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

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel drugs in the areas of infectious disease, oncology and inflammation. Using our internal discovery capabilities and our network of pharmaceutical and academic partners, we have assembled a promising pipeline of clinical and preclinical product candidates. Our most advanced product candidate, cethromycin, is a second generation once-a-day oral antibiotic that recently completed pivotal phase III clinical trials in community acquired pneumonia ("CAP") and in Phase III clinical development for the treatment of respiratory tract infections. We also have product candidates in earlier stages of development for the treatment of indications including inflammation-related tissue damage and malignant melanoma.

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

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

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

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

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

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

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

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

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

If cethromycin is approved for marketing by the FDA, we plan to sell cethromycin using a commercial partner to access the primary care physician market and to build and utilize a focused internal sales force that will market directly to early adopters such as, but not limited to, pulmonary medicine and infectious disease physicians, however while discussions with potential commercial partners are ongoing, we have not yet secured a commercial partnership.

Results of Operations

Fiscal year ended December 31, 2007 compared to the fiscal year ended December 31, 2006

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

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

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

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

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

Fiscal year ended December 31, 2006 compared to the fiscal year ended December 31, 2005

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

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

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

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

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

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

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

Liquidity and Capital Resources

We have devoted substantially all of our cash resources to research and development and general and administrative expenses. To date, we have not generated any revenues from the sale of products, and we do not expect to generate any such revenues for a number of years, if at all. As a result, we have incurred an accumulated deficit of $99.6 million as of December 31, 2007 and we expect to incur significant and increasing operating losses for the foreseeable future. Our working capital as of December 31, 2007 amounted to $13.8 million. Cash, cash equivalents and investments were $18.3 million as of December 31, 2007. Since our inception in 1999 to August 2005, we financed our operations primarily through debt and capital contributions principally from our founder and Chief Executive Officer and borrowings under our bank line of credit. In August 2005 we completed our initial public offering in which we raised $28.7 million, net of underwriters discount and offering costs. In March 2006 we completed a private placement in which we raised $33.4 million, net of underwriters discount and offering costs. In December 2007 we completed a second private placement in which we raised $17.9 million, net of underwriters discount and offering costs.

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

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

     Contractual Obligations

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

                                          Payments Due by December 31,
                   --------------------------------------------------------------------------
                      2008          2009          2010        2011      2012      Thereafter       Total
                   -----------   -----------   -----------   -------   -------   ------------   ------------
Notes payable      $         -   $ 2,000,000   $ 3,915,000   $     -   $     -   $          -   $  5,915,000
Interest               412,317       256,108           304         -         -              -        668,729
Cethromycin
clincial & NDA
costs                6,986,448             -             -         -         -              -      6,986,448
Anthrax efficacy
studies                178,000             -             -         -         -              -        178,000
ALS-357 clinical
program                 34,000             -             -         -         -              -         34,000
Facility
development
costs                  319,560             -             -         -         -              -        319,560
Operating leases       160,648             -             -         -         -              -        160,648
Capital leases           7,259         8,468         4,350         -         -              -         20,077
                   -----------   -----------   -----------   -------   -------   ------------   ------------
Total              $ 8,098,232   $ 2,264,576   $ 3,919,654   $     -   $     -   $          -   $ 14,282,462
                   -----------   -----------   -----------   -------   -------   ------------   ------------

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

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

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

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

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

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

º •
º progress in our clinical development programs, as well as the magnitude of these programs;

º •
º the timing, receipt and amount of milestone and other payments, if any, from present and future collaborators;

º •
º our ability to raise additional capital through the sale of common stock 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;

º •
º our ability to establish and maintain additional collaborative arrangements;

º •
º 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;

º •
º the cost of preparing, filing, prosecuting, maintaining and enforcing patent claims; and

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

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

We account for stock-based awards to employees and non-employees using the accounting provisions of Statement of Financial Accounting Standards No. 123(R) Share-based Payments which provides for the use of the fair value based method to determine compensation for all arrangements where shares of stock or equity instruments are issued for compensation. We use the Black-Scholes options-pricing model to determine the fair value of each option grant as of the date of grant for expense incurred. The Black-Scholes model requires inputs for risk-free interest rate, dividend yield, volatility and expected lives of the options. Since the Company has a limited history of stock activity, expected volatility is based on historical data from several peer public companies with similar product portfolios to us. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected lives for options granted represents the period of time that options granted are expected to be outstanding and is derived from the contractual terms of the options granted. We estimate future forfeits of options based upon historical forfeit rates.