have to suspend or terminate our clinical trials if the participants are being exposed to unacceptable health risks;
•: regulators or institutional review boards may require that we hold, suspend or terminate clinical development for various reasons, including noncompliance with regulatory requirements;
•: the cost of our clinical trials could escalate and become cost prohibitive;
•: any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the product not commercially viable;
•: we may not be successful in recruiting a sufficient number of qualifying subjects for our clinical trials; and
•: the effects of our drug candidates may not be the desired effects or may include undesirable side effects or the drug candidates may have other unexpected characteristics.

~~Our business would be materially harmed if we fail to obtain FDA approval of a new drug application for cethromycin.~~ 18

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

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

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~~additional clinical~~ ~~data~~Our isbusiness ~~required~~would tobe ~~demonstrate~~materially ~~efficacy.~~harmed Weif ~~are~~we ~~engaged~~fail ~~in ongoing discussions with the FDA~~ to ~~identify~~obtain ~~the scope and protocol design for the additional clinical data that would be required to satisfy the~~ FDA's ~~request for additional efficacy information and to complete the CABP clinical development program for successful~~ approval inof ~~the~~a ~~future.~~new Wedrug ~~are~~application ~~working closely with the Agency to identify the scope and protocol design~~ for ~~the additional clinical data needed under a Special Protocol Assessment~~cethromycin.

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

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

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

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

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

To date, each of our product candidates has been manufactured by our collaborators and third party manufacturers for preclinical and clinical trials. If any of our product candidates is approved by the FDA or other regulatory agencies for commercial sale, we will need third parties to manufacture the product in larger quantities. Due to factors beyond our control, our collaborators and third party manufacturers may not be able to increase their manufacturing capacity for any of our product candidates in a timely or economic manner, or at all. Significant scale-up of manufacturing may require additional validation studies, which the FDA must review and approve. If we are unable to increase the manufacturing capacity for a product candidate successfully, the regulatory approval or commercial launch of that product candidate may be delayed or there may be a shortage in the supply of the product candidate. Our product candidates require precise, high-quality manufacturing. The failure of our collaborators and third party manufacturers to achieve and maintain these high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously harm our business.

~~If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market any products we may develop, we may be unable to generate revenues.~~ 19

We do not currently have product sales and marketing capabilities. We have entered into a Commercialization and Development Agreement dated as of September 29, 2008 with Pfizer to utilize their selling and marketing capabilities in Asia. If we receive regulatory approval to commence commercial sales of any of our product candidates, we will have to establish a sales and marketing organization with appropriate technical expertise and distribution capabilities or make arrangements

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~~with~~manufacturers ~~third~~may ~~parties~~not tobe ~~perform~~able ~~these~~to ~~services~~increase intheir ~~other~~manufacturing ~~jurisdictions.~~capacity Iffor weany ~~receive~~of ~~approval~~our toproduct ~~commercialize~~candidates ~~cethromycin~~in ~~for~~a ~~the~~timely ~~treatment~~or ofeconomic ~~CABP~~manner, weor ~~intend~~at toall. ~~engage~~Significant ~~additional~~scale-up ~~pharmaceutical~~of ormanufacturing ~~health~~may ~~care~~require ~~companies~~additional ~~with~~validation ~~existing~~studies, ~~distribution~~which ~~systems~~the ~~and~~FDA ~~direct~~must ~~sales~~review ~~organizations~~and toapprove. ~~assist~~If uswe inare ~~North~~unable ~~America~~to ~~and~~increase ~~abroad.~~the Wemanufacturing ~~may~~capacity ~~not~~for bea ~~able~~product tocandidate ~~negotiate~~successfully, ~~favorable~~the ~~distribution~~regulatory ~~partnering~~approval ~~arrangements,~~or ifcommercial atlaunch ~~all.~~of ~~With~~that ~~respect~~product tocandidate ~~the~~may ~~Pfizer~~be ~~agreement~~delayed ~~and~~or tothere ~~the~~may ~~extent~~be wea ~~enter~~shortage ~~other~~in ~~co-promotion~~the orsupply ~~other~~of ~~licensing~~the ~~arrangements,~~product ~~any~~candidate. ~~revenues~~Our weproduct ~~receive~~candidates ~~will~~require ~~depend~~precise, ~~on the~~high-quality ~~efforts~~manufacturing. The failure of ~~third~~our ~~parties~~collaborators and ~~will~~third ~~not~~party bemanufacturers ~~under~~to ~~our~~achieve ~~control.~~and Ifmaintain wethese ~~are~~high ~~unable~~manufacturing tostandards, ~~establish~~including ~~adequate~~the ~~sales,~~incidence ~~marketing~~of ~~and~~manufacturing ~~distribution capabilities~~errors, ~~whether~~could ~~independently~~result in patient injury or ~~with~~death, ~~third~~product ~~parties~~recalls or withdrawals, ~~our ability~~delays toor ~~generate~~failures in product ~~revenues~~testing or delivery, ~~and~~cost ~~become~~overruns ~~profitable,~~or ~~would~~other beproblems ~~severely~~that ~~limited~~could seriously harm our business.

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

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

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

•: difficulty recruiting and retaining adequate numbers of effective sales and marketing personnel;
•: the inability of sales personnel to obtain access to, or persuade adequate numbers of, physicians to prescribe our products;
•: the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage against companies with broader product lines; and
•: unforeseen costs associated with creating an independent sales and marketing organization.

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

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

•: macrolides such as Biaxin® (clarithromycin), a product of Abbott Laboratories; and Zithromax® (azithromycin), a product of Pfizer Inc.;
•: one other ketolide antibiotic, Ketek® (telithromycin), a product of Aventis Pharmaceuticals;
•: semi-synthetic penicillins such as Augmentin® (amoxicillin and clavulanate potassium), a product of GlaxoSmithKline;

Cethromycin may show evidence of side effects that could diminish its prospects for commercialization and wide market acceptance. If cethromycin is approved by the FDA, it will not be the first ketolide antibiotic introduced to the marketplace. Ketek® has been available for sale in Europe since 2002 and in the United States since August 2004. There are additional ketolide product candidates in preclinical development or in clinical development. If ultimately approved by the FDA, these product candidates may have improved efficacy, ease of administration or more favorable side effect profiles when compared to cethromycin. The availability of additional ketolide antibiotics may have an adverse affect on our ability to generate product revenues and achieve profitability. 20

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•: fluoroquinolones such as Levaquin® (levofloxacin), a product of Ortho-McNeil Pharmaceutical, Inc.; Tequin® (gatifloxacin), a product of Bristol-Myers Squibb Company; FACTIVE® (gemifloxacin mesylate) tablets, a product of Oscient Pharmaceuticals; and Cipro® (ciprofloxacin) and Avelox® (moxifloxacin), both products of Bayer Corporation;
•: tetracyclines such as Tygacil® (tigecycline), a product of Pfizer to treat in-patient CABP; and
•: an oxazolidinone, Zyvox® (linezolid), a product of Pfizer, to treat nosocomial pneumonia.

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

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

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

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

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

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

•: our ability to provide acceptable evidence of safety and efficacy;
•: relative convenience and ease of administration;
•: the prevalence and severity of any adverse side effects;

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•: the availability of alternative treatments;
•: the details of FDA labeling requirements, including the scope of approved indications and any safety warnings;
•: pricing and cost effectiveness;
•: the effectiveness of our or our collaborators' sales and marketing strategy;
•: our ability to obtain sufficient third-party insurance coverage or reimbursement; and
•: our ability to have the product listed on insurance company formularies.

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:

•: demonstrating sufficient safety to obtain regulatory approval to commence a clinical trial;
•: reaching agreement on acceptable terms with prospective contract research organizations and trial sites;

In addition, the commencement of clinical trials may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease, and the eligibility criteria for the clinical trial. If we are unable to enroll a sufficient number of microbiologically evaluable patients, the clinical trials for our product candidates could be delayed until sufficient numbers are achieved. 22

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•: manufacturing sufficient quantities of a product candidate; and
•: obtaining institutional review board approvals to conduct clinical trials at prospective sites.

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 1916 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.~~ 23

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

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~~have promoted~~ ~~our products for off~~Off-label ~~use,~~promotion weof ~~could~~our beproducts ~~subject~~could toresult ~~fines,~~in ~~legal~~substantial ~~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:

•: we may be unable to purchase or license products or product candidates on terms that would allow us to make an appropriate return from resulting products;
•: competitors may be unwilling to assign or license product or product candidate rights to us;
•: we may not have access to the capital necessary to purchase or license products or product candidates; or
•: we may be unable to locate suitable products or product candidates within, or complementary to, our areas of interest.

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

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

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

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

•: we were the first to make the inventions covered by each of our pending patent applications;
•: we were the first to file patent applications for these inventions;

~~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~~ 24

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•: others will not independently develop similar or alternative technologies or duplicate any of our technologies;
•: any of our pending patent applications will result in issued patents;
•: any patents issued to us or our collaborators will provide a basis for commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;
•: we will develop additional proprietary technologies that are patentable; or
•: the patents of others will not have a negative effect on our ability to do business.

~~exercise~~ 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~~ confidential information in connection with our collaborations, then our ability to receive patent protection or protect our proprietary information will be impaired. In addition, some of the technology we have licensed relies on patented inventions developed using U.S. government resources. Under applicable law, the U.S. government has the right to require us to grant a nonexclusive, partially exclusive or exclusive license for such technology to a responsible applicant or applicants, upon terms that are reasonable under the circumstances, if the government determines that such action is necessary.

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

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

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

Our ability to commercialize any product candidates successfully will depend in part on the extent to which governmental authorities, private health insurers and other organizations establish reimbursement levels for the cost of our products and related treatments. Third-party payors are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed healthcare in the United States, as well as legislative proposals to reform healthcare, control pharmaceutical prices or reduce government insurance programs, may also result in exclusion of our product candidates from reimbursement programs. Because many generic antibiotics are available for the treatment of respiratory tract infections, our ability to list cethromycin on insurance company formularies will depend on its effectiveness compared to lower-cost products. The cost containment measures that health care payors and providers are instituting, and the effect of any health care reform, could materially and adversely affect our ability to earn revenues from the sales of cethromycin and our other product candidates.

~~Prescription drug coverage legislation and future legislative or regulatory reform of healthcare systems in the United States and overseas could limit future revenues from our product candidates.~~ 25

In the United States, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to market and sell our product candidates profitably. In particular, the Medicare Prescription Drug Improvement and Modernization Act of 2003

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~~(the~~product ~~"2003~~candidates ~~Act")~~from ~~and~~reimbursement ~~Medicare~~programs. ~~Part D,~~Because ~~which~~many ~~was~~generic ~~established~~antibiotics ~~pursuant~~are ~~thereto~~available infor ~~January of 2006, grant responsibility to reimburse~~ the ~~cost~~treatment of ~~drugs~~respiratory ~~and~~tract ~~broad~~infections, ~~discretion~~our onability ~~which drugs should be covered and~~ to ~~what~~list ~~extent~~cethromycin toon ~~the~~insurance ~~Centers~~company formularies ~~for~~will ~~Medicare~~depend ~~and~~on ~~Medicaid~~its ~~Services,~~effectiveness orcompared ~~CMS,~~to ~~the~~lower-cost ~~agency~~products. ~~within~~The ~~the~~cost ~~Department~~containment ofmeasures ~~Health and Human Services~~ that ~~administers~~health ~~Medicare.~~care ~~Additionally~~payors ~~there~~and ~~is some~~providers ~~likelihood~~are ofinstituting, ~~further~~and ~~reform of~~ the ~~United~~effect ~~States~~of any health care ~~system~~reform, ~~and~~could ~~changes~~materially inand ~~reimbursement~~adversely ~~policies~~affect orour ~~health~~ability ~~care~~to ~~cost~~earn ~~containment~~revenues ~~initiatives~~from ~~that~~the ~~limit~~sales orof ~~restrict~~cethromycin ~~reimbursement~~and ~~for~~ our ~~products~~other ~~may~~product ~~cause our revenues to decline~~candidates.

~~In addition,~~ inHealthcare ~~some~~law ~~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,~~policy 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 datechanges, ~~the~~based ~~Secretary~~on ~~has~~recently ~~made~~enacted ~~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,~~have ~~negatively~~an ~~affecting~~adverse ~~our~~effect ~~anticipated~~on ~~revenues and prospects for profitability~~us.

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

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

We are currently a development stage company with 1916 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. 26

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

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

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

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

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

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

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

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

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

26 Risks Related to Our Common Stock

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Risks Related to the Ownership of Our Common Stock

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

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

•: the progress of our cethromycin development program and the timing and results from our other clinical trial programs, including the initiation and completion of Phase I clinical trials for ALS-886 and ALS-357;
•: the in-licensing or acquisition of additional product candidates;
•: the loss of licenses or proprietary rights to technologies and products;
•: FDA or international regulatory actions;
•: failure of any of our product candidates, if approved, to achieve commercial success;
•: announcements of new products by our competitors;
•: market conditions in the pharmaceutical and biotechnology sectors;
•: litigation or public concern about the safety of our potential products;
•: comments by securities analysts;
•: actual and anticipated fluctuations in our quarterly operating results;
•: deviations in our operating results from the estimates of securities analysts;
•: rumors relating to us or our competitors;
•: public concern as to the efficacy or safety of new technologies;
•: third party reimbursement policies;
•: developments concerning current or future collaborations, including disputes or termination events and the achievement, timing and accounting treatment of milestone payments; and
•: the addition or termination of research programs or funding support.

These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit and the time and attention of our management may be diverted.

There are substantial risks associated with the Standby Equity Distribution Agreement with YA Global Master SPV Ltd. which could contribute to the decline of our stock price and have a dilutive impact on our existing stockholders 28

In order to obtain needed capital, we entered into a SEDA with YA SPV Ltd. in June 2009. The terms of the SEDA are described in Item 1.01 of our Current Report filed on form 8-K on June 19, 2009.

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~~The~~action ~~sale~~litigation ofagainst ~~shares of our common stock pursuant to~~ the ~~SEDA~~company ~~will have a dilutive impact on our stockholders. We believe YA SPV intends to promptly re-sell the shares we issue to them under the SEDA and~~ that ~~such~~issued ~~re-sales could cause~~ the ~~market price of our common~~ stock ~~to decline significantly with advances under the SEDA~~. ToIf ~~the extent of~~ any ~~such decline, any subsequent advances would require us to issue a greater number~~ of ~~shares of common stock to YA SPV in exchange for each dollar of the advance. Under these circumstances~~ our ~~existing~~ stockholders ~~would experience~~brought ~~greater~~a ~~dilution.~~lawsuit ~~The~~against ~~sale~~us, ofwe ~~our common stock under the SEDA~~ could ~~encourage~~incur ~~short~~substantial ~~sales~~costs bydefending ~~third~~the ~~parties,~~lawsuit ~~which~~and ~~could contribute to~~ the ~~further~~time ~~decline~~and attention of our ~~stock~~management ~~price~~may be diverted.

~~Due~~There toare substantial risks associated with the ~~delisting~~Investment ofAgreement ~~our~~with ~~common~~Dutchess ~~stock~~Opportunity ~~from~~Fund, ~~Nasdaq~~II, LP ~~you~~which ~~may~~could ~~have~~contribute ~~difficulty~~to ~~trading~~the ~~our~~decline ~~securities~~of ~~and~~ our ~~securities~~stock ~~may~~price and ~~trade~~have at a ~~lower~~dilutive ~~market~~impact ~~price~~on ~~than~~our ~~they~~existing ~~otherwise would~~stockholders.

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

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

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

~~Future~~We ~~sales~~have a significant number of ~~common~~outstanding ~~stock~~warrants, byand ~~our~~future ~~existing~~sales ~~stockholders~~of ~~may~~the ~~cause~~underlying ~~our~~shares ~~stock~~could adversely affect the market price toof ~~fall~~our common stock.

~~Approximately~~As ~~9,756,064 shares~~ of ~~our~~March 23, ~~common stock and options to purchase 1~~2011,~~816,303~~ ~~shares~~we ofhad ~~our~~outstanding ~~common~~warrants ~~stock which are~~ exercisable ~~(or~~ ~~will~~for bean ~~exercisable~~aggregate ~~within sixty days~~ of ~~December~~approximately 81.3 ~~31,~~million ~~2009)~~shares ~~and~~of common ~~that~~stock. ~~are~~Of ~~owned~~our bytotal ~~affiliates,~~outstanding ~~directors~~warrants, ~~executive~~warrants ~~officers~~representing orthe ~~other~~right ~~insiders are currently eligible for sale subject only~~ to ~~the~~ ~~volume~~purchase ~~limitations~~approximately ~~of Rule~~74.1 ~~144~~million ~~under the Securities Act. Additionally, 15,350,196~~ shares of our common stock, ~~including~~at ~~5,116,732~~an ~~shares~~exercise price of ~~our~~$0.042 ~~common~~per ~~stock~~share ~~underlying warrants, which~~ were ~~issued~~sold toas ~~institutional~~part ~~investors~~of ~~pursuant~~the topublic aequity ~~private~~offering ~~placement~~completed inon ~~March~~July 7, of2010 ~~2006~~ and ~~registered~~warrants ~~for~~representing ~~resale~~the ~~pursuant~~right to apurchase ~~currently~~approximately ~~effective~~1.5 million ~~Registration Statement and 15,286,625~~ shares of our common stock, ~~including~~at ~~5,095,542~~an ~~shares~~exercise price of ~~our~~$0.0672 ~~common~~per ~~stock~~share ~~underlying warrants, which~~ were issued to ~~institutional~~the ~~investors pursuant to a private~~ placement agent in ~~December~~connection ofwith ~~2007~~the ~~and~~public ~~registered~~equity ~~for resale~~offering ~~pursuant~~completed toon aJuly 7, ~~separate~~2010. ~~currently~~Additionally, ~~effective~~warrants ~~Registration~~representing ~~Statement~~the ~~are~~right ~~eligible~~to ~~for sale without restriction~~purchase 0.5 million ~~The~~shares ~~sale~~ of aour ~~significant~~common ~~number~~stock ofat ~~shares~~an ofexercise ~~our~~price ~~common~~of ~~stock,~~$0.042 orper ~~the~~share ~~perception that~~were ~~these~~issued ~~sales~~to ~~could~~our ~~occur,~~lender ~~particularly~~in connection with ~~respect~~an amendment to ~~large~~our ~~stockholders,~~credit ~~other~~facility ~~institutional~~on ~~investors~~September 9, ~~affiliates,~~2010. ~~directors,~~The remaining ~~executive~~approximately ~~officers~~5.2 million orin ~~other~~outstanding ~~insiders,~~warrants ~~could~~have ~~materially~~a ~~and adversely~~weighted ~~affect~~average ~~the~~exercise ~~market~~ price of ~~our~~$2.14 ~~common~~per ~~stock~~share. ~~and~~The ~~impair~~holders ~~our~~may ~~ability~~sell toshares ~~raise~~of ~~capital~~common ~~through~~stock underlying the ~~sale~~warrants ofin ~~additional~~the public ~~equity~~markets ~~securities.~~from

~~Our Chairman and Chief Executive Officer has significant voting control over our company which may delay, prevent or deter corporate actions that may be in the best interest of our stockholders.~~ 29

As of December 31, 2009, Flavin Ventures, LLC controlled approximately 11.3% of our outstanding common stock. Dr. Michael Flavin, our founder and Chairman and Chief Executive Officer, has effective voting control for all shares of our common stock held by Flavin Ventures. As a result, Dr. Flavin will be able to exert significant influence for all matters requiring approval of our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may delay, prevent or deter a change in control of our company even when

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~~such~~time ato ~~change~~time, ~~may~~without belimitations inon the ~~best~~timing, ~~interest~~amount or method of ~~all~~sale. ~~the~~The ~~stockholders,~~sale ~~could~~of ~~deprive~~a ~~stockholders~~significant number of anshares ~~opportunity~~of toour ~~receive~~common astock, ~~premium~~or ~~for~~the ~~their~~perception ~~common~~that ~~stock~~these assales ~~part~~could ofoccur, acould ~~sale~~cause the market price of our ~~company~~common orstock ~~assets~~ to decline and ~~might~~impair ~~affect~~our ~~the~~ability ~~prevailing~~to ~~market~~raise ~~price~~capital through the issuance of ~~our~~additional ~~common~~equity ~~stock~~securities.

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

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

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

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

These provisions include:

•: a classified Board of Directors under which approximately one third of the directors will be elected each year;
•: a requirement that the authorized number of directors to be changed only by a resolution of the Board of Directors;
•: authorized and unissued additional shares of our common stock and preferred stock;
•: advance notice requirements for proposals that can be acted upon at stockholder meetings; and
•: a requirement that only our Chairman or our Board of Directors, acting by resolution, may call stockholder meetings.

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

The cost of public company compliance with the securities laws and regulations is substantial and recently enacted and proposed changes to these laws and regulations will further increase our general and administrative expenses. 30

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission ("SEC") adopted rules requiring public companies to include a report of management on the company's internal controls over financial reporting in their annual reports on Form 10-K. In addition, the public accounting firm auditing the company's financial statements must attest to and report on the effectiveness of the company's internal controls over financial reporting. This requirement will first apply to our annual report on Form 10-K for our fiscal year ending December 31, 2010. If we are unable to conclude that we have effective internal controls over financial reporting or, if our independent auditors are unable to provide us with an unqualified report as to the effectiveness of our internal controls over financial reporting as of December 31, 2010 and future year ends as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities.

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

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

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

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

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

Item 3. Legal Proceedings.

None.

Item 4. Reserved.

3031

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PART II

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

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

2010	High		Low

First Quarter	$	0.23	$	0.10
Second Quarter		0.12		0.06
Third Quarter		0.07		0.03
Fourth Quarter		0.05		0.01

2009	High		Low

First Quarter	$	0.45	$	0.14
Second Quarter		1.62		0.24
Third Quarter		0.82		0.18
Fourth Quarter		0.30		0.17

2008	High		Low
First Quarter	$	1.79	$	0.67
Second Quarter		1.66		0.88
Third Quarter		1.45		0.67
Fourth Quarter		0.87		0.15

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

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

Dividends

We have neither declared nor paid dividends on our common stock or the preferred stock of our subsidiary, Advanced Life Sciences, Inc., since our inception and do not plan to pay dividends in the foreseeable future. Any determination in the future to pay cash dividends will depend on our financial condition, capital requirements, result of operations, contractual limitations and other factors deemed relevant by our Board of Directors. As of December 31, ~~2009~~2010, cumulative accrued undeclared dividends on our subsidiary's preferred stock totaled approximately $12.80 million.

Recent Sales of Unregistered Securities

None.

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Item 6. Selected Financial Data.

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

																	Period from Inception (January 1, 1999) to December 31, 2009
																	Period from Inception (January 1, 1999) to December 31, 2010
		Years ended December 31,
		2009			2008			2007			2006			2005
		2010			2009			2008			2007			2006
Statement of Operations Data:
Revenue		$	2752,~~793,191~~853		$	~~240~~2,~~830~~793,191		$	—240,830		$	~~39,788~~—		$	~~121~~39,~~451~~788		$	56,~~276~~028,~~010~~863
Operating expenses
	Research and development		42,~~462~~499,~~281~~488			154,~~709~~462,~~293~~281			2515,~~735~~709,~~759~~293			1725,~~202~~735,~~113~~759			317,~~121~~202,~~616~~113			~~103~~105,~~022~~522,~~981~~469
	Selling, general and administrative		64,~~322~~371,~~849~~071			76,~~116~~322,~~549~~849			67,~~839~~116,~~575~~549			56,~~457~~839,~~395~~575			35,~~237~~457,~~997~~395			3337,~~371~~742,~~486~~557
Loss from operations			(7,991,939	)		(22,585,012	)		(32,575,334	)		(22,619,720	)		(6,238,162	)		(131,118,457	)
	Impairment charge		2,510,936			—			—			—			—			2,510,936
Interest income			(11,561	)		(306,846	)		(717,884	)		(1,651,916	)		(272,216	)		(2,960,423	)
Loss from operations			(8,628,642	)		(7,991,939	)		(22,585,012	)		(32,575,334	)		(22,619,720	)		(139,747,099	)
Interest expense			1,036,762			525,703			466,963			511,884			478,300			4,185,615
Interest income			(8,360	)		(11,561	)		(306,846	)		(717,884	)		(1,651,916	)		(2,968,783	)
Other (income) expense, net			146,092			—			—			—			—			146,092
Interest expense			946,191			1,036,762			525,703			466,963			511,884			5,131,806
Gain on disposal(1)			—			—			—			(939,052	)		—			(939,052	)
Other (income) expense, net			(244,479	)		146,092			—			—			—			(98,387	)
Net other (income) expense			1,171,293			218,857			(250,921	)		(2,079,084	)		206,084			432,232
Gain on disposal(1)			—			—			—			—			(939,052	)		(939,052	)
Net loss			(9,163,232	)		(22,803,869	)		(32,324,413	)		(20,540,636	)		(6,444,246	)		(131,550,689	)
Net other (income) expense			693,352			1,171,293			218,857			(250,921	)		(2,079,084	)		1,125,584
Net loss			(9,321,994	)		(9,163,232	)		(22,803,869	)		(32,324,413	)		(20,540,636	)		(140,872,683	)
Less net loss attributable to the non-controlling interest in subsidiary			—			—			—			—			—			—
Net loss attributable to Advanced Life Sciences Holdings, Inc.			(9,~~163~~321,~~232~~994	)		(229,~~803~~163,~~869~~232	)		(3222,~~324~~803,~~413~~869	)		(2032,~~540~~324,~~636~~413	)		(620,~~444~~540,~~246~~636	)		(~~131~~140,~~550~~872,~~689~~683	)
Less accumulated preferred stock dividends of subsidiary for the period			175,000			175,000			175,000			175,000			175,000			12,~~844~~019,792
Net loss available to common shareholders		$	(9,~~338~~496,~~232~~994	)	$	(229,~~978~~338,~~869~~232	)	$	(3222,~~499~~978,~~413~~869	)	$	(2032,~~715~~499,~~636~~413	)	$	(620,~~619~~715,~~246~~636	)	$	(~~133~~142,~~395~~892,~~481~~475	)
Basic and diluted loss per common share		$	(0.1606	)	$	(0.5916	)	$	(10.1259	)	$	(01.7812	)	$	(0.4978	)
Weighted average shares outstanding			57153,~~781~~372,~~126~~740			3957,~~098~~781,~~943~~126			2839,~~910~~098,~~041~~943			2628,~~546~~910,~~785~~041			1326,~~610~~546,~~694~~785

	2010			2009			2008			2007			2006

Consolidated Balance Sheet Data:
Cash and cash equivalents	$	159,596		$	2,841,801		$	1,527,108		$	18,324,991		$	27,054,947
Total assets		772,593			6,427,771			2,820,053			19,911,542			30,509,679
Long-term debt, less current portion		—			12,000,000			11,915,000			5,915,000			3,923,810
Total liabilities		10,494,615			14,507,818			15,197,594			12,250,568			9,115,174
Deficit accumulated during development stage		(140,872,683	)		(131,550,689	)		(122,387,457	)		(99,583,588	)		(67,259,175	)
Total equity (deficit)	$	(9,722,022	)	$	(8,080,047	)	$	(12,377,541	)	$	7,660,974		$	21,394,505

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	2009			2008			2007			2006			2005
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	2,841,801		$	1,527,108		$	18,324,991		$	27,054,947		$	15,224,932
Total assets		6,427,771			2,820,053			19,911,542			30,509,679			16,021,910
Long-term debt, less current portion		12,000,000			11,915,000			5,915,000			3,923,810			5,905,634
Total liabilities		14,507,818			15,197,594			12,250,568			9,115,174			7,726,173
Deficit accumulated during development stage		(131,550,689	)		(122,387,457	)		(99,583,588	)		(67,259,175	)		(46,718,539	)
Total stockholders equity (deficit)	$	(8,080,047	)	$	(12,377,541	)	$	7,660,974		$	21,394,505		$	8,295,737

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

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

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

Overview

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

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

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

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

On In late June 2, ~~2009,~~2010 we submitted a final SPA with the FDA ~~AIDAC~~for ~~reviewed~~ the proposed Phase III clinical program of cethromycin ~~NDA~~in the treatment of patients with CABP. ~~The~~We ~~AIDAC~~have ~~voted~~been ~~that~~engaged ~~cethromycin~~in ~~demonstrated~~the ~~safety~~SPA ~~for~~process with the ~~outpatient~~FDA ~~treatment~~over ofthe ~~adults~~last ~~with mild-~~year to~~-moderate~~ ~~CAP,~~establish ~~but~~the ~~voted~~clinical ~~that~~trial ~~cethromycin~~design ~~did~~needed ~~not~~to ~~demonstrate~~gain ~~efficacy~~approval in CABP. As filed, the ~~treatment~~SPA incorporates ofwritten ~~CAP.~~and ~~The~~oral ~~committee~~comments from the FDA's ~~negative~~Division of Anti-Infective and Ophthalmology Products.

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

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

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

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

If cethromycin is approved for marketing by the FDA, we plan to sell cethromycin using commercial partners to access the primary care physician market and to build and utilize a focused internal sales force that will market directly to early adopters such as, but not limited to, pulmonary medicine and infectious disease physicians. In September 2008, we entered into a development and commercialization agreement for cethromycin with Pfizer, in the Asia Pacific region (excluding Japan). We will retain exclusive rights to cethromycin in the rest of the world (excluding Japan), including North America and Europe. In addition to future royalty payments, we would receive milestone and regulatory payments based on successful achievement of clinical, regulatory and commercial objectives in specific markets. We will collaborate with Pfizer to develop additional clinical data in the Asia Pacific region to support regulatory filings in that region. Discussions with other potential commercial partners focused on other geographical markets such as the European Union and the United States are ongoing.

In August 2008, we signed a letter of intent with DSM Pharma Chemicals North America, Inc. ("DSM") to proceed with a proposal to purchase raw materials to produce commercial quantities of cethromycin. Our intent is conditional upon the parties entering into a formal supply agreement which will govern the terms and conditions including but not limited to the timing of production and the milestone payment schedule. While these conditions are pending, the parties recognize that there are lengthy lead times for the raw materials needed to be used to complete the production described in the proposal. Therefore, we authorized DSM to procure the necessary raw materials to be used to complete the production in anticipation of entering into the formal supply agreement. In 2009, we acquired approximately $2.8 million of raw materials.

Development Update—Cethromycin Biodefense Program

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

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

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~~antibiotic~~ The ~~intervention~~double-blind ~~and~~pivotal tosuperiority bestudy ~~widely~~will ~~spread~~compare ~~through~~the ~~human~~efficacy ~~transmission.~~and ~~Yersinia~~safety ~~pestis,~~of ~~the~~once-daily ~~causative~~oral ~~agent~~administration of ~~plague,~~300 ismilligrams ~~classified~~of bycethromycin ~~the~~over ~~Centers for~~seven ~~Disease~~days ~~Control~~of treatment asto aazithromycin. ~~Category A~~The ~~Bioterrorism~~primary ~~Agent~~efficacy ~~and~~endpoint iswill ~~prioritized~~be by the ~~Department~~clinical ofcure ~~Defense~~rate ~~("DoD")~~in ~~and~~a ~~Department~~macrolide-resistant ofStreptococcus ~~Health~~pneumoniae ~~and~~population. The ~~Human~~protocol ~~Services~~also ~~("HHS")~~includes asseveral ~~one~~unique ~~of the most serious biological weapons~~features, ~~along~~such ~~with~~as ~~anthrax~~the ~~and~~inclusion ~~tularemia.~~of ~~Unlike~~patient-reported ~~anthrax~~outcome measures, ~~there~~which ishave nothe ~~FDA-approved~~potential ~~vaccine available~~ to ~~protect~~generate ~~against~~a ~~plague,~~more ~~and~~robust ~~the~~demonstration ~~only~~of ~~antibiotic~~effectiveness ~~treatments currently~~and ~~available~~establish ~~for~~cethromycin ~~improving~~as ~~survival~~a innew ~~the~~standard ~~event~~ of acare ~~plague~~in ~~outbreak~~treating ~~are older agents, such as tetracycline and doxycycline~~pneumonia.

InWith ~~September~~reported ~~2009,~~resistance ~~the~~rates ~~FDA~~as ~~granted~~high ~~Orphan~~as ~~Drug~~40 percent ~~Designation~~ to ~~cethromycin~~standard-of-care ~~for~~macrolide ~~the~~antibiotics ~~prophylactic~~in ~~treatment~~the ~~of plague and tularemia~~U.S., ~~Both~~there ~~tularemia~~is ~~and~~a ~~plague~~pressing ~~are~~medical ~~classified~~need byfor ~~the~~new ~~Centers~~drugs ~~for~~to ~~Disease~~treat ~~Control~~CABP. asBased ~~Category A~~on ~~Bioterrorism~~the ~~Agents,~~data ~~which~~we ishave ~~the~~accumulated ~~highest~~in ~~priority~~our ~~classification.~~extensive ~~High~~pre-~~priority~~clinical ~~agents~~and ~~include~~clinical ~~organisms~~program ~~that~~to ~~pose~~date, coupled with a ~~risk~~thorough toreview ~~national~~of ~~security because~~published ~~they~~literature ~~can~~on bethe ~~easily~~clinical relevance ~~disseminated~~of ormacrolide ~~transmitted~~resistance, ~~result~~we inbelieve ~~high~~that ~~mortality~~cethromycin ~~rates~~has ~~and have~~ the potential ~~for~~to ~~major~~show ~~public~~a ~~health~~superior ~~impact,~~efficacy ~~might~~advantage ~~cause~~in ~~public~~patients ~~panic~~who ~~and~~are ~~social~~resistant ~~disruption,~~to ~~and require~~marketed ~~special~~macrolide ~~action for public health preparedness~~drugs.

InThe ~~August~~cost ~~2009, we announced positive results from an animal study involving cethromycin that was conducted~~ to ~~measure~~complete ~~cethromycin's~~the ~~therapeutic~~SPA ~~efficacy~~is ~~in treating inhalation anthrax after symptoms of infection had developed~~significant. ~~The~~In ~~results~~order ~~of the placebo-controlled non-human primate study showed that a 14-day course of cethromycin achieved up~~ to aadvance ~~60% survival~~the ~~rate~~CABP ~~when~~program, ~~administered~~and ~~after~~commence ~~animals~~the ~~demonstrated~~necessary clinical ~~symptoms~~trial, ofwe ~~anthrax~~are ~~infection~~seeking as a ~~result~~partner ofto ~~an inhaled~~assist ~~dose~~in ~~of aerosolized anthrax spores that was 200 times~~ the ~~median~~funding ~~lethal dose~~ of ~~anthrax. None of~~ the ~~animals that received placebo survived~~ program. ~~Due~~We tocontinue ~~the extreme lethality of anthrax infection once symptoms appear, cethromycin's ability~~ to ~~achieve~~have aongoing ~~60%~~discussions ~~survival~~with ~~rate~~potential iscommercial ~~clinically~~partners ~~and~~focused ~~statistically~~on ~~significant.~~geographical ~~The~~markets ~~study~~such ~~was~~as ~~supported by~~ the ~~National~~European ~~Institute~~Union ~~of Allergy~~ and ~~Infectious Diseases ("NIAID"), an institute of~~ the ~~National~~United ~~Institutes~~States ofas ~~Health~~well ~~("NIH"),~~as ~~which~~various ~~is a component of the HHS. The results of this pivotal study complement previously reported (see below) efficacy~~government results from two non-human primate studies showing that cethromycin is highly effective in protecting animals from death after being infected with inhalation anthrax (post-exposure prophylaxis before the onset of symptoms)agencies.

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

~~In studies~~We ~~conducted~~submitted by the ~~U.S. Army Medical Research Institute of Infectious Diseases ("USAMRIID"),~~ cethromycin ~~was~~NDA ~~shown to be highly active~~ in ~~vitro~~ ~~against 30 strains of anthrax. In May 2007~~September, a2008 ~~non-human~~based ~~primate~~on ~~study showed that a 30-day course of oral cethromycin was 100% protective against a lethal dose of inhaled anthrax as compared to~~ the ~~standard~~results of ~~care,~~53 ~~Cipro®~~clinical ~~(ciprofloxacin),~~studies ~~which~~including ~~demonstrated~~2 ~~90%~~pivotal ~~protection.~~Phase III studies ~~The~~wherein ~~FDA has designated~~ cethromycin asdemonstrated ~~an orphan drug for the post~~non-~~exposure~~inferiority ~~prophylactic~~to ~~treatment~~Biaxin® ~~of inhalation anthrax, but the FDA has not yet approved the drug for marketing~~ in ~~this~~mild-to-moderate ~~or any other indication~~CABP.

InOn ~~August~~June 2, ~~2008~~2009, ~~we announced that~~ the ~~DTRA~~FDA ofAIDAC reviewed the ~~DoD~~cethromycin ~~awarded~~NDA. usThe aAIDAC ~~two-year~~voted ~~contract~~that ~~worth~~cethromycin updemonstrated tosafety ~~$3.8 million~~for tothe ~~further~~outpatient ~~study~~treatment ~~cethromycin~~of asadults ~~a potential~~with ~~broad~~mild-~~spectrum~~to-moderate ~~medical countermeasure. The contract~~CABP, ~~part~~but ofvoted ~~the~~that ~~agency's~~cethromycin ~~Transformational~~did ~~Medical~~not ~~Technologies~~demonstrate ~~Initiative~~efficacy ~~("TMTI"),~~in ~~will~~the ~~fund~~treatment ~~NDA-enabling~~of ~~studies~~CABP ~~evaluating cethromycin's efficacy~~ in ~~combating~~light ~~Category A~~of ~~and~~the Bnew ~~bioterror~~FDA ~~agents~~draft ~~such~~CABP asguidance ~~Fransicella~~which ~~tularensis~~was ~~(tularemia),~~published ~~Yersinia~~in March ~~pestis~~of ~~(plague) and Burkholderia pseudomallei (melioidosis)~~2009.

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

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

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

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~~Financial~~Cethromycin Biodefense Program Update

~~Since~~In ~~our~~November ~~inception~~2010, we ~~have~~announced ~~incurred~~that ~~net~~we ~~losses~~submitted ~~each~~a ~~year.~~full ~~Our~~proposal ~~net~~to ~~loss~~the ~~for~~National ~~the~~Institute ~~year~~of ~~ended~~Allergy ~~December 31,~~and ~~2009~~Infectious ~~was~~Diseases $9("NIAID").~~2 million.~~ AsThe ofproposal ~~December 31,~~requests ~~2009, we had an accumulated deficit of~~ $~~131.6~~38 million~~. We have funded operations to date primarily from debt financings and capital contributions~~ ~~from~~over ~~our~~5 years ~~founder~~for ~~and Chief Executive Officer, proceeds from~~ the ~~initial~~development ~~public offering~~ of ~~our~~an ~~common~~intravenous ~~stock,~~("IV") ~~the~~formulation ~~subsequent sale~~ of our ~~common~~novel ~~stock in three private placements~~antibiotic, ~~including~~cethromycin ~~our commercial~~to ~~partnership~~therapeutically ~~agreement~~treat ~~with~~anthrax, ~~Pfizer~~tularemia and ~~borrowings under our bank line of credit~~plague. In addition, wethe ~~executed~~proposal includes ~~Standby~~pre-clinical ~~Equity~~development ~~Distribution~~as ~~Agreements~~well ~~which~~as ~~allow~~funding usfor tofour ~~sell~~Phase 1 ~~our~~clinical ~~common~~trials ~~stock~~and toa ~~an accredited~~Phase 2 ~~investor~~clinical ~~pursuant~~trial to evaluate the ~~terms~~safety and efficacy of ~~the~~IV ~~agreements~~cethromycin ~~(see~~in patients ~~below)~~hospitalized with moderate-to-severe CABP.

In April ~~2009~~2010, ~~our~~we ~~shareholders~~announced ~~approved~~positive anresults ~~amendment~~from toan ~~our~~in ~~articles~~vitro ofstudy ~~incorporation~~assessing ~~to increase~~ the ~~number~~efficacy of ~~authorized~~cethromycin ~~shares~~against ~~from~~30 65strains of Burkholderia pseudomallei (melioidosis),~~000,000~~ toa ~~125~~serious,~~000,000~~ ~~including~~life-threatening anbacterial ~~increase~~pathogen. ~~in the~~Cethromycin ~~number~~showed ofsignificant in ~~authorized~~vitro ~~shares~~activity ofagainst ~~common~~clinical ~~stock~~and ~~from~~environmental ~~60,000,000~~strains toof ~~120,000,000~~B. Aspseudomallei ofas ~~February 26,~~measured ~~2010,~~by 96minimal inhibitory concentration ("MIC"),~~366,619~~ ~~shares~~the lowest concentration of ~~common~~an ~~stock~~antimicrobial ~~were~~that ~~issued~~will ~~and~~inhibit ~~outstanding~~the ~~and~~visible ~~14,571,464~~growth ~~shares~~of ~~are reserved~~a ~~for~~microorganism ~~issuance~~after ~~under~~24 hours ~~options~~of ~~and warrants~~incubation. ~~Accordingly,~~Cethromycin ~~out~~demonstrated ofantibacterial ~~the~~activity ~~120,000,000~~with ~~shares~~MIC ofvalues ~~common~~ranging from ~~stock~~0.5—8 ug/ml ~~authorized,~~and ~~9,061,917~~MIC90 ~~remain~~of ~~available~~4 ~~for future issuance~~ug/ml. ~~Shareholder~~Most ~~approval~~notably, ~~would~~cethromycin ~~be required~~also todemonstrated ~~increase~~positive ~~the~~activity ~~number~~against ofstrains ~~authorized~~that ~~shares~~were soresistant ~~that~~to ~~additional~~a ~~common~~commonly ~~shares~~used ~~could~~antibiotic, azithromycin, befor ~~issued.~~which ~~The~~MIC ~~availability~~values ofwere ~~additional~~all ~~shares~~greater ofthan ~~common~~64 ~~stock~~ug/ml. ~~for~~In ~~issuance~~a ~~will~~separate ~~afford~~study, uscethromycin ~~flexibility~~also demonstrated in ~~acting~~ ~~upon~~vitro ~~financing~~activity ~~transactions~~against to30 strains ~~strengthen~~of ~~our~~Burkholderia ~~financial~~mallei ~~position~~with ~~and/or~~MIC ~~commercial~~values ~~partnership~~ranging ~~opportunities~~from ~~that~~0.06—1 ~~may~~ug/ml ~~arise~~and asMIC90 weof ~~advance~~0.5 ug/ml, ~~our~~which ~~cethromycin~~are ~~commercialization~~comparable ~~program~~to azithromycin.

In ~~April~~March ~~2009~~2010, we ~~filed~~announced athat ~~shelf~~we ~~registration~~received ~~statement~~notice onfrom ~~Form S-3~~the ~~with~~BARDA of the ~~SEC~~U.S. Department of Health and ~~the~~Human ~~shelf~~Services ~~registration~~that ~~was~~it ~~subsequently~~has ~~declared~~completed ~~effective~~its byinitial ~~the~~technical ~~SEC.~~evaluation ~~The~~of ~~shelf~~our ~~registration~~funding ~~allowed~~proposal usfor toadvanced ~~raise~~development ~~capital~~of ~~from~~cethromycin ~~time~~as toa ~~time~~biodefense ~~through~~countermeasure ~~the~~and ~~sale~~identified ofit ~~common~~as ~~stock~~a ~~under~~scientifically ~~our~~and ~~SEDA~~technically ~~facility.~~sound ~~This~~proposal ~~S-3~~important ~~registration~~to ~~statement~~program ~~will~~goals noand ~~longer~~objectives that may require further development and may be ~~effective~~recommended ~~with~~for ~~the filing~~acceptance ofsubject ~~this~~to ~~report~~funds availability. InWe ~~order~~were invited to ~~continue~~submit additional information to ~~raise~~allow ~~additional~~BARDA ~~capital~~to ~~through~~make a final determination on the ~~sale~~appropriateness of ~~common~~the ~~stock,~~proposal ~~preferred~~to ~~stock~~enter ~~and/or~~into ~~equity~~contract ~~warrants~~negotiations. ~~under~~The ~~our~~Company ~~SEDA~~is ~~facility~~engaged orin ~~through~~ongoing ~~other~~discussions ~~methods~~with ~~of raising~~BARDA ~~capital,~~in welight ~~will~~of berecent ~~required~~amendments to ~~file a~~the ~~registration~~Broad ~~statement~~Agency ~~and~~Announcement ~~have~~that would itfund ~~declared~~the ~~effective~~development byof ~~the~~cethromycin, ~~SEC~~if awarded.

WeRelated ~~received~~to athis ~~notice on April 28~~development, ~~2009~~we ~~from~~also ~~the~~gained ~~Nasdaq~~clarity ~~Listing~~from ~~Qualifications Panel (~~the ~~"Panel")~~FDA ~~that~~on the ~~Panel~~biodefense ~~had~~regulatory ~~determined~~package torequired ~~delist~~for ~~our~~submission ~~common~~in ~~stock~~light ~~from~~of ~~The~~recent ~~Nasdaq~~AIDAC ~~Capital Market.~~meetings ~~The~~discussing ~~Panel's~~the ~~decision~~use ~~was~~of ~~based on our inability to evidence compliance with~~ the ~~$2.5 million shareholders~~ FDA's ~~equity~~Animal ~~requirement~~Rule orfor ~~the~~approval ~~$35.0 million market value~~ of ~~listed securities~~biodefense ~~requirement of the Nasdaq Capital Market~~therapeutics. ~~The~~As ~~trading~~anticipated, ofthe ~~our~~FDA ~~common~~recommended ~~stock~~that, onin ~~The~~parallel ~~Nasdaq~~with ~~Capital~~pivotal ~~Market~~animal ~~was~~studies ~~suspended~~demonstrating atefficacy ~~the~~under ~~open~~FDA's ofAnimal ~~trading on May 5~~Rule, ~~2009.~~we ~~Our common stock began~~should ~~trading~~complete on the ~~OTCBB~~CABP onclinical ~~May 6,~~program ~~2009.~~and ~~Trading~~gain onmarket ~~the~~approval ~~OTCBB still allows us~~ to ~~sell shares of common stock under our SEDA facility. On August 20, 2009,~~ the ~~Nasdaq~~CABP ~~Stock~~NDA ~~Market~~prior ~~filed~~to ~~a Form 25~~submitting ~~with~~an ~~the~~amended ~~SEC~~NDA tofor ~~complete~~ the ~~delisting~~biodefense indications.

~~In June~~ ~~2009,~~IV weFormulation ~~entered~~Program into a SEDA with YA SPV, an affiliate of Yorkville Advisors, for the sale of up to $15.0 million of shares of our common stock over a two-year commitment period. Under the terms of the SEDA, we may from time to time, in our discretion, sell newly-issued shares of our common stock to YA SPV at a discount to the current market price of 5%. The amount of each advance under the SEDA is limited to the greater of $600,000 or the average trading volume for the five trading days prior to the advance notice date. We are not obligated to utilize any of the $15.0 million available under the SEDA and there are no minimum commitments or minimum use penalties, nor does the agreement prohibit the Company from entering into any other financing arrangements. We entered into the SEDA with the consent of our lender under our credit facility, which requires us to maintain availability under the SEDA of at least $6.0 million at all times unless the bank otherwise consents. From the inception of the SEDA through December 31, 2009, we issued 34,102,143 shares to YA SPV and received proceeds of approximately $9.4 million. In addition, between the period of January 1, 2010 and February 26, 2010, we raised approximately $1.8 million and issued Update

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

Antimicrobial Peptide Program

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

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~~11,441,609~~directly. ~~shares~~They ~~through~~have ~~the~~shown ~~usage~~activity ofagainst ~~the~~clinically ~~SEDA~~important ~~facility.~~resistant ~~Shares~~bacteria, ofsuch ~~common~~as ~~stock~~vancomycin-resistant ~~sold~~enterococci, ~~under~~a ~~the~~pathogen ~~SEDA~~that inis ~~excess~~most ofcommonly $9acquired by patients while hospitalized, and methicillin-resistant Staphylococcus aureus.~~0 million~~ ~~were~~Also, ~~sold~~these ~~with~~peptides ~~the~~are ~~consent~~expected ofto ~~our~~have ~~lender~~significant ~~under~~activity ~~our~~against ~~credit~~biodefense pathogens such as Bacillus ~~facility~~anthracis.

InUnder ~~June~~the ~~2009,~~terms ~~prior~~of tothe ~~entering~~agreement ~~into~~with ~~the SEDA~~UBC, ~~the~~we ~~Company~~paid ~~and~~an YAoption ~~Global,~~fee anupon ~~affiliate~~execution of ~~Yorkville~~the ~~Advisors,~~agreement ~~agreed~~and towill ~~terminate~~make aadditional ~~Former~~payments ~~SEDA~~based ~~dated~~on asthe completion of ~~September 29,~~specific ~~2008~~milestones. ~~For~~In ~~the period of January 1~~return, ~~2009~~UBC ~~through~~granted ~~the~~us ~~end of~~ the ~~Former~~exclusive ~~SEDA,~~option ~~we issued 9,883,994 shares~~ to YAevaluate ~~Global~~the technology and ~~received~~obtain ~~approximately~~a ~~$3.9 million. In addition~~worldwide, inexclusive ~~September~~license ~~2008,~~to ~~we paid YA Global a commitment fee of $300~~manufacture,~~000~~ bydistribute ~~issuing~~and ~~393,339~~market ~~shares~~products ofemanating ~~our~~from ~~common~~the ~~stock~~program.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Results of Operations

Fiscal year ended December 31, 2010 compared to the fiscal year ended December 31, 2009

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

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

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

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

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

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

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

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

Fiscal year ended December 31, 2009 compared to the fiscal year ended December 31, 2008

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

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

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

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

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

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

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Fiscal year ended December 31, 2008 compared to the fiscal year ended December 31, 2007

Revenue. Revenue for the year ended December 31, 2008 was $241,000 compared to $0 for the year ended December 31, 2007. Revenue in 2008 was derived from a grant awarded by the DTRA of the U.S. Department of Defense. The contract award of $3.8 million is over a two year period which began in August 2008.

Research and development expense. Research and development expense decreased $10.0 million to $15.7 million for the year ended December 31, 2008 as compared to 2007. Included in the 2008 amount is a $10.0 million milestone expense incurred under our license agreement for cethromycin with Abbott. The largest component of the total decline was cethromycin clinical trial expenses which were $14.5 million lower than in 2007. Data from the second of two pivotal Phase III clinical trials was released in November of 2007 effectively bringing the trials to their natural conclusion. Expenses incurred to compile our NDA totaled $2.1 million for the year ended December 31, 2008 and represented a decline of $5.0 million when compared to 2007. The majority of this decrease is attributable to our cethromycin bulk-scale manufacturing program that was successfully concluded during the third quarter of 2007. Manufacturing expenses incurred in relation to process optimization activities of cethromycin totaled $0.7 million for the year ended December 31, 2008 and $0.5 million higher than the same period in 2007. Expenses related to our study testing cethromycin's efficacy in treating inhalation anthrax post-exposure for the prophylaxis in non-human primates declined $1.1 million to $0 for the year ended December 31, 2008 as compared to the same period in 2007. This study was completed during the third quarter of 2007.

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

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

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

Liquidity and Capital Resources

We have devoted substantially all of our cash resources to research and development and general and administrative expenses. To date, we have not generated any revenues from the sale of products, and we do not expect to generate any such revenues in the near term, if at all. As a result, we have incurred an accumulated deficit of $~~131~~140.69 million as of December 31, ~~2009~~2010 and we expect to incur significant operating losses for the foreseeable future. As of December 31, ~~2009~~2010 we had negative working capital of $110.63 million. ~~Cash~~and cash and cash equivalents were $20.82 million ~~as of December 31, 2009~~. Since our inception in 1999 to August 2005, we financed our operations primarily through debt and capital contributions from our founder and controlling stockholder and borrowings under our bank line of credit. In August 2005 we completed our initial public offering in which we raised $28.7 million, net of underwriters discount and offering costs. Since that time, we have completed three private placements in which we raised $52.8 million, net of underwriters' discounts and offering costs and raised additional debt financing through our $10.0 million bank line of credit. Between January 2009 and March 2010 we raised $15.6 million under the 2008 and 2009 SEDA facilities. And in July 2010 we completed a secondary public offering and raised approximately $2.5 million (including the exercise of unit warrants issued as part of that offering), net of placement agent fees and offering expenses payable by us. Between October 2010 and January 2011, we raised $1.1 million under the 2010 SEDA facility, which was terminated in January 2011.

In ~~June~~January ~~2009~~2011, we entered into aan ~~SEDA~~Investment Agreement with ~~YA SPV~~Dutchess, for the sale of up to $155.0 million of shares of our common stock over a ~~two-year~~period ~~commitment~~of ~~period~~two years. ~~Under~~We ~~the~~also ~~terms~~have an effective registration statement on file with the SEC for the purchase and sale of up to 72,162,601 shares, with respect to common stock issuable under the ~~SEDA~~agreement with Dutchess. Through March 23, 2011 we ~~may~~have ~~from~~issued ~~time~~47,403,618 shares to ~~time~~Dutchess, inincluding ~~our~~2,475,248 ~~discretion~~shares as a commitment fee, ~~sell~~and ~~newly-issued~~received ~~shares~~proceeds of approximately $0.7 million. Based on the last reported share price of our common stock on March 21, 2011, we would be able to YAraise ~~SPV~~approximately atan aadditional ~~discount~~$0.3 million through the use of the Dutchess Agreement.

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

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~~to the current market~~ price ~~of 5%. The amount of each advance under the SEDA is limited to the greater of $600,000 or the average trading volume for the five trading days prior to the advance notice~~ ~~date. We are not obligated to utilize any~~ of ~~the~~ $~~15.~~0 ~~million~~.042 ~~available~~per ~~under~~share ~~the~~used ~~SEDA~~in ~~and there are no minimum commitments or minimum use penalties, nor does~~ the ~~agreement~~exchange ~~prohibit~~was the ~~Company~~ ~~from~~same ~~entering~~price ~~into~~per ~~any~~share ~~other~~used ~~financing~~in ~~arrangements. We entered into the SEDA with the consent of~~ our ~~lender~~public ~~under~~equity ~~our credit facility, which requires us to maintain availability under the SEDA of at least $6~~offering.~~0 million~~ atAs ~~all~~a ~~times~~result ~~unless the bank otherwise consents. From the inception~~ of the ~~SEDA through December 31~~exchange, ~~2009, we issued 34,102,143 shares to YA SPV and received proceeds of approximately $9.4 million. In addition, between~~ the ~~period~~promissory ofnote ~~January 1,~~was ~~2010~~cancelled and ~~February 26,~~retired ~~2010, we raised approximately $1.8 million~~ and ~~issued~~accrued ~~11,441,609~~interest ~~shares through the usage~~ of ~~the SEDA facility. Shares of common stock sold under the SEDA in excess of~~ $~~9.0 million~~52,000 ~~were~~has ~~sold~~been ~~with~~deferred ~~the~~based ~~consent~~on of our ~~lender~~current ~~under~~liquidity ~~our credit facility~~situation.

InWe ~~June~~have a revolving line of credit with a financial institution under which we had $8.1 million and $10.0 million outstanding as of December 31, 2010 and 2009, respectively. ~~prior~~In toSeptember ~~entering~~2010, we entered into ~~the~~a ~~SEDA,~~Second ~~the~~Amended ~~Company~~and Restated Business Loan Agreement and YArelated ~~Global,~~loan ~~agreed~~documents with our lender to ~~terminate~~give aeffect ~~Former~~to ~~SEDA~~letter ~~dated~~agreements aswe ofentered ~~September 29,~~into ~~2008~~in May and June 2010. ~~For~~Among other things, the ~~period~~amendment ofextends the loan maturity by one year to January 1, ~~2009~~ ~~through~~2012. Under the ~~end~~terms of the ~~Former SEDA~~agreement, we ~~issued~~repaid 9$1.5 million of the outstanding loan balance on April 1,~~883,994~~ ~~shares~~2010 and were required to YAfurther ~~Global~~reduce the balance by an additional $1.5 million by October 1, 2010 and ~~received~~$1.0 million ~~approximately~~by April 1, 2011. Our Chief Executive Officer, Michael T. Flavin, Ph.D., provided a personal guarantee to the loan facility until the principal balance is reduced to $37.90 million. In addition, inthe ~~September~~interest ~~2008~~rate on the outstanding loan balance increased from 8.5% to 10.0% under the terms of the amended loan agreement. In connection with the amendment, we ~~paid~~also YAissued ~~Global~~to aour ~~commitment~~lender ~~fee~~500,000 ofwarrants, which are exercisable at $~~300~~0.042 per share, and will issue an additional 500,000 warrants in September 2011. We have also agreed that the line of credit is secured by ~~issuing~~substantially ~~393~~all of our assets including,~~339~~ subject to Abbott Laboratories' consent which has not been provided, our rights under the license agreement for cethromycin with Abbott Laboratories, and is further secured by 2.5 million shares of our common stock held by ALS Ventures, LLC. The credit agreement contains a material adverse change clause, which is subject to the judgment of the lender and, if triggered, can accelerate the payment of the debt.

In ~~September~~October ~~2001~~2010, we ~~incurred~~paid ~~indebtedness~~$420,000 ~~under~~in a ~~$2.0 million~~principal ~~promissory~~reduction ~~note~~to ~~with~~our ~~the~~lender ~~Chief~~toward ~~Executive~~a ~~Officer~~mandatory prepayment of ~~the Company, which bears interest at 7~~$1.~~75%.~~5 million ~~Principal~~that ~~plus any accrued interest~~ was due ~~in a lump sum~~ on ~~January~~October 51, 2010. OnUntil ~~January 4,~~the ~~2010,~~balance of the ~~note~~prepayment ~~was~~is ~~extended~~made, we are subject to ~~January 5,~~the ~~2012,~~default ~~all~~provisions ~~other~~of ~~terms~~the ~~remained~~loan ~~unchanged~~documents ~~and~~including inacceleration ~~effect~~of payment.

WeIn ~~have~~November a2010, ~~$10.0 million~~we ~~revolving~~entered ~~line~~into ~~of credit with~~ a ~~financial~~Forbearance ~~institution~~Agreement with aour ~~maturity~~lender ~~date~~relating ofto ~~January 1,~~the ~~2011,~~Second Amended and aRestated ~~fixed~~Business ~~interest~~Loan ~~rate of 8~~Agreement.~~5%.~~ ~~The~~Under ~~line~~the ofterms ~~credit is secured by substantially all~~ of ~~our~~the ~~assets~~agreement, ~~except that~~ the lender ~~collateral~~agreed ~~specifically~~to ~~excludes~~forbear ~~any~~from exercising rights ~~that~~and weremedies ~~may~~under ~~have~~the asloan ~~a result of our license~~ agreement ~~with~~from ~~Abbott~~the ~~for~~date ~~cethromycin, and is further secured by 2.5 million shares~~ of ~~our~~the ~~common~~agreement ~~stock~~to ~~held by ALS Ventures,~~January ~~LLC.~~3, ~~The credit agreement contains a material adverse change clause~~2011, ~~which is~~ subject to ~~the~~certain ~~judgment~~conditions. ~~of the~~Among ~~lender~~other ~~and~~things, ifwe were ~~triggered,~~required ~~can~~to ~~accelerate~~engage ~~the~~an ~~payment~~advisor offor ~~the~~purposes ~~debt. We entered into the SEDA with the consent~~ of ~~our~~reviewing ~~lender under~~ our ~~credit~~business ~~facility~~plans, ~~which~~budgets ~~requires~~and usexpenditures toand ~~maintain~~making ~~availability under~~recommendations ~~the~~regarding ~~SEDA of at least $6.0 million at all times unless~~ the ~~bank otherwise consents~~same. InWe ~~October~~were ~~2008,~~also werequired ~~issued~~to ~~warrants~~submit to the lender as a ~~closing fee for the purchase of 65,000 shares of~~ ~~common~~business ~~stock~~plan atoutlining anour ~~exercise~~budgets ~~price of $1.00 per share. The warrants became exercisable upon issuance~~ and ~~will~~capital ~~expire~~raising ~~five years from the date of the grant~~plans. ~~As of December 31, 2009 the line of credit had an outstanding balance of $10.0 million.~~

~~Net~~In ~~cash~~December ~~used~~2010, inwe ~~operating~~entered ~~activities~~into ~~was~~an ~~$11.9 million~~Omnibus inAmendment ~~2009~~with ~~compared~~our lender relating to ~~$24.1 million~~the inSecond ~~2008.~~Amended ~~Approximately~~and ~~$6.1 million~~Restated ofBusiness ~~cash~~Loan ~~was~~Agreement ~~used~~and ~~for~~Forbearance inAgreement. ~~our~~Under ~~cethromycin programs~~the interms ~~2009~~of the amendment, ~~compared~~the lender agreed to ~~$18.7 million~~waive inthe ~~2008.~~existing ~~These~~defaults ~~amounts~~under ~~are~~the ~~net~~loan ofagreement ~~DTRA~~and ~~grant~~we ~~award~~agreed ~~funds,~~to ~~which~~make ~~reimburse~~an usinterest ~~for~~reserve ~~certain~~payment ~~research~~of ~~and~~$186,000 ~~development~~by ~~expenses~~January 10, ~~associated~~2011 ~~with~~which ~~the~~was ~~grant.~~paid on that ~~The~~date. ~~decrease~~Upon inreceipt ~~net~~of ~~cash~~this ~~used~~interest isreserve ~~primarily~~payment, the ~~result~~due ofdate afor the $101.01 million ~~milestone~~principal payment toowed ~~Abbott~~by inus ~~2008.~~was ~~Cash~~extended ~~used~~to ~~for~~April 1, ~~general~~2011. ~~corporate~~The ~~purposes was~~ $51.81 million ~~in 2009 compared~~principal topayment, ~~$5.4 million~~as inwell ~~2008.~~as ~~This reflects~~ an ~~increase~~additional in$1.0 million ~~interest~~principal ~~paid~~payment inalso ~~2009~~due ason aApril 1, ~~result~~2011, ofcan ~~borrowing~~be andeferred ~~additional~~until ~~$6.0~~January ~~million~~1, on2012 ~~our~~if ~~line~~we ofpay ~~credit~~$486,000 in ~~October~~additional ~~2008~~interest ~~to partially fund~~reserve ~~the~~by ~~$10.0~~April ~~million~~1, ~~milestone payment to Abbott~~2011.

~~Cash~~On ~~provided~~February 21, ~~from~~2011, ~~financing~~we ~~activities~~received ~~was~~a ~~$13.3 million~~letter infrom ~~2009~~our ~~compared~~lender toinforming ~~$7.6 million~~us that we were in ~~2008.~~default Inunder ~~2009,~~the weloan ~~received~~documents ~~approximately~~governing ~~$13.2 million,~~our ~~net~~principal ofcredit ~~offering expenses,~~facility. ~~for~~The ~~the~~letter indicated ~~sale~~that ofwe ~~43,986,137~~had ~~shares~~failed to YAfund ~~Global~~an ~~and~~interest YAreserve ~~SPV~~account ~~through~~as required by an amendment to the ~~SEDA~~credit ~~facilities~~facility. InThe ~~2008,~~lender requested that we ~~borrowed~~cure ~~$6.0~~such default by February ~~million~~25, on2011. ~~our~~The lender ~~new~~noted ~~line~~that ofit ~~credit~~was reserving the right to ~~partially~~exercise ~~fund~~all rights and remedies under the ~~$10.0 million~~ ~~Abbott~~loan ~~milestone~~documents ~~payment~~if ~~and~~we ~~raised~~failed $1to meet the payment deadline.~~7 million,~~ ~~net~~Remedies ofavailable ~~offering~~to ~~expenses,~~the ~~through~~lender ainclude, ~~stock~~among other ~~purchase~~things, ~~agreement~~the inright ~~connection~~to ~~with~~accelerate ~~our~~payment ~~entry~~of ~~into~~all aamounts ~~development~~outstanding ~~and commercialization~~under ~~agreement~~the ~~with~~line ~~Pfizer~~of credit.

3942

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

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

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

Contractual Obligations

As of December 31, ~~2009~~2010, the annual amounts of future minimum payments under debt obligations, interest, lease obligations and other long term liabilities consisting of executed research and development, and license agreements are as follows:

	Payments Due by December 31,
	2010		2011		2012		2013		2014		Total
	2011		2012		2013		2014		2015		Total
Notes payable and bank line of credit	$	—	$	10,000,000	$	2,000,000	$	—	$	—	$	12,000,000
Bank line of credit	$	2,080,000	$	6,000,000	$	—	$	—	$	—	$	8,080,000
Interest		1863,~~006,500~~976		~~155~~1,~~000~~762		1,~~722~~040		—237		—		1867,~~163,222~~015
CABP program related costs		~~105~~229,~~844~~870		—		—		—		—		~~105~~229,~~844~~870
ALS-357 clinical program		338,930		422,550		105,638		—		—		867,118
Biodefense program related costs		80,539		—		—		—		—		80,539
Biodefense program related costs		1,556,660		—		—		—		—		1,556,660
Grant payable		500,000		—		—		—		—		500,000
Grant payable		—		500,000		—		—		—		500,000
Operating leases		111,840		87,965		9,480		2,370		—		211,655
Operating leases		99,740		102,360		78,485		—		—		280,585
Capital leases		4,779		5,416		6,137		4,884		—		21,216
Capital leases		4,350		—		—		—		—		4,350
Total	$	3,871,004	$	6,095,143	$	16,657	$	7,491	$	—	$	9,990,295
Total	$	3,112,024	$	11,179,910	$	2,185,845	$	—	$	—	$	16,477,779

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

In the third quarter of 2008, we signed a letter of intent with DSM to procure raw materials to be used to produce commercial quantities of cethromycin. The lead times for acquiring these raw materials needed to be used to complete production are lengthy. As of December 31, 2009 the cost of raw materials actually purchased was approximately $2.8 million. The agreement allows for us to purchase additional raw materials at a later time. 43

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

Our commitments under operating leases consist of payments made to a related party relating to our facilities lease in Woodridge, Illinois. The operating lease expired in September of 2008 and pursuant to the terms of the lease and pending agreement on a lease renewal, the Company leased the facilities on a month-to-month basis. In October 2009, the Company renewed its lease with BioStart. Because of the ownership interest in BioStart held by Flavin Ventures, our audit committee, acting on behalf of the board, has overseen all lease negotiations on our behalf and the board has approved the final terms of our lease renewal. The lease, which commenced on October 1, 2009, is for a term of three years and provides us with 9,440 square feet of space at a rental rate of $10.50 per square foot.

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~~This~~ As ~~rate~~a isresult ~~comparable~~of our default status with ~~market~~our ~~rates~~lender, ~~for~~the ~~similar~~entire ~~office~~$8.1 million ~~space~~outstanding inline ~~the~~of ~~surrounding~~credit ~~area.~~balance ~~The~~is ~~rental~~classified ~~rate~~as ~~increases~~a bycurrent ~~2.5%~~liability ~~for~~on the ~~second~~December 31, ~~year~~2010 balance sheet. The above table reflects principal and byinterest ~~3.0%~~obligations inbased on the ~~final~~terms ~~year~~ of the ~~lease~~loan ~~term.~~agreement ~~The lease~~that ~~has~~existed aas ~~provision~~of ~~allowing~~December 31, us2010 prior to ~~negotiate~~the annotification ~~amendment~~we toreceived from ~~lease~~the ~~additional~~lender ~~laboratory~~regarding ~~and~~our ~~office~~default ~~space~~under ~~should~~the terms of the ~~need~~loan ~~arise~~agreement.

In August 2008, ~~we announced that~~ the DTRA of the DoD awarded us a two-year contract worth up to $3.8 million to further study cethromycin as a potential broad-spectrum medical countermeasure. Under the terms of the contract, $1.8 million of DTRA funds were available over a nine-month base period beginning in August 2008 and the remaining $2.0 million were available to be awarded over the ensuing 15 months to complete the project. In ~~March 2009, we received notice from the DoD that it has exercised its option to award us the additional $2.0 million under the previously announced contract. In~~ conjunction with the grant awarded by the DTRA, we entered into subcontractor arrangements to further study cethromycin as a potential broad-spectrum medical countermeasure. The subcontractors' costs ~~are~~were ~~expected to be~~ approximately $3.10 million over approximately a two-year period which began in August 2008.

WeOur will not be generating any product-based revenues or realizing cash flows from operations in the near term, if at all. We believe we will have cash and cash equivalents sufficient to fund our existing and anticipated development commitments, ~~indebtedness~~under ~~and general~~ operating ~~expenses~~leases ~~through~~consist ~~the first quarter~~ of ~~2010.~~payments Inmade ~~order~~ to ~~continue~~a ~~our~~related ~~business~~party ~~activities~~relating ~~during 2010, we intend~~ to ~~raise additional capital through the issuance of equity securities and by licensing~~ our ~~lead~~facilities ~~compound,~~lease ~~cethromycin,~~in ~~to commercial partners. We believe~~Woodridge, ~~based upon current market conditions~~Illinois, ~~additional~~ commercial partnership agreements would include a series of milestone payments, including up-front milestones that would fund our continued operations. Although management believes we could secure additional commercial partnerships, there can be no assurances that such partnerships will be available at terms acceptable to us, if at all. We have executed Standby Equity Distribution Agreements which ~~allow~~expires uson ~~to sell our common stock to an accredited investor pursuant to the terms of the agreements (see Note~~October 1, ~~to the consolidated financial statements)~~2012. ~~In April~~ ~~2009~~Additionally, we ~~filed~~rent acertain ~~shelf~~office ~~registration~~equipment statement on Form S-3 with the SEC and the shelf registration was subsequently declared effective by the SEC. The shelf registration allowed us to raise capital from time to time through the sale of common stock under ~~our~~operating ~~SEDA facility~~leases. This S-3 registration statement will no longer be effective with the filing of this report. In order to continue to raise additional capital through the sale of common stock, preferred stock and/or equity warrants under our SEDA facility or through other methods of raising capital, we will be required to file a registration statement and have it declared effective by the SEC. Furthermore, as of February 26, 2010, 9,061,917 shares of authorized common stock remains available for future issuance. In order to issue additional shares of common stock, shareholder approval would be required to increase the number of authorized shares. If we raise additional capital by issuing equity securities, our shareholders could experience substantial dilution. As a result of these uncertainties, there is substantial doubt about our ability to continue as a going concern.

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

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

•: progress in our clinical development programs, as well as the magnitude of these programs;
•: the timing, receipt and amount of milestone and other payments, if any, from present and future collaborators;

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•: our ability to raise additional debt or equity financing or the receipt of milestone payments that would be paid to us as a result of our entering into a commercial partnership for cethromycin, or a combination of both;
•: our ability to repay our indebtedness and other obligations;
•: our ability to establish and maintain additional collaborative arrangements;
•: the resources, time and costs required to successfully initiate and complete our preclinical and clinical trials, obtain regulatory approvals, protect our intellectual property and obtain and maintain licenses to third-party intellectual property;
•: the cost of preparing, filing, prosecuting, maintaining and enforcing patent claims; and
•: the timing, receipt and amount of sales and royalties, if any, from our potential products.

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

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

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

~~Stock-based~~Impairment ~~Compensation~~of Long Lived Assets

WeLong-lived ~~account~~assets ~~for~~are ~~stock-based~~reviewed ~~awards~~for toimpairment ~~employees~~whenever ~~and~~events ~~non-employees~~or ~~using~~changes ~~the~~in ~~fair~~circumstances ~~value~~indicate ~~based~~that ~~method~~the tocarrying ~~determine~~amount ~~compensation~~of ~~for~~assets ~~all~~may ~~arrangements~~not ~~where~~be ~~shares~~recoverable. ofIt ~~stock~~is orreasonably ~~equity~~possible ~~instruments~~that ~~are~~these ~~issued~~assets ~~for~~could ~~compensation.~~become Weimpaired ~~use~~as a ~~Black-Scholes-Merton~~result ~~options-pricing~~of ~~model~~technology toor ~~determine~~other ~~the~~industry ~~fair~~changes ~~value~~or because of ~~each option~~a ~~grant~~change asin the intended use of such assets. Long lived asset impairment exists when the ~~date~~estimated fair value of ~~grant~~a ~~for~~long ~~expense~~lived ~~incurred.~~asset ~~The~~is ~~Black-Scholes-Merton~~less ~~model~~than ~~requires~~its ~~inputs~~carrying ~~for~~value. ~~risk-free~~In ~~interest~~the ~~rate,~~fourth ~~dividend~~quarter ~~yield~~2010, ~~volatility~~we ~~and~~decided ~~expected~~to ~~lives~~make ofour ~~the~~commercial ~~options.~~launch ~~Expected~~materials ~~volatility~~available isfor ~~based~~sale. Based on ~~historical~~discussions ~~volatility~~with prospective purchasers, none of ~~our~~which ~~stock~~have ~~since~~resulted ~~August 5,~~in ~~2005~~a sale, we determined that the ~~date~~value ~~our~~of ~~stock~~the ~~began~~commercial tolaunch ~~trade~~materials ~~publicly.~~was impaired, ~~The~~and ~~risk~~therefore recorded a $2.5 million non-~~free~~cash ~~rate~~impairment ~~for~~charge ~~periods~~during ~~within~~ the ~~contractual~~fourth ~~life~~quarter of 2010 to eliminate the ~~option~~carrying isvalue ~~based~~in onexcess of the Uestimated fair value.S. This ~~Treasury~~charge ~~yield~~is ~~curve~~classified inwithin ~~effect~~"Impairment atcharge" ~~the~~in ~~time~~our consolidated statement of operations for the ~~grant~~year ended December 31, 2010. ~~The~~An ~~expected~~income-based ~~lives~~valuation ~~for~~technique ~~options~~was ~~granted~~used ~~represents~~to ~~the~~measure fair ~~period~~value as of ~~time~~December 31, ~~that~~2010 ~~options granted~~using ~~are~~information ~~expected~~from todiscussions bewith ~~outstanding~~prospective ~~and~~purchasers. isAs ~~derived~~of ~~from~~December 31, 2010 the ~~contractual~~estimated ~~terms~~fair value of the ~~options~~commercial ~~granted.~~launch Wematerials ~~estimate~~was $250,000 ~~future~~and ~~forfeitures~~is ofclassified ~~options~~as ~~based~~a ~~upon~~non-current ~~historical~~"Assets ~~forfeiture~~held ~~rates.~~for sale" in our consolidated balance sheet.

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

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

We are subject to foreign currency exchange rate risk primarily due certain contract manufacturing agreements. Our exchange loss for the year ended December 31, 2009 was $146,000, which is included in other expense. As of December 31, 2009, we have no outstanding obligations or commitments denominated in foreign currencies. To date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of fluctuations in foreign currency exchange rates. 45

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Item 8. Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Advanced Life Sciences Holdings, Inc. (a Delaware corporation in the development stage) and its subsidiary (the "Company") as of December 31, ~~2009~~2010 and ~~2008~~2009, and the related consolidated statements of operations, ~~stockholders'~~total equity (deficit), and cash flows for each of the three years in the period ended December 31, ~~2009~~2010 and for the period from January 1, 1999 (inception) through December 31, ~~2009~~2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Advanced Life Sciences Holdings, Inc. and its subsidiary as of December 31, ~~2009~~2010 and ~~2008~~2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2009~~2010, and for the period from January 1, 1999 (inception) to December 31, ~~2009~~2010 in conformity with accounting principles generally accepted in the United States of America.

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

The Company is in the development stage at December 31, ~~2009~~2010.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois March 1024, ~~2010~~2011

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

CONSOLIDATED BALANCE SHEETS

			December 31, 2010			December 31, 2009

ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	159,596		$	2,841,801
	Grant receivable			—			530,219
	Prepaid insurance			33,576			111,761
	Other prepaid expenses			11,612			88,535

		Total current assets		204,784			3,572,316

PROPERTY AND EQUIPMENT:
	Furniture and fixtures			214,380			244,072
	Computer software and equipment			281,257			258,786
	Leasehold improvements			177,253			177,253

		Total property and equipment—at cost		672,890			680,111
	Less accumulated depreciation			(628,347	)		(624,158	)

		Property and equipment—net		44,543			55,953

OTHER ASSETS:
	Assets held for sale			250,000			2,760,936
	Deferred offering and financing costs			248,266			13,566
	Other long-term assets			25,000			25,000

		Total other assets		523,266			2,799,502

TOTAL ASSETS			$	772,593		$	6,427,771

LIABILITIES AND EQUITY (DEFICIT)
CURRENT LIABILITIES:
	Accounts payable		$	1,211,113		$	604,334
	Accrued payroll			34,803			664,436
	Other accrued expenses			548,725			661,504
	Accrued interest payable			99,134			73,194
	Short-term lease payable			4,829			4,350
	Current portion of the line of credit			8,080,000			—
	Short-term grant payable			500,000			—

		Total current liabilities		10,478,604			2,007,818
Long-term lease payable				16,011			—
Long-term grant payable				—			500,000
Long-term notes payable—related party				—			2,000,000
Line of credit				—			10,000,000

		Total liabilities		10,494,615			14,507,818

COMMITMENTS AND CONTINGENCIES
EQUITY (DEFICIT):
	Common stock, $0.01 par value—620,000,000 shares authorized and 259,303,325 issued and outstanding at December 31, 2010; 120,000,000 shares authorized and 84,925,010 issued and outstanding at December 31, 2009			2,593,033			849,250
	Additional paid-in capital			128,557,628			122,621,392
	Deficit accumulated during the development stage			(140,872,683	)		(131,550,689	)
	Noncontrolling interest in subsidiary			—			—

		Total equity (deficit)		(9,722,022	)		(8,080,047	)

TOTAL LIABILITIES AND EQUITY (DEFICIT)			$	772,593		$	6,427,771

			December 31, 2009			December 31, 2008
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	2,841,801		$	1,527,108
	Grant receivable			530,219			63,444
	Prepaid insurance			111,761			227,313
	Other prepaid expenses and deposits			88,535			143,808
		Total current assets		3,572,316			1,961,673
PROPERTY AND EQUIPMENT:
	Furniture and fixtures			244,072			244,072
	Laboratory equipment			—			159,186
	Computer software and equipment			258,786			258,786
	Leasehold improvements			177,253			505,804
		Total property and equipment—at cost		680,111			1,167,848
	Less accumulated depreciation			(624,158	)		(760,329	)
		Property and equipment—net		55,953			407,519
OTHER ASSETS:
	Commercial launch materials			2,760,936			—
	Deferred offering and financing costs			13,566			450,861
	Other long-term assets			25,000			—
		Total other assets		2,799,502			450,861
TOTAL ASSETS			$	6,427,771		$	2,820,053
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
	Accounts payable		$	604,334		$	1,379,941
	Accrued clinical trial and NDA expenses			—			458,260
	Accrued payroll			664,436			506,537
	Other accrued expenses			661,504			352,466
	Accrued interest payable			73,194			72,572
	Short-term lease payable			4,350			8,468
		Total current liabilities		2,007,818			2,778,244
Long-term lease payable				—			4,350
Long-term grant payable				500,000			500,000
Long-term notes payable—related party				2,000,000			2,000,000
Line of credit				10,000,000			9,915,000
		Total liabilities		14,507,818			15,197,594
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
	Common stock, $0.01 par value—120,000,000 shares authorized; 84,925,010 issued and outstanding at December 31, 2009; 40,810,932 shares issued and outstanding at December 31, 2008			849,250			408,109
	Additional paid-in capital			122,621,392			109,601,807
	Deficit accumulated during the development stage			(131,550,689	)		(122,387,457	)
	Noncontrolling interest in subsidiary			—			—
		Total equity (deficit)		(8,080,047	)		(12,377,541	)
TOTAL LIABILITIES AND EQUITY (DEFICIT)			$	6,427,771		$	2,820,053

See notes to consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF OPERATIONS

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

			Year ended December 31,
			2010			2009			2008
Revenue:
	Management fees		$	—		$	—		$	—		$	1,161,180
	Grants			752,853			2,793,191			240,830			4,822,445
	Royalty—related party			—			—			—			45,238

		Total revenue		752,853			2,793,191			240,830			6,028,863

Expenses:
	Research and development			2,499,488			4,462,281			15,709,293			97,542,170
	Contracted research and development—related party			—			—			—			7,980,299
	Selling, general and administrative			4,371,071			6,322,849			7,116,549			37,742,557
	Impairment charge			2,510,936			—			—			2,510,936

		Total expenses		9,381,495			10,785,130			22,825,842			145,775,962

Loss from operations				(8,628,642	)		(7,991,939	)		(22,585,012	)		(139,747,099	)
Net other (income) expense:
	Interest income			(8,360	)		(11,561	)		(306,846	)		(2,968,783	)
	Interest expense			946,191			1,036,762			525,703			5,131,806
	Other (income) expense, net			(244,479	)		146,092			—			(98,387	)
	Gain on sale of interest in Sarawak Medichem Pharmaceuticals joint venture			—			—			—			(939,052	)

Net other expense				693,352			1,171,293			218,857			1,125,584

Net loss				(9,321,994	)		(9,163,232	)		(22,803,869	)		(140,872,683	)

Less net loss attributable to the noncontrolling interest in subsidiary				—			—			—			—

Net loss attributable to Advanced Life Sciences Holdings, Inc.				(9,321,994	)		(9,163,232	)		(22,803,869	)		(140,872,683	)

Less accumulated preferred stock dividends of subsidiary for the period				175,000			175,000			175,000			2,019,792

Net loss available to common shareholders			$	(9,496,994	)	$	(9,338,232	)	$	(22,978,869	)	$	(142,892,475	)

Net loss per share available to common shareholders—basic and diluted			$	(0.06	)	$	(0.16	)	$	(0.59	)

Weighted average shares outstanding—basic and diluted				153,372,740			57,781,126			39,098,943
Unaudited pro forma share and per share information on a post-split basis—(See Note 1)
Pro forma net loss per share available to common shareholders—basic and diluted			$	(1.86	)	$	(4.85	)	$	(17.63	)

Pro forma weighted average shares outstanding—basic and diluted				5,112,425			1,926,038			1,303,298

												Period From Inception (January 1, 1999) Through December 31, 2009
			Year ended December 31,
			2009			2008			2007
Revenue:
	Management fees		$	—		$	—		$	—		$	1,161,180
	Grants			2,793,191			240,830			—			4,069,592
	Royalty—related party			—			—			—			45,238
		Total revenue		2,793,191			240,830			—			5,276,010
Expenses:
	Research and development			4,462,281			15,709,293			25,735,759			95,042,682
	Contracted research and development—related party			—			—			—			7,980,299
	Selling, general and administrative			6,322,849			7,116,549			6,839,575			33,371,486
		Total expenses		10,785,130			22,825,842			32,575,334			136,394,467
Loss from operations				(7,991,939	)		(22,585,012	)		(32,575,334	)		(131,118,457	)
Net other (income) expense:
	Interest income			(11,561	)		(306,846	)		(717,884	)		(2,960,423	)
	Interest expense			1,036,762			525,703			466,963			4,185,615
	Other (income) expense, net			146,092			—			—			146,092
	Gain on sale of interest in Sarawak Medichem Pharmaceuticals joint venture			—			—			—			(939,052	)
Net other (income) expense				1,171,293			218,857			(250,921	)		432,232
Net loss				(9,163,232	)		(22,803,869	)		(32,324,413	)		(131,550,689	)
Less net loss attributable to the noncontrolling interest in subsidiary				—			—			—			—
Net loss attributable to Advanced Life Sciences Holdings, Inc.				(9,163,232	)		(22,803,869	)		(32,324,413	)		(131,550,689	)
Less accumulated preferred stock dividends of subsidiary for the period				175,000			175,000			175,000			1,844,792
Net loss available to common shareholders			$	(9,338,232	)	$	(22,978,869	)	$	(32,499,413	)	$	(133,395,481	)
Net loss per share available to common shareholders—basic and diluted			$	(0.16	)	$	(0.59	)	$	(1.12	)
Weighted average shares outstanding—basic and diluted				57,781,126			39,098,943			28,910,041

See notes to consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF TOTAL EQUITY (DEFICIT)

											Deficit Accumulated During the Development Stage

		Common Stock
		Common Stock						Additional Paid-in Capital						Noncontrolling Interest in Subsidiary
		Shares			Amount			Additional Paid-in Capital						Noncontrolling Interest in Subsidiary		Total
BALANCE—January 1, 1999 (inception)			—		$	—		$	—		$	—		$	—	$	—
	Issuance of stock (at inception)		1,588,000			250,000			—			—			—		250,000
	Issuance of common stock, net of offering costs (August 2005)		6,721,814			67,218			29,210,558			—			—		29,277,776
	Issuance of common stock, net of offering costs (March 2006)		10,233,464			102,335			33,266,653			—			—		33,368,988
	Issuance of common stock, net of offering costs (December 2007)		10,191,083			101,911			17,750,327			—			—		17,852,238
	Exchange of shares under recapitalization (December 2004)		(1,629,685	)		(256,563	)		—			—			—		(256,563	)
	Issuance of shares under recapitalization (December 2004)		9,482,015			94,820			161,743			—			—		256,563
	Capital contributions (December 2004)		—			—			12,711,330			—			—		12,711,330
	Issuance of 14,887 warrants (December 2004)		—			—			11,898			—			—		11,898
	Issuance of common stock in exchange for licenses (December 2004)		1,122,569			11,226			8,988,774			—			—		9,000,000
	Issuance of common stock in exchange for reduction of milestones payable (August 2005)		600,000			6,000			3,000,000			—			—		3,006,000
	Modification of 14,887 warrants (August 2005)		—			—			18,925			—			—		18,925
	Issuance of stock related to option exercises (since inception)		193,727			8,083			27,192			—			—		35,275
	Compensation expense related to stock options (since inception)		—			—			1,712,132			—			—		1,712,132
	Net loss (since inception)		—			—			—			(99,583,588	)		—		(99,583,588	)

BALANCE—December 31, 2007			38,502,987		$	385,030		$	106,859,532		$	(99,583,588	)	$	—	$	7,660,974
	Adjustment to net offering costs (December 2007)		—			—			(50,141	)		—			—		(50,141	)
	Issuance of common stock, net of offering costs (September 2008)		1,888,606			18,886			1,634,193			—			—		1,653,079
	Issuance of common stock as payment for commitment fees (September 2008)		393,339			3,933			296,067			—			—		300,000
	Issuance of 65,000 warrants (October 2008)		—			—			7,445			—			—		7,445
	Issuance of stock related to option exercises		26,000			260			3,822			—			—		4,082
	Compensation expense related to stock options		—			—			850,889			—			—		850,889
	Net loss		—			—			—			(22,803,869	)		—		(22,803,869	)

BALANCE—December 31, 2008			40,810,932		$	408,109		$	109,601,807		$	(122,387,457	)	$	—	$	(12,377,541	)
	Issuance of common stock under the standby equity distribution agreements, net of offering costs		43,986,137			439,862			12,475,173			—			—		12,915,035
	Issuance of stock related to option exercises		127,941			1,279			18,855			—			—		20,134
	Compensation expense related to stock options		—			—			525,557			—			—		525,557
	Net loss		—			—			—			(9,163,232	)		—		(9,163,232	)

BALANCE—December 31, 2009			84,925,010		$	849,250		$	122,621,392		$	(131,550,689	)	$	—	$	(8,080,047	)

	Issuance of common stock under the standby equity distribution agreements, net of offering costs		50,659,541			506,596			2,384,313			—			—		2,890,909
	Issuance of common stock, net of offering costs (July 2010)		37,918,800			379,188			574,759			—			—		953,947
	Issuance of common stock—debt exchange (July 2010)		47,619,047			476,190			1,523,810			—			—		2,000,000
	Issuance of common stock as payment for commitment fees (September 2010)		1,984,127			19,841			80,159			—			—		100,000
	Issuance of common stock for Unit Warrant Exercises, net of offering costs		36,196,800			361,968			1,080,283			—			—		1,442,251
	Compensation expense related to stock options		—			—			292,912			—			—		292,912
	Net loss		—			—			—			(9,321,994	)		—		(9,321,994	)

BALANCE—December 31, 2010			259,303,325		$	2,593,033		$	128,557,628		$	(140,872,683	)	$	—	$	(9,722,022	)

												Deficit Accumulated During the Development Stage
			Common Stock
									Additional Paid-in Capital						Noncontrolling Interest in Subsidiary
			Shares			Amount											Total
BALANCE—January 1, 1999 (inception)				—		$	—		$	—		$	—		$	—	$	—
	Issuance of stock (at inception)			1,588,000			250,000			—			—			—		250,000
	Issuance of common stock, net of offering costs (August 2005)			6,721,814			67,218			29,210,558			—			—		29,277,776
	Issuance of common stock, net of offering costs (March 2006)			10,233,464			102,335			33,266,653			—			—		33,368,988
																—
	Exchange of shares under recapitalization (December 2004)			(1,629,685	)		(256,563	)		—			—			—		(256,563	)
	Issuance of shares under recapitalization (December 2004)			9,482,015			94,820			161,743			—					256,563
	Capital contributions (December 2004)			—			—			12,711,330			—			—		12,711,330
	Issuance of 14,887 warrants (December 2004)			—			—			11,898			—			—		11,898
	Issuance of common stock in exchange for licenses (December 2004)			1,122,569			11,226			8,988,774			—			—		9,000,000
	Issuance of common stock in exchange for															—
		reduction of milestones payable (August 2005)		600,000			6,000			3,000,000			—			—		3,006,000
	Modification of 14,887 warrants (August 2005)			—			—			18,925			—					18,925
																—
	Issuance of stock related to option exercises (since inception)			164,500			7,791			22,896			—			—		30,687
																—
	Compensation expense related to stock options (since inception)			—			—			978,076			—			—		978,076
	Net loss (since inception)			—			—			—			(67,259,175	)		—		(67,259,175	)
BALANCE—December 31, 2006				28,282,677		$	282,827		$	88,370,853		$	(67,259,175	)	$	—	$	21,394,505
	Issuance of common stock, net of offering costs (December 2007)			10,191,083			101,911			17,750,327			—			—		17,852,238
	Issuance of stock related to option exercises			29,227			292			4,296			—					4,588
	Compensation expense related to stock options			—			—			734,056			—			—		734,056
	Net loss			—			—			—			(32,324,413	)		—		(32,324,413	)
BALANCE—December 31, 2007				38,502,987		$	385,030		$	106,859,532		$	(99,583,588	)	$	—	$	7,660,974
																—
	Adjustment to net offering costs (December 2007)			—			—			(50,141	)		—			—		(50,141	)
	Issuance of common stock, net of offering costs (September 2008)			1,888,606			18,886			1,634,193			—			—		1,653,079
	Issuance of common stock as payment for commitment fees (September 2008)			393,339			3,933			296,067			—			—		300,000
	Issuance of 65,000 warrants (October 2008)			—			—			7,445			—					7,445
	Issuance of stock related to option exercises			26,000			260			3,822			—			—		4,082
	Compensation expense related to stock options			—			—			850,889			—					850,889
																—
	Net loss			—			—			—			(22,803,869	)		—		(22,803,869	)
BALANCE—December 31, 2008				40,810,932		$	408,109		$	109,601,807		$	(122,387,457	)	$	—	$	(12,377,541	)
	Issuance of common stock under the standby equity distribution agreements, net of offering costs			43,986,137			439,862			12,475,173			—					12,915,035
	Issuance of stock related to option exercises			127,941			1,279			18,855			—					20,134
	Compensation expense related to stock options			—			—			525,557			—					525,557
	Net loss			—			—			—			(9,163,232	)		—		(9,163,232	)
BALANCE—December 31, 2009				84,925,010		$	849,250		$	122,621,392		$	(131,550,689	)	$	—	$	(8,080,047	)

See notes to consolidated financial statements.

4649

Table of Contents

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

					Twelve months ended December 31,									Inception (January 1, 1999) Through December 31, 2010

					2010			2009			2008			Inception (January 1, 1999) Through December 31, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss				$	(9,321,994	)	$	(9,163,232	)	$	(22,803,869	)	$	(140,872,683	)
	Adjustments to reconcile net loss to net cash flows used in operating activities:
		Depreciation and amortization				32,513			106,907			218,796			980,990
		Non-cash interest expense				52,214			13,867			8,050			174,954
		Stock compensation expense				292,912			525,557			850,889			3,381,490
		Non-cash impairment charge				2,510,936			—			—			2,510,936
		Non-cash research and development				—			—			—			24,466,667
		Non-cash settlement of milestone payment				—			—			—			6,000
		Gain on sale of interest in Sarawak Medichem Pharmaceuticals (SMP)				—			—			—			(939,052	)
		(Gain) loss on disposal				(1,435	)		244,659			35			256,553
		Changes in operating assets and liabilities:
			Clinical supplies			—			—			—			533,333
			Accounts receivable			530,219			(466,775	)		(63,444	)		—
			Prepaid expenses			155,108			170,825			946,899			(53,736	)
			Commercial launch materials			—			(2,760,936	)		—			(2,760,936	)
			Other assets			—			(25,000	)		10,000			(16,452	)
			Accounts payable			146,158			(616,900	)		(1,464,517	)		750,492
			Accrued expenses			(854,096	)		33,679			(1,814,721	)		471,846
			Licenses payable			—			—			—			(11,000,000	)
			Accrued interest on debt			25,940			622			49,816			677,197

				Net cash flows from operating activities		(6,431,525	)		(11,936,727	)		(24,062,066	)		(121,432,401	)

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and equipment					—			(5,466	)		(362,353	)		(1,098,167	)
	Proceeds from the sale of SMP					—			—			—			939,052
	Proceeds from the sales of investments					—			—			—			31,557,158
	Purchase of investments					—			—			—			(31,557,158	)

				Net cash flows from investing activities		—			(5,466	)		(362,353	)		(159,115	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from issuance of common stock and capital contributions					5,707,213			13,178,259			1,664,713			108,258,762
	Proceeds from issuance of note payable and line of credit					—			85,000			6,000,000			15,103,691
	Proceeds from grants					—			—			—			500,000
	Proceeds from stock options exercised					—			20,134			4,082			59,491
	Payments for financing fees					(34,714	)		(18,039	)		(35,000	)		(87,753	)
	Payments of debt					(1,920,000	)		—			—			(1,920,000	)
	Payments on capital leases					(3,178	)		(8,468	)		(7,259	)		(163,078	)

				Net cash flows from financing activities		3,749,321			13,256,886			7,626,536			121,751,113

NET (DECREASE) INCREASE IN CASH						(2,682,205	)		1,314,693			(16,797,883	)		159,596
CASH—Beginning of period						2,841,801			1,527,108			18,324,991			—

CASH—End of period					$	159,596		$	2,841,801		$	1,527,108		$	159,596

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Cash paid during the period for interest				$	816,261		$	1,023,530		$	477,835		$	4,230,432

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
	Noncash investment activity:
		Purchase of property and equipment under capital leases				22,471			—			—			186,720
		Capital expenses included in accounts payable				—			—			5,466			—
	Noncash financing activity:
		Issuance of common shares for licenses				—			—			—			9,000,000
		Issuance of common shares for reduction of milestone payment				—			—			—			3,000,000
		Debt discount				—			—			—			30,823
		Unpaid costs associated with the issuance of common stock				320,257			—			61,775			320,257
		SEDA and financing related costs				385,205			—			423,911			722,650
		Issuance of common shares for related party note payable				2,000,000			—			—			2,000,000

					Year ended December 31,									Inception (January 1, 1999) Through December 31, 2009
					2009			2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss				$	(9,163,232	)	$	(22,803,869	)	$	(32,324,413	)	$	(131,550,689	)
	Adjustments to reconcile net loss to net cash flows
		used in operating activities:
		Depreciation and amortization				106,907			218,796			206,755			948,477
		Non-cash interest expense				13,867			8,050			37,768			122,740
		Stock compensation expense				525,557			850,889			734,056			3,088,578
		Non-cash research and development				—			—			—			24,466,667
		Non-cash settlement of milestone payment				—			—			—			6,000
		Gain on sale of interest in Sarawak Medichem Pharmaceuticals (SMP)				—			—			—			(939,052	)
		Loss on disposal				244,659			35			1,761			257,988
		Changes in operating assets and liabilities:
			Clinical supplies			—			—			—			533,333
			Accounts receivable			(466,775	)		(63,444	)		—			(530,219	)
			Prepaid expenses			170,825			946,899			1,691,599			(208,844	)
			Commercial launch materials			(2,760,936	)		—			—			(2,760,936	)
			Other assets			(25,000	)		10,000			—			(16,452	)
			Accounts payable			(616,900	)		(1,464,517	)		1,674,355			604,334
			Accrued expenses			33,679			(1,814,721	)		1,469,209			1,325,942
			Licenses payable			—			—			—			(11,000,000	)
			Accrued interest on debt			622			49,816			—			651,257
				Net cash flows from operating activities		(11,936,727	)		(24,062,066	)		(26,508,910	)		(115,000,876	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and equipment					(5,466	)		(362,353	)		(58,436	)		(1,098,167	)
	Proceeds from the sale of SMP					—			—			—			939,052
	Proceeds from the sales of investments					—			—			—			31,557,158
	Purchase of investments					—			—			—			(31,557,158	)
				Net cash flows from investing activities		(5,466	)		(362,353	)		(58,436	)		(159,115	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from issuance of common stock and capital contributions					13,178,259			1,664,713			17,852,238			102,551,549
	Proceeds from issuance of note payable and line of credit					85,000			6,000,000			—			15,103,691
	Proceeds from grants					—			—			—			500,000
	Proceeds from stock options exercised					20,134			4,082			4,588			59,491
	Payments for financing fees					(18,039	)		(35,000	)					(53,039	)
	Payments on capital leases					(8,468	)		(7,259	)		(19,436	)		(159,900	)
				Net cash flows from financing activities		13,256,886			7,626,536			17,837,390			118,001,792
NET (DECREASE) INCREASE IN CASH						1,314,693			(16,797,883	)		(8,729,956	)		2,841,801
CASH—Beginning of period						1,527,108			18,324,991			27,054,947			—
CASH—End of period					$	2,841,801		$	1,527,108		$	18,324,991		$	2,841,801
SUPPLEMENTAL DISCLOSURE OF
	CASH FLOW INFORMATION:
	Cash paid during the period for interest				$	1,023,530		$	477,835		$	416,583		$	3,414,171
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
	Noncash investment activity:
		Purchase of property and equipment under capital leases				—			—			—			164,249
		Capital expenses included in accounts payable				—			5,466			—			—
	Noncash financing activity:
		Issuance of common shares for licenses				—			—			—			9,000,000
		Issuance of common shares for reduction of milestone payment				—			—			—			3,000,000
		Unpaid costs associated with the issuance of common stock				—			61,775			—			—
		Debt discount				—			—			—			30,823
		SEDA and financing related costs				—			423,911			—			337,445

See notes to consolidated financial statements.

4750

Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1. Nature of Business

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

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

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

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

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

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

4851

Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~2010

1. Nature of Business (Continued)

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

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

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

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

In September 2008, in connection with the Company's entry into a development and commercialization agreement, the Company entered into a stock purchase agreement with Wyeth (Wyeth was subsequently acquired by Pfizer and as a result will be referred to as "Pfizer" throughout these financial statements). ~~entered~~Under ~~into~~the ~~a development~~terms ~~and~~of ~~commercialization~~ agreement, ~~for~~Pfizer ~~cethromycin~~made ~~(Restanza™)~~an inup-front ~~the~~investment ~~Asia Pacific region~~in ~~excluding~~the ~~Japan. The~~ Company ~~will~~by ~~retain~~purchasing ~~exclusive~~1,888,606 ~~rights~~shares ~~to cethromycin in the rest~~ of ~~the~~its ~~world,~~common ~~including~~stock ~~North~~at ~~America~~a ~~and~~price ~~Europe~~of ~~excluding Japan~~$0.908 Inper ~~addition~~share tofor ~~future~~approximately ~~royalty payments~~$1.7 million, ~~the Company~~net ~~would receive milestone and regulatory payments based on successful achievement~~ of ~~clinical~~offering expenses, ~~regulatory~~representing ~~and~~approximately ~~commercial objectives in specific markets~~4.9% ~~The~~of the Company's ~~and~~total ~~Pfizer~~then ~~will~~outstanding ~~collaborate to develop additional clinical data in the Asia Pacific region to support regulatory filings in that region~~shares. ItIn isAugust ~~not~~2010 ~~anticipated that Pfizer would file for regulatory approval in~~ the ~~Asia~~development ~~Pacific region~~and ~~prior~~commercialization toagreement ~~the~~was ~~Company~~terminated ~~obtaining~~by ~~U.S.~~mutual ~~approval~~agreement ~~for~~among ~~cethromycin from~~ the ~~United States Food and Drug Administration ("FDA")~~parties.

In ~~connection~~September ~~with~~2008, the Company's ~~entry~~and ~~into~~YA aGlobal ~~development~~Investments, L.P. ~~and~~("YA ~~commercialization agreement~~Global"), ~~the~~an ~~Company~~affiliate of Yorkville Advisors, entered into a ~~stock~~Standby ~~purchase~~Equity ~~agreement~~Distribution ~~with~~Agreement ~~Pfizer~~(the "2008 SEDA"). ~~Under~~For the ~~terms~~period of ~~the agreement,~~January ~~Pfizer~~2009 ~~made~~through anthe ~~up-front~~end ~~investment~~of inthe 2008 SEDA, the Company byissued ~~purchasing 1~~9,~~888~~883,~~606~~994 shares ofto ~~its~~YA ~~common~~Global ~~stock~~and atreceived aapproximately ~~price of~~ $03.~~908~~9 million. ~~per~~In ~~share~~addition, ~~for~~in ~~approximately~~September 2008, the Company paid YA Global a commitment fee of $~~1.7 million~~300,000 ~~net~~by ~~of offering~~issuing ~~expenses~~393,339 ~~representing~~shares ~~approximately~~of 4its common stock.9% ofThe Company and YA Global agreed to terminate the ~~Company's~~2008 ~~total~~SEDA ~~then~~in ~~outstanding~~June ~~shares~~2009.

In April 2009, the Company's shareholders approved an amendment to its articles of incorporation to increase the number of authorized shares from 65,000,000 to 125,000,000 including an increase in the number of authorized shares of common stock from 60,000,000 to 120,000,000. 52

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~2010

1. Nature of Business (Continued)

In ~~April~~June 2009, after terminating the ~~Company~~2008 ~~filed~~SEDA, athe ~~shelf~~Company ~~registration~~and ~~statement~~YA onGlobal ~~Form~~Master SPV ~~S-3~~Ltd. ~~with~~("YA ~~the~~Master"), ~~SEC~~an ~~which~~affiliate ~~was~~of ~~subsequently~~Yorkville ~~declared~~Advisors, ~~effective~~agreed byto enter into another Standby Equity Distribution Agreement (the ~~SEC~~"2009 SEDA"). ~~The~~For ~~shelf~~the ~~registration allows~~period from June 2009 through March 10, 2010, the Company toissued ~~raise~~49,549,200 ~~capital~~shares ~~from~~to ~~time~~YA toMaster ~~time~~and ~~through~~received ~~the~~proceeds ~~sale~~of approximately $11.7 million. Shares of common stock, ~~preferred~~sold ~~stock~~under the 2009 SEDA in excess of $9.0 million were sold with the consent of the Company's lender under its credit facility. In March 2010, the Company and~~/or~~ ~~equity~~YA ~~warrants~~Master agreed to terminate the 2009 SEDA.

~~The~~In July 2010, the Company ~~received~~completed a ~~notice~~public onoffering ~~April 28~~of 379,188 ~~2009~~units ~~from~~at ~~the~~a ~~Nasdaq~~price ~~Listing~~of ~~Qualifications~~$4.20 ~~Panel~~per ~~(the~~unit, ~~"Panel")~~raising ~~that~~approximately ~~the~~$1.6 million ~~Panel~~in ~~had~~gross ~~determined~~offering toproceeds ~~delist~~and approximately ~~the~~$1.0 million ~~Company's~~in ~~common~~net ~~stock~~proceeds ~~from The~~after ~~Nasdaq~~deducting ~~Capital~~placement ~~Market~~agent fees and offering expenses payable by the Company. ~~The~~Each ~~Panel's~~unit ~~decision~~sold ~~was~~in ~~based~~the onoffering consisted of (i) 100 shares of the Company's ~~inability~~common stock, (ii) 100 stock warrants to ~~evidence~~purchase ~~compliance~~shares ~~with~~of ~~the~~common ~~$2.5 million~~stock ~~shareholders'~~at ~~equity~~an ~~requirement~~exercise orprice ~~the~~of $~~35.~~0.042 per share and (iii) ~~million market~~one ~~value~~warrant ofto ~~listed~~purchase ~~securities~~an ~~requirement~~additional unit, consisting of ~~the~~100 ~~Nasdaq~~shares ~~Capital~~of ~~Market.~~common ~~The~~stock ~~Company's~~and ~~common~~100 stock onwarrants, at an exercise price of $4.20 per additional unit. The ~~Nasdaq~~stock ~~Capital~~warrants ~~Market~~may ~~was~~be ~~suspended~~exercised at ~~the~~any ~~open~~time ofduring ~~trading~~the onperiod ~~May 5,~~commencing ~~2009. The~~six ~~Company's~~months ~~common~~after ~~stock~~the ~~began~~closing ~~trading~~date and ending on the ~~OTC~~fifth ~~Bulletin~~anniversary ~~Board~~of ~~("OTCBB")~~the onclosing ~~May 6, 2009~~date. ~~Trading~~The onexercise period for the ~~OTCBB~~unit ~~still~~warrants ~~allows~~has expired. Prior to expiration, the Company toissued ~~sell~~36,196,800 shares of common stock ~~under~~and ~~its~~36,196,800 ~~Standby~~additional ~~Equity~~stock warrants through the exercise of unit warrants and received an additional $1.5 million in gross proceeds as a result of these exercises. Dawson ~~Distribution~~James ~~Agreement~~Securities, Inc. ("~~SEDA~~Dawson James") ~~facility~~acted ~~(see~~as ~~below)~~the placement agent for the offering. OnIn ~~August 20,~~addition ~~2009~~to cash placement agent fees, the ~~Nasdaq~~Company ~~Stock~~issued ~~Market~~to ~~filed~~Dawson James a ~~Form 25~~compensation ~~with~~warrant ~~the~~to purchase ~~SEC~~1,516,752 toshares ~~complete~~of ~~the~~common ~~delisting~~stock at an exercise price of $0.0672 per share.

In ~~June~~July ~~2009~~2010, the Company, ~~entered~~acting ~~into~~through athe ~~SEDA~~independent ~~with~~audit YAcommittee ~~Global~~of ~~Master~~its ~~SPV Ltd.~~Board ~~("YA SPV"), an affiliate~~ of ~~Yorkville Advisors~~Directors, ~~for~~entered ~~the~~into ~~sale~~an ofagreement upwith ~~to $15~~Dr.0 ~~million~~Flavin, ofproviding ~~shares of~~that the Company's ~~common~~ ~~stock~~$2.0 million ~~over~~promissory anote ~~two-year~~with ~~commitment period~~Dr. Flavin ~~Under~~would ~~the~~be ~~terms~~exchanged offor ~~the SEDA~~47, ~~the Company may from time to time~~619,047 ~~in its discretion, sell newly-issued~~ shares of ~~its common stock to YA SPV at a discount to~~ the ~~current~~Company's ~~market~~common ~~price of 5%~~stock. The ~~amount~~price of ~~each advance under the SEDA is limited to the greater of~~ $~~600,000 or the average trading volume for the five trading days prior to the advance notice date~~0.042 ~~The~~per ~~Company~~share isused ~~not~~in ~~obligated to utilize any of~~ the ~~$15.0 million~~exchange ~~available~~was ~~under~~ the ~~SEDA~~same ~~and there are no minimum commitments or minimum use penalties, nor does the agreement~~price ~~prohibit~~per ~~the~~share ~~Company~~used ~~from~~in ~~entering into any other financing arrangements. The Company entered into~~ the ~~SEDA with the consent of its lender under the~~ Company's ~~credit~~public ~~facility,~~equity ~~which requires the Company to maintain availability under the SEDA of at least $6~~offering.~~0 million~~ atAs ~~all~~a ~~times~~result ~~unless the bank otherwise consents. From the inception~~ of the ~~SEDA through December 31~~exchange, ~~2009,~~ the ~~Company~~ ~~issued~~promissory ~~34,102,143~~note ~~shares~~was tocancelled ~~YA SPV~~ and ~~received proceeds of approximately $9~~retired.~~4 million.~~ In addition, between the period of January 1, 2010 and February 26, 2010, the Company raised approximately $1.8 million and issued 11,441,609 shares through the usage of the SEDA facility. Shares of common stock sold under the SEDA in excess of $9.0 million were sold with the consent of the Company's lender under the Company's credit facility.

In ~~June~~September ~~2009~~2010, ~~prior~~the toCompany ~~entering~~entered into ~~the~~another ~~SEDA,~~Standby ~~the~~Equity ~~Company~~Distribution ~~and~~Agreement ~~YA Global Investments, L.P.~~ (the "YA2010 ~~Global~~SEDA"), anwith ~~affiliate~~YA ofMaster ~~Yorkville~~for ~~Advisors,~~the ~~agreed~~sale toof ~~terminate~~up ato ~~prior~~$10.0 million ~~Standby Equity~~of ~~Distribution~~shares ~~Agreement~~of ~~dated~~the Company's ascommon ofstock ~~September 29,~~over ~~2008~~a ~~("Former~~two-year ~~SEDA")~~commitment period. ~~For~~Under the ~~period~~terms of ~~January 1,~~the ~~2009~~2010 ~~through~~SEDA, ~~the~~between ~~end~~October of2010 ~~the~~and ~~Former~~January ~~SEDA~~2011, the Company ~~issued~~sold 952,~~883~~133,~~994~~074 shares of its common stock to YA ~~Global~~ Master at a discount to the current market price of 5% and received proceeds of approximately $31.91 million. ~~In addition~~Additionally, ~~in September 2008,~~ the Company paid to YA ~~Global~~ Master a commitment fee of $~~300~~100,000 by issuing ~~393~~1,~~339~~984,127 shares of ~~the Company's~~its common stock. In January 2011, the Company and YA Master agreed to terminate the 2010 SEDA.

~~The~~In ~~consolidated~~January ~~financial~~2011, ~~statements~~the ~~have~~Company ~~been~~and ~~prepared~~Dutchess onOpportunity aFund, ~~going~~II, LP ~~concern basis~~("Dutchess"), ~~which~~entered ~~contemplates~~into ~~continuity~~an ofInvestment ~~operations~~Agreement ~~and~~for the ~~realization~~sale of ~~assets~~up ~~and~~to ~~liquidation~~$5.0 million of ~~liabilities~~ inshares of the Company's ~~ordinary~~common ~~course~~stock over a period of ~~business~~two years. ~~Given~~Under ~~this~~the ~~uncertainty~~terms of the Investment Agreement, ~~there~~the isCompany ~~substantial~~may ~~doubt~~sell asfrom time to ~~the~~time, ~~Company's~~in ~~ability~~its todiscretion, ~~continue~~newly-issued asshares of its common stock to Dutchess at a ~~going~~discount ~~concern~~to the

5053

Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~2010

1. Nature of Business (Continued)

~~The~~current ~~Company~~market ~~has~~price ~~incurred~~of ~~losses~~5%. ~~since~~Additionally, ~~its~~the ~~incorporation~~Company inpaid ~~January 1999 and has funded its operations~~ to ~~date~~Dutchess ~~primarily~~a ~~from~~commitment ~~debt~~fee ~~financings~~of ~~and capital contributions from its founder and Chief Executive Officer~~$50,000 ~~proceeds~~by ofissuing ~~the IPO and the subsequent private placements~~2,475,248 ~~including~~shares ~~issuances~~ of its common stock ~~under the SEDA and the Former SEDA~~. The Company ~~will~~also ~~not~~has bean ~~generating~~effective ~~any~~registration ~~product-based~~statement ~~revenues or realizing cash flows from operations in the near term, if at all. Based~~ on ~~management's~~file ~~best~~with ~~estimates,~~ the ~~Company~~Securities ~~has~~and ~~resources~~Exchange toCommission ~~fund~~("SEC") ~~operations~~for ~~through~~ the ~~first~~purchase ~~quarter of 2010. Throughout 2009, the Company has raised capital through issuance of common stock under the SEDA~~ and ~~the Former SEDA. The Company's shelf registration statement filed in April 2009, allowed it to raise capital from time to time through the~~ sale of ~~common~~up ~~stock~~to ~~under~~72,162,601 ~~its~~shares, ~~SEDA facility. This S-3 registration statement will no longer be effective~~ with ~~the~~respect ~~filing of this report. In order~~ to ~~continue to raise additional capital through the sale of~~ common stock, ~~preferred~~issuable ~~stock and/or equity warrants~~ under the ~~Company's~~agreement ~~SEDA~~with ~~facility or through other methods of raising capital,~~Dutchess. ~~the~~Through ~~Company will be required to file~~March a23, ~~registration~~2011 ~~statement and have it declared effective by~~ the ~~SEC. Furthermore,~~Company ashas ofissued ~~February 26~~47, ~~2010~~403, ~~9,061,917~~ 618 shares ~~of authorized common stock remains available for future issuance. In order~~ to ~~issue additional shares of common stock~~Dutchess, ~~shareholder approval~~including ~~would be required to increase~~ the ~~number of authorized~~ shares. Ifissued ~~the~~as ~~Company~~a ~~raises~~commitment ~~additional capital by issuing equity securities~~fee, ~~its~~and ~~shareholders~~received ~~could~~proceeds ~~experience~~of ~~substantial~~approximately ~~dilution~~$0.7 million. InBased ~~addition,~~on asthe alast ~~result~~reported share price of the Company's ~~continued~~common ~~losses~~stock ~~and~~on ~~current~~March 21, ~~cash and financing position~~2011, ~~realization~~the ofCompany ~~assets~~would orbe ~~liquidation~~able ofto ~~liabilities,~~raise ~~without~~approximately ~~substantial~~an ~~adjustments~~additional ~~is uncertain~~$0. ~~The~~3 million ~~accompanying~~through ~~financial statements do not include any adjustments that might result from~~ the ~~outcome~~use of ~~these uncertainties. Given this uncertainty, there is substantial doubt as to~~ the ~~Company's~~ ~~ability~~Dutchess ~~to continue as a going concern~~Agreement.

InOn ~~order~~March 17, to2011, ~~continue~~the ~~its~~Company's ~~business~~Board ~~activities~~of ~~during~~Directors ~~2010,~~authorized ~~the~~and ~~Company~~approved ~~intends~~a to1-for-30 ~~raise~~reverse ~~additional~~stock ~~capital~~split. byThe ~~issuing~~Company's ~~additional common~~ shares, ~~assuming~~are ~~the~~not ~~shareholders'~~yet ~~approval~~trading ofon a ~~additional~~post-split ~~authorized~~basis ~~common~~and ~~shares~~the ~~and~~expected byeffective ~~licensing~~date ~~its~~of ~~lead~~the ~~compound~~reverse stock split is March 28, ~~cethromycin~~2011, subsequent to ~~commercial~~the ~~partners.~~issuance ~~The~~of the Company's ~~believes,~~2010 ~~based~~financial ~~upon~~statements. ~~current~~Pro ~~market conditions, additional commercial~~forma ~~partnership~~weighted ~~agreements~~average ~~would~~shares ~~include~~outstanding aand ~~series~~earnings ofper ~~milestone~~share ~~payments,~~calculations ~~including~~have ~~up-front~~been ~~milestones~~included ~~that~~on ~~would~~the ~~fund~~face of the Company's ~~continued~~consolidated ~~operations.~~statements ~~Although~~of ~~management~~operations ~~believes~~reflecting the post-split ~~Company~~effect ~~could~~of ~~secure~~the ~~additional~~pending ~~commercial~~reverse ~~partnerships,~~stock ~~there~~split. ~~can~~All beother noshare ~~assurances~~information ~~that~~including ~~such~~shares ~~partnerships~~issued ~~will~~and beoutstanding ~~available~~has atbeen ~~terms~~presented ~~acceptable~~on toa ~~the~~pre-split ~~Company, if at all~~basis.

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

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

Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

1. Nature of Business (Continued)

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

2. Summary of Significant Accounting Policies

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

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

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

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

Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~2010

2. Summary of Significant Accounting Policies (Continued)

ofusing ~~their~~information ~~estimated~~from ~~useful~~discussions ~~lives~~with orprospective ~~the~~purchasers. ~~term~~As of ~~the~~December 31, ~~respective~~2010, ~~leases using~~ the ~~straight-line~~estimated ~~method.~~fair ~~Maintenance~~value ~~and~~of ~~repair~~the ~~costs~~commercial ~~are~~launch ~~expensed~~materials aswas ~~incurred. Fixed assets capitalized under capital leases amounted to~~ $30250,000 ~~as of December 31, 2009~~ and ~~2008,~~is ~~and~~classified ~~accumulated~~as ~~depreciation~~a non-current of"Assets ~~$26,000~~held ~~and~~for ~~$19,000,~~sale" asin ofthe ~~December 31,~~Company's ~~2009~~consolidated ~~and~~balance ~~2008, respectively~~sheet.

Deferred Offering and Financing Costs—Deferred offering and financing costs represent legal, accounting, and commitment fees incurred to raise capital and obtain financing. ~~The~~In September 2010, the Company entered into the 2010 SEDA with YA Master for the sale of up to $10.0 million of shares of the Company's common stock over a two-year commitment period. In connection with this agreement, the Company incurred deferred offering costs ~~related~~which toincluded ~~the~~legal, ~~Former~~accounting ~~SEDA~~and ~~(see~~commitment ~~Note 1)~~fees of approximately $293,000. These costs, which are attributable to a proposed offering of securities, were deferred and ratably allocated against ~~the~~ gross proceeds of future offerings under the 2010 SEDA. ~~Deferred~~As ~~financing~~of December 31, 2010, the unamortized amount of deferred offering costs ~~were~~related ~~incurred~~to asthe a2010 ~~result~~SEDA ofwas $119,000. Also in September 2010, the Company ~~restructuring~~entered into an amended loan agreement with its ~~line~~lender. ofDeferred ~~credit~~financing ~~(see~~costs of ~~Note 4)~~approximately $173,000 related to legal and other closing fees were incurred. These costs ~~are~~were capitalized and will be amortized over the life of the ~~applicable~~remaining term. The unamortized amount of deferred financing costs related to this amended loan agreement was $130,000 as of December 31, 2010.

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

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

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

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 56

Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~2010

2. Summary of Significant Accounting Policies (Continued)

~~and~~available ~~the~~for ~~percent~~sale, ~~completed~~and asheld ofdiscussions ~~that~~with ~~accounting~~prospective ~~date~~purchasers. ~~Research~~Although ~~and~~those ~~development~~discussions ~~expenses~~did ~~resulting~~not ~~from~~lead ~~contracts~~to ~~that~~a ~~require~~sale ~~payments~~of ~~based upon~~ the ~~progress~~materials, ~~towards~~based ~~completion~~on ofthose ~~certain~~discussions, ~~milestones are~~the ~~estimated~~Company ~~based~~determined ~~upon~~that the estimated ~~percentage~~value of ~~completion~~its ~~method.~~commercial ~~The~~launch ~~Company~~materials ~~believes~~was ~~that~~impaired ~~the~~and ~~estimates~~recorded ~~made~~an asimpairment ofcharge ~~December 31,~~to ~~2009~~eliminate ~~are reflective of~~ the ~~actual~~carrying ~~expenses~~value ~~incurred~~in asexcess of ~~that date~~fair value.

~~The company~~ Research ~~recognizes~~and Development Expenses—Research and development expenses consist of internal research costs and fees paid for contract research in~~-process~~ conjunction with the research and development inof ~~accordance~~the ~~with~~Company's ~~GAAP~~proprietary product portfolio. ~~Assets~~All tosuch becosts ~~used~~are expensed as incurred including in-process research and development. Clinical ~~activities,~~trial ~~specifically,~~costs ~~compounds~~incurred ~~that have~~by ~~yet~~third toparties ~~receive~~are ~~new~~expensed ~~drug~~as ~~approval~~the ~~from~~contracted work is performed. The Company estimates both the ~~FDA~~total cost and ~~would~~time ~~have~~period noof ~~alternative~~the ~~use~~trials ~~should~~and ~~approval~~the ~~not~~percent becompleted ~~given,~~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 ~~immediately~~estimated ~~charged~~based toupon ~~expense~~the percentage ~~when~~of ~~acquired~~completion method.

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

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

Revenue Recognition—~~Revenue~~Payments ~~related~~received tofor ~~award~~the ~~grants~~reimbursement ~~from~~of ~~various~~expenses ~~government~~for ~~agencies~~research isand development activities are recorded in accordance with FASB ASC 605-45, Principal Agent Considerations. Pursuant to that guidance, for transactions in which the Company acts as ~~expenses~~principal, ~~are~~with discretion ~~incurred~~to choose suppliers, bear credit risk and perform a substantive part of the services, ~~performed in accordance~~revenue ~~with~~is recorded at the ~~terms~~gross amount of the ~~grant agreements~~reimbursement. ~~Royalty~~Costs ~~revenue~~associated iswith ~~earned~~these reimbursements ~~from~~are reflected as a ~~license~~component of ~~the~~research ~~Company's~~and ~~chemical~~development ~~process technology~~expenses.

Fair Value of Financial Instruments—The carrying values of certain of the Company's financial instruments, including cash equivalents and accounts payable, ~~approximates~~approximate fair value due to their short maturities. ~~The~~As ~~fair~~of ~~values~~December 31, of2010, the Company's ~~long-term~~has ~~obligations~~an ~~(see~~outstanding ~~Note 4)~~loan ~~are~~obligation ~~based~~with onits ~~assumptions~~lender ~~concerning~~in the amount ~~and~~of $8.1 million. The ~~timing~~terms of ~~estimated~~the ~~future~~amended ~~cash~~loan ~~flows~~agreement ~~and~~with ~~assumed~~the ~~discount~~lender ~~rates~~are ~~reflecting~~such ~~varying~~that ~~degrees~~a ~~of risk~~$1.1 million ~~The~~principal ~~Company~~payment, ~~estimates~~as ~~that~~well ~~the~~as ~~fair~~an ~~value~~additional ~~of its~~ $101.0 million ~~(carrying~~principal ~~value)~~payment ~~revolving~~also due on April 1, ~~line~~2011, ofcan ~~credit~~be isdeferred ~~approximately~~until January 1, 2012 if the Company pays $9486,000 in additional interest reserve by April 1, 2011 (see Note 4). The remaining $6.0 million ~~and~~balance ~~that~~is due on January 1, 2012 and the ~~fair~~loan ~~value~~carries an interest rate of 10%. The Company is currently in default of the loan documents governing the loan facility and is engaged in a dialogue to develop a constructive and workable solution to its $2current liquidity situation, although there can be no guarantee that such a solution will be reached, or reached on terms that would be acceptable to the Company.~~0 million~~ ~~(carrying~~Given ~~value)~~its ~~promissory~~current ~~note~~situation with its lender, the Company does not believe it is ~~approximately~~practicable $1to estimate a fair value of its outstanding loan obligation.~~9 million.~~

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

2. Summary of Significant Accounting Policies (Continued)

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

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

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

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

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

Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~ 2010

2. Summary of Significant Accounting Policies (Continued)

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

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

In May, 2009, the FASB issued guidance related to subsequent events, which is included in ASC subtopic 855, "Subsequent Events." The provisions require Company management to evaluate events or transactions occurring subsequent to the balance sheet date but prior to the issuance of the financial statements for potential recognition or disclosure in the financial statements and to disclose the results of management's findings in the financial statements. In addition, the provisions identify the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements and the required disclosures of such events. This statement is effective for interim or annual periods ending after June 15, 2009. The adoption of the provisions did not have a material impact on the Company's statements of financial position, results of operations and cash flows.

In December 2007, the FASB issued new accounting guidance related to the accounting for noncontrolling interests in consolidated financial statements, which are included in ASC subtopic 810, "Noncontrolling Interests in Consolidated Financial Statements". This guidance changes the accounting and reporting for minority interests, which includes retrospective adjustments to recharacterize noncontrolling interests and classification as a component of equity. The Company's only noncontrolling interest is the ownership, by deCODE Genetics, of the preferred stock of ALS, Inc. The new guidance was effective beginning the first fiscal quarter of 2009. The adoption of this guidance did not have a material impact on the Company's statements of financial position, results of operations and cash flows.

3. Related Party Transactions

The Company's Chief Executive Officer, Michael T. Flavin Ph.D., loaned $2.0 million to the Company in 2001 (see Note 4). Interest expense related to the note of $~~158~~91,000, $~~155~~158,000 and $155,000 was recorded ~~and paid,~~ for the years ended December 31, ~~2009~~2010, ~~2008~~2009 and ~~2007~~2008, respectively.

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

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

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

4. Long Term Obligations

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

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

Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~2010

34. ~~Related~~Long ~~Party~~Term ~~Transactions~~Obligations (Continued)

~~The~~principal ~~Company's~~balance ~~line~~is ofreduced ~~credit~~to ~~with~~$7.0 million. aIn ~~financial~~addition, ~~institution~~the isinterest ~~secured~~rate byon ~~substantially~~the ~~all~~outstanding loan balance increased from 8.5% to 10.0% under the terms of the amended loan agreement. In connection with the amendment, the Company's ~~assets~~issued to its lender 500,000 ~~except~~warrants, ~~that~~which ~~the~~are ~~collateral~~exercisable ~~specifically~~at ~~excludes~~$0.042 ~~any~~per ~~rights~~share, ~~that~~and ~~the~~will issue an additional 500,000 warrants in September 2011. The Company ~~has~~also asagreed athat ~~result~~the line of credit is secured by substantially all of its ~~license~~assets ~~agreement~~including, ~~with~~subject to Abbott Laboratories' ~~("Abbott")~~consent which has not been provided, its rights under its license agreement for cethromycin with Abbott Laboratories, and is further secured by 2.5 million shares of the Company's common stock held by ALS Ventures, LLC. ~~(see~~The ~~Note 4)~~credit agreement contains a material adverse change clause, which is ~~beneficially~~subject ~~owned~~to bythe judgment of the ~~Company's~~lender ~~Chief~~and, ~~Executive~~if ~~Officer~~triggered, can accelerate the payment of the debt.

~~The~~In ~~Company~~October ~~leases facilities from the BioStart Property Group ("BioStart")~~2010, ~~a wholly-owned subsidiary of Flavin Ventures, which is owned by~~ the Company's ~~Chief~~paid ~~Executive~~$420,000 ~~Officer. The operating lease expired~~ in ~~September of 2008 and pursuant to the terms of the lease and pending agreement on~~ a ~~lease~~principal ~~renewal,~~reduction ~~the Company leased the facilities on a month-~~to~~-month~~ ~~basis. In October 2009, the Company renewed~~ its ~~lease~~lender ~~with~~toward ~~BioStart.~~a ~~Because~~mandatory ofprepayment ~~the ownership interest in BioStart held by Flavin Ventures, the Company's audit committee, acting on behalf~~ of ~~the board, oversaw all lease negotiations on behalf of the Company and the board approved the final terms of the Company's lease renewal~~$1.5 million ~~The~~that ~~lease,~~was ~~which~~due ~~commenced~~ on October 1, ~~2009, is for a term of three years and provides the Company with 9,440 square feet of space at a rental rate of $10~~2010.50 ~~per~~Until ~~square foot. This rate is comparable with market rates for similar office space in~~ the ~~surrounding area. The rental~~ ~~rate~~balance ~~increases by 2.5% for the second year and by 3.0% in the final year~~ of the ~~lease~~prepayment ~~term.~~is ~~The~~made, ~~lease has a provision allowing~~ the Company tois ~~negotiate~~subject ~~an amendment~~ to ~~lease additional laboratory and office space should~~ the ~~need~~default ~~arise.~~provisions ~~Lease~~of ~~payments totaled approximately $235,000, $284,000 and $272,000 for~~ the ~~years~~loan ~~ended~~documents ~~December 31,~~including ~~2009,~~acceleration ~~2008~~of ~~and 2007, respectively (see Note 10)~~payment.

In ~~connection~~November ~~with~~2010, ~~its~~the ~~lease~~Company ~~renewal~~entered into a Forbearance Agreement with ~~BioStart,~~its lender relating to the ~~Company~~Second ~~discontinued~~Amended and Restated Business Loan Agreement. Under the ~~rental~~terms of the ~~laboratory~~agreement, the ~~and~~lender ~~certain~~agreed ~~office~~to ~~space.~~forbear Infrom exercising rights and remedies under the ~~third~~loan ~~quarter~~agreement from the date of ~~2009~~the agreement to January 3, 2011, subject to certain conditions. Among other things, the Company ~~recorded~~was ~~a non-cash~~required ~~charge~~to engage an advisor for purposes of ~~approximately~~reviewing ~~$234~~the Company's business plans,~~000~~ tobudgets ~~expense~~and ~~capitalized~~expenditures ~~leasehold~~and ~~improvements~~making ~~related~~recommendations regarding the same. The Company was also required to submit to the ~~space~~lender noa ~~longer~~business ~~leased~~plan outlining its budgets and capital raising plans.

In December 42010, the Company entered into an Omnibus Amendment with its lender relating to the Second Amended and Restated Business Loan Agreement and Forbearance Agreement. ~~Long~~Under ~~Term~~the terms ~~Obligations~~ of the amendment, the lender agreed to waive the existing defaults under the loan agreement and the Company agreed to make an interest reserve payment of $186,000 by January 10, 2011 which was paid on that date. Upon receipt of this interest reserve payment, the due date for the $1.1 million principal payment owed by the Company was extended to April 1, 2011. The $1.1 million principal payment, as well as an additional $1.0 million principal payment also due on April 1, 2011, can be deferred until January 1, 2012 if the Company pays $486,000 in additional interest reserve by April 1, 2011.

InOn February 21, ~~September 2001~~2011, the Company ~~incurred~~received ~~indebtedness~~a ~~under~~letter afrom ~~$2.0 million~~its ~~promissory~~lender ~~note~~informing ~~with~~it that the ~~Chief~~Company ~~Executive~~was ~~Officer~~in ofdefault under the ~~Company,~~loan ~~which~~documents ~~bears~~governing ~~interest~~its atprincipal ~~7.75%.~~credit ~~Principal~~facility. ~~plus~~The ~~any~~letter ~~accrued~~indicated that the Company had failed to fund an interest ~~was~~reserve ~~due~~account inas arequired ~~lump~~by ~~sum~~an onamendment ~~January 5,~~to ~~2010~~the credit facility. OnThe ~~January 4,~~lender ~~2010,~~requested that the ~~note~~Company ~~was~~cure ~~extended~~such todefault ~~January~~by February 525, ~~2012~~2011. ~~and~~The islender ~~therefore~~noted ~~classified~~that asit ~~a long-term~~was ~~liability~~reserving inthe right to exercise all rights and remedies under the ~~financial~~loan ~~statements.~~documents ~~All~~if ~~other~~the ~~terms~~Company ~~remained~~failed ~~unchanged~~to ~~and~~meet inthe ~~effect~~payment deadline. AsRemedies available ofto ~~December 31~~the lender include, ~~2009~~among ~~and~~other ~~December 31~~things, ~~2008,~~ the ~~Company~~right ~~had $2.0 million~~to accelerate payment of all amounts outstanding under the ~~note~~line of credit.

The Company has a $10.0 million revolving line of credit with a financial institution with a maturity date of January 1, 2011, and a fixed interest rate of 8.5%. The line of credit is secured by substantially all of the Company's assets, except that the collateral specifically excludes any rights that the Company may have as a result of its license agreement with Abbott for cethromycin, and is further secured by 2.5 million shares of the Company's common stock held by ALS Ventures, LLC. The credit agreement contains a material adverse change clause, which is subject to the judgment of the lender and, if triggered, can accelerate the payment of the debt. The Company entered into the SEDA with the consent of its lender under the Company's credit facility, which requires the Company to maintain availability under the SEDA of at least $6.0 million at all times unless the bank otherwise consents. In 60

Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~2010

4. Long Term Obligations (Continued)

~~October~~ On ~~2008~~February 25, 2011, the Company ~~issued~~informed to the lender asthat ait ~~closing~~would ~~fee~~not ~~warrants~~be ~~for~~funding the ~~purchase~~interest ofreserve ~~65,000~~account ~~shares~~in the amount demanded in the notice of default. The Company did, however, pay its ~~common~~February ~~stock~~2011 atinterest anpayment ~~exercise~~to ~~price~~remain ofcurrent ~~$1.00~~with ~~per~~its ~~share~~interest payment obligation. ~~The~~Following ~~warrants~~this ~~became~~payment, ~~exercisable~~the Company met with the lender and is engaged in a dialogue to develop ~~upon~~a ~~issuance~~constructive and workable solution to the current liquidity situation, although there can be no guarantee that such a solution will ~~expire~~be ~~five~~reached, ~~years~~or ~~from~~reached on terms that would be acceptable to the Company ~~date~~or ofthat would not require the ~~grant.~~Company Asto offile ~~December 31,~~for ~~2009~~bankruptcy. ~~and~~As ~~2008,~~a result of the Company's ~~had~~default ~~outstanding~~status ~~under~~with its lender, the ~~note~~entire $108.01 million ~~and~~outstanding ~~$9.9~~loan balance is classified as a current liability on the December ~~million~~31, ~~respectively~~ 2010 balance sheet.

5. Stockholders' Equity (Deficit)

Authorized Capital—In April 2010, the Company's shareholders approved an amendment to the Company's articles of incorporation to increase the number of authorized shares from 125,000,000 to 625,000,000 including an increase in the number of authorized shares of common stock from 120,000,000 to 620,000,000. As of December 31, ~~2009~~2010, the authorized capital stock of the Company consists of ~~120~~620,000,000 shares of voting common stock authorized for issuance with a par value of $0.01 and 5,000,000 shares of undesignated preferred stock which may be issued from time to time in one or more series. The Company has not issued any preferred stock as of December 31, ~~2009~~2010.

6. Noncontrolling Interest

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

As of December 31, ~~2009~~2010, ALS Inc. had 250,000 shares of Series A Cumulative Preferred Stock authorized, issued and outstanding to deCODE. The Series A Preferred Stock is nonvoting except as to certain matters including the issuance of any class of stock ranking prior to the shares of Series A Preferred Stock, or the merger or consolidation of ALS Inc. if such merger would adversely affect the powers, preferences or rights of the Series A Preferred Stock. The Series A Preferred stockholder is entitled to receive dividends payable in cash at the rate of 7.0% per annum per share on the amount of liquidation preference of the shares.

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

The total liquidation preference values as of December 31, ~~2009~~2010 and ~~2008~~2009 are approximately $4.35 million and $4.23 million respectively, including approximately $12.80 million and $1.78 million of unpaid dividends. Any determination in the future to pay cash dividends will depend on the Company's financial condition, capital requirements, result of operations, contractual limitations and other factors deemed relevant by the Board of Directors.

~~7. Incentive Stock Plan~~ 61

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~2010

7. Incentive Stock Plan ~~(Continued)~~

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

In April 2005, ~~our~~the ~~board~~Company's Board of ~~directors~~Directors adopted the 2005 Stock Incentive Plan. The 2005 Stock Incentive Plan permits awards of non-qualified stock options, incentive ~~stock~~ stock options, stock appreciation rights, restricted stock, restricted stock units and performance shares. In addition, the plan provides an opportunity for the deferral of salary and bonuses into restricted stock units and the deferrals of gains or payments due upon the vesting or exercise of awards under our stock incentive plan. As of December 31, ~~2009~~2010, only non-qualified stock options have been issued under this plan.

The maximum number of shares of common stock that may be subject to awards under ~~our~~the Company's incentive plans is 46,686,107. Options granted under the 2005 Stock Incentive Plan vest at ~~the~~ the discretion of the ~~board~~Board of ~~directors~~Directors and expire 10 years from the date of grant. To date, the vesting term of the options granted under the Plan has ranged from immediate vesting to 3 years. As of December 31, ~~2009~~2010, ~~897,597~~all options were ~~available to be~~ granted under the plan.

The compensation cost that has been charged ~~against~~to ~~income~~expense for the Company's Plans was approximately $~~526~~293,000, $~~851~~526,000 and $~~734~~851,000 for ~~2009~~2010, ~~2008~~2009 and ~~2007~~2008, respectively. Since the ~~Company~~ Company records a full valuation allowance against its deferred tax assets, no tax benefit has been recognized related to these share-based compensation charges.The following schedule details the grants under the Company's plan for the year ended December 31, 2010.

The following schedule details the grants under the Company's plan for the year ended December 31, 2009.

Options			Weighted Average Exercise Price			Aggregate Intrinsic Value

Outstanding at January 1, 2010	3,381,706		$	1.55	7.5	$	—
Granted	2,996,027		$	0.05
Exercised	—		$	—
Expired	—		$	—
Forfeited	(98,430	)	$	2.27

Outstanding at December 31, 2010	6,279,303		$	0.82	8.0	$	—

Options exercisable at December 31, 2010	3,085,221		$	1.54	6.6	$	—

Vested or expected to vest at December 31, 2010	6,060,793		$	0.85	8.0	$	—

Options			Weighted Average Exercise Price			Aggregate Intrinsic Value
Outstanding at January 1, 2009	3,123,259		$	1.62	7.7	$	—
Granted	673,200		$	0.69
Exercised	(127,941	)	$	0.16
Expired	(53,520	)	$	0.16
Forfeited	(233,292	)	$	1.09
Outstanding at December 31, 2009	3,381,706		$	1.55	7.5	$	—
Options exercisable at December 31, 2009	2,204,181		$	2.05	6.8	$	—

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~2010

7. Incentive Stock Plan (Continued)

Asyears ~~of December 31~~2010, 2009, ~~there~~and 2008 was approximately $~~480~~195,000, of$573,000 ~~total~~and ~~unrecognized~~$688,000, ~~compensation~~respectively. ~~cost~~There ~~related~~were tono ~~unvested~~options ~~stock~~exercised ~~options~~in ~~granted~~2010. ~~under~~The ~~the~~total ~~Plans;~~intrinsic ~~that~~value ~~cost~~of isoptions ~~expected~~exercised during the years toended beDecember 31, ~~recognized~~2009 ~~over~~and a2008 ~~period~~was ofapproximately ~~3 years~~$14,000 and $21,000, respectively.

~~Cash~~As ~~received~~of ~~from options exercises under the Plans for the years ended~~ December 31, ~~2009~~2010, ~~2008~~there ~~and 2007~~ was approximately $20318,~~100,~~000 ~~$4,100~~of ~~and~~total ~~$4,600,~~unrecognized ~~respectively.~~compensation ~~The~~cost ~~Company issues~~related ~~new~~to ~~shares~~unvested ~~of common~~ stock asoptions agranted ~~result~~under ~~of stock option exercises. No tax benefits have been recognized in connection with~~ the ~~stock~~Plans; ~~option~~that ~~exercises~~cost ~~due~~is expected to ~~the~~be ~~Company's~~recognized ~~net~~over ~~operating~~a ~~losses~~period ~~and~~of ~~full valuation allowance on its deferred tax assets~~3 years.

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

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

	2009			2008		2007
	2010			2009			2008
Expected volatility		~~104~~120.07	%	~~71% - 81%~~	104.0	62% ~~- 66%~~		71% - 81	%
Weighted-average volatility		~~104~~120.07	%	~~76.5%~~	104.0	~~65.5~~%		76.5	%
Expected dividends		0.0	%	~~0.0%~~	0.0	~~0.0~~%		0.0	%
Expected term (in years)		6.0		~~6.0 - 6.5~~	6.0	~~6.5~~		6.0 - 6.5
Risk-free rate		21.3370	%	~~2.79% - 3.34%~~	2.33	~~4.63~~% ~~- 4.65%~~		2.79% - 3.34	%

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

8. Income Taxes

Net deferred tax assets consist primarily of net operating loss ("NOL") carryforwards. ~~Realization~~As of ~~future~~December 31, ~~tax~~2010, ~~benefits~~the ~~related~~Company tohad ~~deferred~~a ~~tax~~NOL ~~assets~~carryforward isfor ~~dependent~~income ontax ~~many~~purposes ~~factors~~of approximately $108.2 million. In addition, ~~including~~the Company had federal tax credits for increasing research and development expenditures of approximately $2.6 million. Utilization of the Company's ~~ability~~NOL tocarryforwards ~~generate~~may ~~future~~be ~~taxable~~subject ~~income~~to insubstantial ~~the~~annual ~~near~~limitations ~~term.~~due ~~The~~to ~~Company~~the ~~establishes~~ownership achange ~~valuation~~limitations ~~allowance~~provided ~~for~~by ~~deferred~~the ~~tax~~Internal ~~assets~~Revenue inCode ~~accordance~~and ~~with~~similar ~~GAAP~~state ~~when~~provisions. itSuch an isannual ~~more-likely-than-not~~limitation ~~that~~could result in the ~~deferred~~expiration ~~tax~~of ~~asset~~the ~~will~~NOL ~~not~~carryforwards bebefore ~~realized~~utilization. ~~through~~Realization of future ~~reversals~~tax ofbenefits ~~existing~~related ~~taxable~~to ~~temporary~~deferred ~~differences~~tax ~~and,~~assets tois adependent ~~lesser~~on ~~extent~~many factors, including ~~future~~the ~~taxable~~Company's ~~income.~~ability ~~Due~~ to ~~the~~generate ~~uncertainty~~future oftaxable ~~future~~income ~~earnings,~~in ~~management~~the isnear ~~unable~~term. toThe ~~predict~~Company ~~whether~~establishes ~~its~~a ~~net~~valuation allowance for deferred tax assets ~~will~~in beaccordance ~~realized~~with ~~and,~~GAAP ~~accordingly,~~when ~~has~~it ~~recorded~~is more-likely-than-not athat ~~full~~the ~~valuation allowance~~deferred ~~against~~tax ~~these~~asset ~~assets.~~will not

5863

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~ 2010

8. Income Taxes (Continued)

be ~~NOL~~realized ~~carryforwards~~through ~~of approximately $98.3 million for income tax purposes are available to offset~~ future ~~taxable~~reversals ~~income. In addition, federal tax credits for increasing research and development expenditures~~ of ~~approximately~~existing ~~$2.5 million~~taxable ~~are~~temporary ~~available~~differences ~~to offset future tax. These carryforwards begin to expire in varying amounts beginning in the year 2019. In March 2006~~and, in ~~conjunction with the Company's issuance of common stock~~ to a ~~group~~lesser ~~of investors in March 2006~~extent, ~~the~~future 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~~. IfDue ~~taxable~~to ~~income exceeds $4.0 million in a year, $78.4 million of~~ the ~~unaffected~~uncertainty ~~NOL carryforwards are available. If some or all~~ of ~~the $4.1 million~~future ~~NOL is not utilized in a tax year~~earnings, ~~the~~management ~~excess~~is ~~carries~~unable ~~forward. This excess increases the $4.1 million available in the succeeding year. Tax credits have been similarly~~to ~~limited.~~predict ~~The Company is in the process of assessing~~ whether ~~the~~its ~~issuances~~net ofdeferred ~~common~~tax ~~stock~~assets ~~during~~will ~~2009~~be ~~affected~~realized ~~this Section 382 limitation~~ and, ~~the amount of NOL carryforward available to be used annually in the future; however~~accordingly, ~~as the Company~~ has recorded a full valuation allowance onagainst ~~its~~these ~~deferred tax~~ assets~~, the outcome of the assessment will not affect the amounts recorded in the financial statements~~.

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

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

The following is a summary of the significant components of the Company's deferred tax assets as of December 31, ~~2009~~2010 and ~~2008~~2009:

		2009			2008
		2010			2009
Deferred tax assets:
	Net operating losses	$	3842,~~328~~186,~~035~~203		$	3338,~~745~~328,~~721~~035
	Stock based compensation		1,~~236~~303,~~255~~037			~~993~~1,~~113~~236,255
	Depreciation		9186,~~437~~330			~~112~~91,~~370~~437
	In-process research and development		87,~~794~~511,~~221~~021			108,~~077~~794,~~422~~221
	Other accruals and reserves		~~361~~1,~~096~~360,031			~~308~~361,~~758~~096
	Less valuation allowance		(4852,~~811~~446,~~044~~622	)		(4548,~~237~~811,~~384~~044	)
Deferred tax asset—net		$	—		$	—

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

	Years ended December 31,

	2010			2009
Tax 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	%

Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~ 2010

8. Income Taxes (Continued)

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

	Years ended December 31,
	2009			2008
Tax provision at the statutory federal rate		34	%		34	%
State income taxes, net of federal income tax benefit		5	%		5	%
Valuation allowance		(39	)%		(39	)%
Effective tax rate		0	%		0	%

9. Employee Benefit Plan

The Company has established a 401(k) plan that covers all employees who meet minimum eligibility requirements. Eligible persons can defer a portion of their annual compensation into the 401(k) plan subject to certain limitations imposed by the Internal Revenue Code. Employees' elective deferrals are immediately vested upon contribution to the 401 (k) plan. The ~~company~~Company matches employee contributions at a rate of 50% up to 6% of the employee's annual salary. Company contributions vest 25% per year after the first year of service has been completed. Approximately $7469,000, $8374,000 and $7283,000 were recognized as expense in ~~2009~~2010, ~~2008~~2009 and ~~2007~~2008, respectively.

10. Commitments

Lease Obligations—The Company leases facilities from the BioStart, a wholly-owned subsidiary of Flavin Ventures, which is owned by the Company's Chief Executive Officer. The ~~operating~~ lease, ~~expired~~which incommenced ~~September~~on October 1, 2009, is for a term of ~~2008~~three years and ~~pursuant~~provides to the ~~terms~~Company with 9,440 square feet of ~~the~~space ~~lease~~at ~~and~~an ~~pending~~annual ~~agreement~~rental onrate aof ~~lease~~$10.50 ~~renewal,~~per square foot. The rental rate increases by 2.5% for the ~~Company~~second ~~leased~~year and by 3.0% in the ~~facilities~~final onyear ~~a month-to-month basis~~of the lease term. InThe ~~October~~lease ~~2009,~~has a provision allowing the Company ~~renewed~~to ~~its~~negotiate an amendment to lease additional ~~with~~laboratory ~~BioStart~~and asoffice ~~discussed~~space ~~further~~should inthe ~~Note 3~~need arise. Additionally, the Company leases certain ~~capital~~ equipment under aboth operating and capital ~~lease~~leases.

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

	Operating Leases		Capital lease Obligations

Year ending December 31,
2011		111,840		7,177
2012		87,965		7,177
2013		9,480		7,177
2014		2,370		5,121
2015		—		—

Total	$	211,655		26,652

Less amount representing interest				5,436

Present value of minimum lease payments			$	21,216

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

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

Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~2010

10. Commitments (Continued)

~~Minimum~~On ~~annual~~February 25, ~~payments~~2011, ~~under~~the ~~operating~~Company ~~leases~~announced ~~and~~that its Chief Executive Officer informed the ~~present~~Company's ~~value~~employees that as a measure to help address its liquidity issues, it had implemented a company-wide compensation reduction plan that would reduce salaries of ~~minimum~~impacted ~~capital~~employees ~~lease~~by ~~payments~~30%-50%. asIncluded in this reduction were all of ~~December 31,~~the ~~2009~~officers ~~are~~of asthe Company ~~follows:~~with whom the Company has entered into employment agreements.

	Operating Leases		Capital lease Obligations
Year ending December 31,
2010	$	99,740	$	4,655
2011		102,360		—
2012		78,485		—
2013		—		—
2014		—		—
Total	$	280,585		4,655
Less amount representing interest				304
Present value of minimum lease payments			$	4,351

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

~~Rental expense~~ Grant ~~relating~~Payable—In toApril 2005, the ~~lease~~Company ~~with~~was ~~BioStart~~awarded ~~totaled~~a ~~approximately~~ $~~194~~500,000, ~~$241~~grant from the State of Illinois to fund expansion of its corporate headquarters in Woodridge,~~000~~ ~~and~~Illinois. ~~$230~~Under the terms of the grant,~~000~~ inthe ~~2009~~Company is to create 100 full-time jobs at its corporate headquarters between January 31, ~~2008~~2005 and ~~2007~~December 31, ~~respectively~~2010 ("Grant Period"). ~~Common~~Under ~~area~~the ~~maintenance~~current ~~expense~~terms ~~totaled approximately~~of ~~$41~~the agreement,~~000~~ if the Company does not create the specified number of full-time jobs, it is required to repay the grant proceeds on a pro-rata basis of actual jobs created compared to the total defined in the grant within 45 days of the expiration or termination of the agreement. The entire grant has been spent and therefore the $43500,000 has been classified as a current liability as the Company must create and ~~$41~~maintain positions created during the Grant Period through December 31,~~000~~ in2010. ~~2009~~Through December 31, ~~2008~~2010, four new jobs have been created and ~~2007~~retained since the grant was awarded. In December 2010, ~~respectively~~the Company submitted a request to the Illinois Department of Commerce to extend the deadline to create 100 full-time jobs to December 31, 2011. As of March 23, 2011, the Illinois Department of Commerce has not made a determination regarding the request to extend the deadline.

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. 66

Vendor Contracts—The Company administers its cethromycin program largely under contracts with third parties. Through December 31, 2009, contracts totaling $46.9 million have been executed related to the cethromycin program, which includes the development, commercialization, regulatory review and pre-launch activities associated with cethromycin as well as anthrax-related studies. To date the Company has paid $46.8 million under these contracts and the remaining balance of $0.1 million is expected to be paid in the first quarter of 2010. Subcontractor arrangements in connection with the DTRA award grant are expected to be approximately $3.1 million over a two-year period which began in August 2008. Through December 31, 2009 the Company has paid $1.5 million related to these agreements. In addition, to date the Company has executed $1.2 million in contracts related to the ALS-357 program. Through December 31, 2009 the Company has paid $0.3 million related to these contracts and the remaining balance of $0.9 million would be paid over the life of the program which the Company estimates to be two to three years. The commencement of clinical trials to study ALS-357 as a topical treatment for patients with metastatic melanoma may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease, and the eligibility criteria for the clinical trial.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~2010

10. Commitments (Continued)

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

11. Research and Development Alliances

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

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

~~Pfizer~~University of Illinois at Chicago—In ~~September~~December ~~2008~~1999, the Company entered into a ~~development~~license ~~and commercialization~~ agreement with ~~Pfizer for cethromycin in~~ the ~~Asia~~University ~~Pacific region~~of ~~excluding~~Illinois ~~Japan.~~at ~~The~~Chicago ~~Company will retain exclusive rights~~ ("UIC") to license ~~cethromycin~~an inanti-melanoma ~~the~~compound. ~~rest~~In consideration of the ~~world~~exclusive, ~~including~~world-wide ~~North~~license, ~~America~~the ~~and~~Company ~~Europe~~paid ~~excluding~~an ~~Japan.~~upfront Inlicense ~~addition~~fee toof ~~future~~$15,000 ~~royalty~~upon ~~payments,~~ the ~~Company~~execution ~~would~~of ~~receive~~the agreement. ~~milestone~~The ~~and~~Company ~~regulatory~~is ~~payments~~obligated ~~based~~to onmake ~~successful~~up ~~achievement~~to ~~of clinical~~$135,000 ~~regulatory~~in ~~and~~aggregate ~~commercial objectives~~

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~2010

11. Research and Development Alliances (Continued)

inmilestone ~~specific~~payments ~~markets~~upon the achievement of certain objectives. ~~The~~In December 2004, the Company ~~will~~filed ~~collaborate~~an IND with the FDA for the anti-melanoma compound which triggered a $10,000 milestone payment to ~~develop~~UIC ~~additional~~which ~~clinical~~was ~~data~~classified as research and development expense. Under the terms of the agreement, the Company is obligated to reimburse UIC for patent protection costs which totaled approximately $9,000, $18,000 and $54,000 in 2010, 2009 and 2008, respectively. In addition, the ~~Asia~~Company ~~Pacific~~must ~~region~~pay royalties equal to ~~support~~6% ~~regulatory~~of ~~filings~~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 ~~that~~any ~~region~~event, a minimum royalty of $5,000 annually once commercial sales commence.

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

University of Illinois at Chicago—In December 1999, the Company entered into a license agreement with the University of Illinois at Chicago ("UIC") to license an anti-melanoma compound. In consideration of the exclusive, world-wide license, the Company paid an upfront license fee of $15,000 upon the execution of the agreement. The Company is obligated to make up to $135,000 in aggregate milestone payments upon the achievement of certain objectives. In December 2004, the Company filed an IND with the FDA for the anti-melanoma compound which triggered a $10,000 milestone payment to UIC which was classified as research and development expense. Under the terms of the agreement, the Company is obligated to reimburse UIC for patent protection costs which totaled approximately $18,000, $54,000 and $41,000 in 2009, 2008 and 2007, respectively. In addition, the Company must pay royalties equal to 6% of net sales to UIC based on sales of the licensed compound by the Company or its affiliates or sublicensees, as well as a percentage of all other income the Company receives from sublicensees, but in any event, a minimum royalty of $5,000 annually once commercial sales commence.

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

12. Net Loss Per Share Available to Common Shareholders

Basic loss per share available to common shareholders is computed by dividing net loss available to common shareholders by the number of weighted average common shares outstanding during the reporting period. Diluted loss per share available to common shareholders is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period. The computation of diluted shares outstanding for the periods ended December 31, ~~2009~~2010, ~~2008~~2009 and ~~2007~~2008 excludes incremental shares of 1392,~~673~~688,~~867~~929, 13,~~415~~673,~~420~~867 and 1213,~~075~~415,~~661~~420 related to employee stock options and warrants. These shares are excluded due to their anti-dilutive effect as a result of the Company's losses for the years ended December 31, ~~2009~~2010, ~~2008~~2009 and ~~2007~~2008.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, ~~2009~~2010, ~~2008~~2009 AND ~~2007~~2008 AND FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH DECEMBER 31, ~~2009~~2010

13. Unaudited Quarterly Financial Data

Selected quarterly data for ~~2009~~2010 and ~~2008~~2009 is as follows:

		2010

		First			Second			Third			Fourth
Revenue		$	479,824		$	273,029		$	—		$	—
Research and development expenses			864,204			753,988			662,278			219,018
Selling, general and administrative expenses			1,341,829			1,293,758			1,167,230			568,254
Impairment charge			—			—			—			2,510,936
Operating loss			(1,726,209	)		(1,774,717	)		(1,829,508	)		(3,298,208	)
Net loss available to common shareholders			(2,020,513	)		(2,070,671	)		(2,056,179	)		(3,349,631	)
Loss per share available to common shareholders:
	Basic and Diluted	$	(0.02	)	$	(0.02	)	$	(0.01	)	$	(0.01	)

		2009

		First			Second			Third			Fourth
Revenue		$	411,485		$	706,814		$	616,940		$	1,057,952
Research and development expenses			934,769			1,309,050			916,241			1,302,221
Selling, general and administrative expenses			1,508,953			1,690,505			2,201,684			921,706
Operating loss			(2,032,237	)		(2,292,741	)		(2,500,985	)		(1,165,975	)
Net loss available to common shareholders			(2,326,973	)		(2,612,558	)		(2,901,996	)		(1,496,704	)
Loss per share available to common shareholders:
	Basic and Diluted	$	(0.06	)	$	(0.06	)	$	(0.05	)	$	(0.02	)

		2008
		First			Second			Third			Fourth
Revenue		$	—		$	—		$	32,006		$	208,824
Research and development expenses			1,868,054			1,690,088			11,240,032			911,120
Selling, general and administrative expenses			1,726,366			1,682,604			1,828,607			1,878,971
Operating loss			(3,594,420	)		(3,372,692	)		(13,036,633	)		(2,581,267	)
Net loss available to common shareholders			(3,585,884	)		(3,442,662	)		(13,132,416	)		(2,817,907	)
Loss per share available to common shareholders:
	Basic and Diluted	$	(0.09	)	$	(0.09	)	$	(0.34	)	$	(0.07	)

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

* * * * * *

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

None.

Item 9A. Controls and Procedures.

Disclosure Controls and Procedures

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

Management Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting was designed to provide reasonable assurance to the Company's management and ~~board~~Board of ~~directors~~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~~Board of ~~directors~~Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:

•: Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets to the Company;
•: Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•: Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition or disposition of the Company's assets that could have a material effect on the financial statements.

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

Our management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, ~~2009~~2010. In making this assessment, it used the criteria based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in "Internal Control—Integrated Framework". Based on our assessment we believe that, as of December 31, ~~2009~~2010, our internal control over financial reporting is effective, at a reasonable assurance level, based on those criteria.

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

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Changes in Internal Control

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

Item 9B. Other Information.

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The information required by this item is incorporated by reference to the information set forth in the section entitled "Board of Directors and Executive Officers" contained in our Notice of Annual Stockholders' Meeting and Proxy Statement to be filed within 120 days after the end of our fiscal year (the "~~2010~~2011 Proxy Statement").

Item 11. Executive Compensation.

The information required by this item is incorporated by reference to the information set forth in the section entitled "Executive Compensation" within the ~~2010~~2011 Proxy Statement.

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

The information required by this item is incorporated by reference to the information set forth in the section entitled "Stock Ownership" within the ~~2010~~2011 Proxy Statement.

Equity Compensation Plan Information

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

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securites remaining available for future issuance under equity compensation plans (excluding securities reflected in column a)
	(a)		(b)		(c)
Equity compensation plans approved by security holders		1392,~~673~~688,~~867~~929	$	20.6242		~~897,597~~—
Equity compensation plans not approved by security holders		—		—		—
Total		1392,~~673~~688,~~867~~929	$	20.6242		~~897,597~~—

Item 13. Certain Relationships and Related Transactions.

The information required by this item is incorporated by reference to the information set forth in the section entitled "Certain Transactions" within the ~~2010~~2011 Proxy Statement.

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Item 14. Principal Accountant Fees and Services.

The information required by this item is incorporated by reference to the information set forth in the section entitled "Fees of Independent Registered Public Accounting Firm and Audit Committee Report" within the ~~2010~~2011 Proxy Statement.

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) (1) Financial Statements

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

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


Report of Independent Registered Public Accounting Firm			46
Consolidated Balance Sheets at December 31, 2010 and 2009			47
Consolidated Statements of Operations for the years ended December 31, 2010, 2009, 2008 and period from inception (January 1, 1999) through December 31, 2010			48
Consolidated Statements of Total Equity (Deficit) for the years ended December 31, 2010, 2009, 2008 and period from inception (January 1, 1999) through December 31, 2010			49
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009, 2008 and period from inception (January 1, 1999) through December 31, 2010			50
Notes to the Consolidated Financial Statements			51

(2): Financial Statement Schedule

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

(3): Exhibits

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

(b) Exhibits:

See Item 15(a)(3) above.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, State of Illinois, on the ~~10th~~24th day of March, ~~2010~~2011.


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

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

Signature	Title	Date
/s/ MICHAEL T. FLAVIN, PH. D. Michael T. Flavin, Ph. D.	Chairman and Chief Executive Officer (Principal Executive Officer)	March 1024, ~~2010~~2011
/s/ JOHN L. FLAVIN John L. Flavin	President, Chief Financial Officer (Principal Financial and Accounting Officer) and Director	March 1024, ~~2010~~2011
/s/ SCOTT F. MEADOW Scott F. Meadow	Director	March 1024, ~~2010~~2011
/s/ THERON E. ODLAUG, PH.D. Theron E. Odlaug, Ph. D.	Director	March 10, 2010
/s/ TERRY W. OSBORN, PH. D. Terry W. Osborn, Ph. D.	Director	March 24, 2011
/s/ TERRY W. OSBORN, PH.D. Terry W. Osborn, Ph. D.	Director	March 10, 2010
/s/ RICHARD A. RECK Richard A. Reck	Director	March 24, 2011
/s/ RICHARD A. RECK Richard A. Reck	Director	March 10, 2010
/s/ ISRAEL RUBINSTEIN, M.D. Israel Rubinstein, M.D.	Director	March 24, 2011

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Signature	Title	Date
/s/ ISRAEL RUBINSTEIN, M.D. Israel Rubinstein, M.D.	Director	March 10, 2010
/s/ ROSALIE SAGRAVES, PHARM. D. Rosalie Sagraves, Pharm. D.	Director	March 24, 2011
/s/ ROSALIE SAGRAVES, PHARM. D. Rosalie Sagraves, Pharm. D.	Director	March 10, 2010
/s/ THOMAS V. THORNTON Thomas V. Thornton	Director	March 24, 2011
/s/ THOMAS V. THORNTON Thomas V. Thornton	Director	March 10, 2010

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EXHIBIT INDEX

		Description
3.1		~~Second~~Third Amended and Restated Certificate of Incorporation of Advanced Life Sciences Holdings, Inc. (as filed in our ~~Registration~~Quarterly ~~Statement~~Report on Form S10-3Q as exhibit 43.1 on ~~April~~May 810, ~~2009~~2010)
3.2		By-laws of Advanced Life Sciences Holdings, Inc. (as filed in our Amended Registration Statement on Form S-1/A as exhibit 3.3 on July 28, 2005, as amended and filed in our Current Report on Form 8-K as exhibit 3.1 on December 14, 2007)
4.1		Standby Equity Distribution Agreement, dated ~~June~~as 19of September 29, ~~2009~~2008, by and between ~~Advanced~~the ~~Life~~Company ~~Sciences Holdings, Inc.~~ and YA Global ~~Master~~Investments ~~SPV Ltd~~L.P. (as filed in our Current Report on Form 8-K as exhibit 4.1 on ~~June~~October 193, ~~2009~~2008)
4.2		Standby Equity Distribution Agreement, dated asJune ~~of September 29~~19, ~~2008~~2009, by and between ~~the~~Advanced ~~Company~~Life Sciences Holdings, Inc. and YA Global ~~Investments~~Master LSPV Ltd.P. (as filed in our Current Report on Form 8-K as exhibit 4.1 on ~~October~~June 319, ~~2008~~2009)
4.3		~~Form~~Standby ofEquity ~~Warrant~~Distribution toAgreement, ~~Purchase~~dated ~~Shares~~as of ~~Common~~September ~~Stock~~28, of2010, ~~Advanced~~by ~~Life~~and ~~Sciences~~between ~~Holdings,~~the ~~Inc.~~Company ~~Stock~~and YA Global Master SPV Ltd. (as filed in our ~~Current~~Registration ~~Report~~Statement on Form 8S-K1 as exhibit 410.226 on ~~March~~September 229, ~~2006~~2010)
4.4		Form of Warrant to Purchase Shares of Common Stock of Advanced Life Sciences Holdings, Inc. Stock. (as filed in our Current Report on Form 8-K as exhibit 4.2 on ~~December~~March 122, ~~2007~~2006)
4.5		~~Warrant~~Form ~~issued~~of toWarrant ~~The Leaders Group, Inc.~~ to ~~purchase~~Purchase ~~14,887~~Shares ~~shares~~ of ~~our~~Common ~~common~~Stock ~~stock~~of atAdvanced $5Life ~~per~~Sciences ~~share~~Holdings, ~~dated~~Inc. asStock. ~~of December 21, 2004~~ (as filed in our ~~Amended~~Current ~~Registration~~Report ~~Statement~~ on Form S8-~~1/A~~K as exhibit 4.2 on ~~June~~December 312, ~~2005~~2007)
4.6		~~Warrant~~Form ~~issued to The Leaders Group, Inc. to purchase 65,000 shares~~ of ~~Advanced~~common ~~Life Sciences Holdings Common~~ stock atpurchase $1warrant ~~per~~(2010 ~~share,~~Unit ~~dated~~Offering) ~~as of October 23, 2008~~ (as filed in our ~~Quarterly~~Registration ~~Report~~Statement on ~~Form~~From 10S-Q1 as exhibit 4.13 on ~~November~~May 610, ~~2008~~2010)
4.7		Warrant issued to The Leaders Group, Inc. to purchase 65,000 shares of Advanced Life Sciences Holdings Common stock at $1 per share, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 4.1 on November 6, 2008)
4.8		Form of Warrant Agent Agreement between Advanced Life Sciences Holdings, Inc. and Onyx Stock Transfer LLC (as filed in our Registration Statement on Form S-1 as exhibit 4.5 on June 16, 2010)
4.9		Form of unit purchase warrant (2010 Unit Offering) (as filed in our Registration Statement on Form S-1 as exhibit 4.5 on June 16, 2010)
10.1	**	Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and Michael T. Flavin, Ph.D. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.1 on November 14, 2007)
10.2	**	Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and John L Flavin (as filed in our Quarterly Report on Form 10-Q as exhibit 10.2 on November 14, 2007)
10.3	**	Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and Suseelan Pookote, Ph.D. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.4 on November 14, 2007)
10.4	**	Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and Ze-Qi Xu, Ph.D. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.5 on November 14, 2007)
10.5	**	Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and Patrick W. Flavin (as filed in our Quarterly Report on Form 10-Q as exhibit 10.6 on November 14, 2007)

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		Description
10.4	**	Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and Ze-Qi Xu, Ph.D. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.5 on November 14, 2007)
10.5	**	Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and Patrick W. Flavin (as filed in our Quarterly Report on Form 10-Q as exhibit 10.6 on November 14, 2007)
10.6	**	Amended and Restated Employment Agreement, dated November 13, 2007, between Advanced Life Sciences, Inc. and David Eiznhamer, Ph.D. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.7 on November 14, 2007)
10.7	**	~~Amended~~Stock ~~and~~Incentive ~~Restated~~Plan ~~Employment~~Assignment, Assumption and Amendment Agreement, dated ~~May~~December 213, ~~2008~~2004, by and between Advanced Life Sciences, Inc. and ~~Michael~~Advanced J.Life ~~Cogan~~Sciences Holdings, Inc. (as filed in our ~~Quarterly~~Registration ~~Report~~Statement on Form 10S-Q1 as exhibit 10.1 on ~~May~~April 728, ~~2008~~2005)
10.8	**	~~Stock~~Amended ~~Incentive Plan Assignment, Assumption and Amendment Agreement, dated December 13, 2004, by and between~~ Advanced Life Sciences Holdings, Inc. ~~and~~2005 ~~Advanced~~Stock ~~Life~~Incentive ~~Sciences Holdings, Inc~~Plan. (as filed in our ~~Registration~~Current ~~Statement~~Report on Form S8-1K as exhibit 10.1 on April 2813, ~~2005~~2010)
10.9	**	Advanced Life Sciences ~~Holdings~~, Inc. ~~2005~~Annual ~~Stock~~Bonus ~~Incentive~~ Plan. (as filed in our ~~Quarterly~~Registration ~~Report~~Statement on Form 10S-Q1 as exhibit 10.218 on ~~May~~April 728, ~~2008~~2005)
10.10		~~Development~~Assignment ~~and~~of ~~Commercialization~~Lease ~~Agreement~~ by ~~and~~Lessor ~~between~~with ~~Pfizer~~Consent ~~(formerly~~of ~~Wyeth)~~Lessee, ~~acting~~dated ~~through~~November ~~its~~1, ~~Pfizer~~2004, ~~(formerly~~by ~~Wyeth)~~Flavin ~~Pharmaceuticals~~Ventures, ~~Division~~LLC ~~and~~to ~~Advanced~~BioStart ~~Life~~Property ~~Sciences Holdings~~Group, ~~Inc~~LLC., ~~dated as of September 23, 2008~~ (as filed in our ~~Quarterly~~Registration ~~Report~~Statement on Form 10S-Q1 as exhibit 10.1120 on ~~November~~April 628, ~~2008~~2005)
10.11	**	Lease Agreement between Advanced Life Sciences, Inc. ~~Annual~~and ~~Bonus~~BioStart ~~Plan~~Property Group, LLC (as filed in our ~~Registration~~Current ~~Statement~~Report on Form S8-1K as exhibit 10.181 on ~~April~~October 2830, ~~2005~~2009)
10.12		~~Assignment~~License ofAgreement, ~~Lease~~dated December 13, 2004, by ~~Lessor~~and ~~with~~between ~~Consent~~Abbott ofLaboratories ~~Lessee,~~and ~~dated~~Advanced ~~November~~Life 1,Sciences ~~2004~~Holdings, byInc. ~~Flavin~~(as ~~Ventures~~amended on April 27, ~~LLC~~2005, toAugust ~~BioStart~~2, ~~Property~~2005 ~~Group~~and August 5, ~~LLC.~~2005 (as filed in our ~~Registration~~Current ~~Statement~~Report on Form S8-1K as exhibit 10.2010 on ~~April~~August 2812, 2005)
10.13		~~First~~Fourth Amendment to ~~Lease~~License Agreement between Advanced Life Sciences, Inc. and ~~BioStart~~Abbott ~~Property~~Laboratories ~~Group, LLC~~ (as filed in our ~~Current~~Quarterly Report on Form 810-KQ as exhibit 10.29 on ~~April~~November 2014, ~~2006~~2007)
10.14		License Agreement, dated ~~December~~April 1328, ~~2004~~2003, by and between ~~Abbott~~The ~~Laboratories~~University ~~and~~of ~~Advanced Life Sciences Holdings~~Chicago, ~~Inc. (~~as ~~amended~~Operator onof ~~April~~Argonne ~~27,~~National ~~2005~~Laboratory, ~~August 2, 2005~~ and ~~August~~Advanced 5Life Sciences, ~~2005~~Inc. (as filed in our ~~Current~~Registration ~~Report~~Statement on Form 8S-K1 as exhibit 10.1011 on ~~August~~April 1228, 2005)
10.15		~~Fourth~~Exclusive ~~Amendment to~~ License Agreement, dated December 2, 1999, by and between the Board of Trustees of the University of Illinois and Advanced Life Sciences, Inc. ~~and Abbott Laboratories~~ (as filed in our ~~Quarterly~~Registration ~~Report~~Statement on Form 10S-Q1 as exhibit 10.912 on ~~November~~April 1428, ~~2007~~2005)
10.16		Patent Assignment and License Agreement, dated ~~April~~January 2824, ~~2003~~1989, byBaxter ~~and~~International ~~between~~Inc. ~~The University of Chicago, as Operator of Argonne National Laboratory,~~ and ~~Advanced~~Michael ~~Life Sciences, Inc~~T. Flavin (as filed in our Registration Statement on Form S-1 as exhibit 10.1113 on April 28, 2005)
10.17		~~Exclusive~~Letter ~~License~~of ~~Agreement,~~intent ~~dated~~to ~~December~~proceed 2,with ~~1999,~~purchase byof ~~and~~raw ~~between~~materials ~~the~~to ~~Board~~produce of1,750 ~~Trustees~~Kg of ~~the~~Cethromycin ~~University~~between ofAdvanced ~~Illinois~~Life Sciences, Inc. and ~~Advanced~~DSM ~~Life~~Pharmaceutical ~~Sciences~~Products, Inc. (as filed in our ~~Registration~~Quarterly ~~Statement~~Report on Form S10-1Q as exhibit 10.121 on ~~April~~August 2814, ~~2005~~2008)
10.18		Patent Assignment and License Agreement, dated January 24, 1989, Baxter International Inc. and Michael T. Flavin (as filed in our Registration Statement on Form S-1 as exhibit 10.13 on April 28, 2005)
10.19		Letter of intent to proceed with purchase of raw materials to produce 1,750 Kg of Cethromycin between Advanced Life Sciences, Inc. and DSM Pharmaceutical Products, Inc. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.1 on August 14, 2008)

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Exhibit No.			Description
	10.20		Amended and Restated Business Loan Agreement between Advanced Life Sciences, Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.1 on November 6, 2008)
	10.18		Second Amended and Restated Business Loan Agreement between Advanced Life Sciences, Inc. and The Leaders Bank, dated as of September 9, 2010 (as filed in our Registration Statement on Form S-1 as exhibit 10.16 on September 29, 2010)
	10.21		Amended and Restated Promissory Note between Advanced Life Sciences, Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.2 on November 6, 2008)
	10.19		Amended and Restated Guaranty between Advanced Life Sciences Holdings, Inc. to and for the benefit of The Leaders Bank, dated as of September 9, 2010 (as filed in our Registration Statement on Form S-1 as exhibit 10.17 on September 29, 2010)
	10.22		Commercial Pledge Agreement between Advanced Life Sciences, Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.3 on November 6, 2008)
	10.20		Amended and Restated Security Agreement between Advanced Life Sciences Holdings, Inc. and The Leaders Bank, dated as of September 9, 2010 (as filed in our Registration Statement on Form S-1 as exhibit 10.18 on September 29, 2010)
	10.23		Commercial Guaranty between Advanced Life Sciences Holdings, Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.4 on November 6, 2008)
	10.21		Amended and Restated Security Agreement between Advanced Life Sciences, Inc. and The Leaders Bank, dated as of September 9, 2010 (as filed in our Registration Statement on Form S-1 as exhibit 10.19 on September 29, 2010)
	10.24		Commercial Security Agreement between Advanced Life Sciences Holdings, Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.5 on November 6, 2008)
	10.22		Intellectual Property Security Agreement between Advanced Life Sciences, Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.7 on November 6, 2008)
	10.25		Amended and Restated Commercial Security Agreement between Advanced Life Sciences, Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.6 on November 6, 2008)
	10.23		Guaranty by Michael T. Flavin to and for the benefit of The Leaders Bank, dated as of September 9, 2010 (as filed in our Registration Statement on Form S-1 as exhibit 10.21 on September 29, 2010)
	10.26		Intellectual Property Security Agreement between Advanced Life Sciences, Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.7 on November 6, 2008)
	10.24		Amended and Restated Commercial Pledge Agreement between ALS Ventures, LLC, Advanced Life Sciences, Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.9 on November 6, 2008)
	10.27		Commercial Guaranty between Advanced Life Sciences Holdings Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.8 on November 6, 2008)
	10.25		Forbearance Agreement between Advanced Life Sciences Holdings, Inc. and The Leaders Bank, dated as of November 23, 2010 (as filed in our Registration Statement on Form S-1 as exhibit 10.22 on January 18, 2011)
	10.28		Amended and Restated Commercial Pledge Agreement between ALS Ventures, LLC, Advanced Life Sciences, Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.9 on November 6, 2008)
	10.26		Omnibus Amendment to the Second Amended and Restated Business Loan Agreement and Forbearance Agreement between Advanced Life Sciences Holdings, Inc. and The Leaders Bank, dated as of December 29, 2010 (as filed in our Registration Statement on Form S-1 as exhibit 10.23 on January 18, 2011)
	10.29		Agreement to Provide Insurance between Advanced Life Sciences, Inc. and The Leaders Bank, dated as of October 23, 2008 (as filed in our Quarterly Report on Form 10-Q as exhibit 10.10 on November 6, 2008)
	10.27		Binding Term Sheet, dated September 30, 2009, by and between Abbott Laboratories and Advanced Life Sciences Holdings, Inc. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.1 on November 10, 2009)
	10.30		Condition Precedent Waiver between Advanced Life Sciences, Inc. and YA Global Investments, L.P., dated as of November 19, 2008. (as filed in our Amendment No. 1 to Registration Statement on Form S-3 on Form S-1 as exhibit 10.30 on November 19, 2008)
	10.28		Letter Agreement with Dawson James Securities, Inc. dated February 26, 2010, as amended on May 27, 2010 (as filed in our Registration Statement on Form S-1 as exhibit 10.29 on May 29, 2010)
	10.31		Binding Term Sheet, dated September 30, 2009, by and between Abbott Laboratories and Advanced Life Sciences Holdings, Inc. (as filed in our Quarterly Report on Form 10-Q as exhibit 10.1 on November 10, 2009)
	10.29		Second Amended and Restated Debt Exchange Agreement between Advanced Life Sciences Holdings, Inc. and Michael T. Flavin, Ph.D. dated as of July 22, 2010 (as filed in our Current Report on Form 8-K as exhibit 10.1 on July 22, 2010)
	10.32		New Lease Agreement, dated October 29, 2009, by and between Advanced Life Sciences, Inc. and BioStart Property Group, LLC (as filed in our Current Report on Form 8-K as exhibit 10.1 on November 2, 2009)
	10.30		Standby Equity Distribution Agreement between Advanced Life Sciences Holdings, Inc. and YA Global Master SPV Ltd., dated September 27, 2010 (as filed in our Registration Statement on Form S-1 as exhibit 10.26 on September 29, 2010)
	10.33		Amended and Restated Promissory Note Loan Amendment dated January 4, 2010, between Advanced Life Sciences Holdings, Inc. and Michael T. Flavin. (as filed in our Current Report on Form 8-K as exhibit 10.1 on January 4, 2010)
	10.31		Investment Agreement between Advanced Life Sciences Holdings, Inc. and Dutchess Opportunity Fund, II, LP, dated January 17, 2011 (as filed in our Registration Statement on Form S-1 as exhibit 10.29 on January 18, 2011)

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		Description
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
23.2		Consent of Deloitte & Touche LLP (as filed in our Amendment No. 1 to Registration Statement on Form S-3 on Form S-1 as exhibit 23.1 on November 19, 2008)
31.1	*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
23.3		Consent of Winston & Strawn LLP (as filed in our Amendment No. 2 to Registration Statement on Form S-3 on Form S-1 as exhibit 5.1 on December 3, 2008)
24.1		Power of Attorney (as filed in our Registration Statement on Form S-3 as exhibit 24.1 on October 21, 2008)
31.1	*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	*	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	*	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

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