##### Table of Contents



SECURITIES AND EXCHANGE
    COMMISSIONWashington, D.C.
    20549
  Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2005oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          
    to   Commission File Number:
    000-50414
 ADVANCIS PHARMACEUTICAL
    CORPORATION
 (Exact name of Registrant as
    specified in its Charter)
  Delaware

52-2208264(State or other jurisdiction of
    
    incorporation or organization)

(I.R.S. employer
    identification number)20425 Seneca Meadows Parkway
    
    Germantown, Maryland(Address of principal
    executive offices)

20876(Zip Code)   (301) 944-6600
 (Registrants telephone
    number, including area code)
  None
 (Former name, former address and
    former fiscal year  if changed since last
    report)
  None
 Common Stock, par value $0.01 per share
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2).
 o o þ
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  INDEX
  FORM 10-K
   PagePART IItem 1.

Business


2Item 1A.

Risk Factors


17Item 1B.

Unresolved Staff
    Comments


29Item 2.

Properties


29Item 3.

Legal
    Proceedings


29Item 4.

Submission of
    Matters to a Vote of Security Holders


29PART IIItem 5.

Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


30Item 6.

Selected Financial
    Data


31Item 7.

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


32Item 7A.

Quantitative and
    Qualitative Disclosures About Market Risk


48Item 8.

Financial
    Statements and Supplementary Data


48Item 9.

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


49Item 9A.

Controls and
    Procedures


49Item 9B.

Other
    Information


49PART IIIItem 10.

Directors and
    Executive Officers of the Registrant


50Item 11.

Executive
    Compensation


50Item 12.

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


50Item 13.

Certain
    Relationships and Related Transactions


50Item 14.

Principal
    Accounting Fees and Services


50PART IVItem 15.

Exhibits and
    Financial Statement Schedules


50EX-10.6EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2   1




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FORWARD-LOOKING
    STATEMENTS
  This annual report on
    Form 10-K
    contains forward-looking statements, within the meaning of the
    Securities Exchange Act of 1934 and the Securities Act of 1933,
    that involve risks and uncertainties. In some cases,
    forward-looking statements are identified by words such as
    believe, anticipate, expect,
    intend, plan, will,
    may and similar expressions. You should not place
    undue reliance on these forward-looking statements, which speak
    only as of the date of this report. All of these forward-looking
    statements are based on information available to us at this
    time, and we assume no obligation to update any of these
    statements. Actual results could differ from those projected in
    these forward-looking statements as a result of many factors,
    including those identified in the sections titled Risk
    Factors, Managements Discussion and Analysis
    of Financial Condition and Results of Operations and
    elsewhere. We urge you to review and consider the various
    disclosures made by us in this report, and those detailed from
    time to time in our filings with the Securities and Exchange
    Commission, that attempt to advise you of the risks and factors
    that may affect our future results.
 PART I  Item 1.
    Business  Overview
  once-a-day tm
        ®
 2




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(301) 944-6600. Form 10-K.
  Form 10-K
  Market
    Opportunity
      Substantial market. IMS
    World Review 2004
  Increased resistance to existing
    therapies. Streptococcus
    pneumoniae
  Growing need for improved new
    treatments.
 3




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Difficulties in developing new classes of anti-infective
    compounds.
  Limitations of standard treatment regimens.
  Our
    Proprietary PULSYS Technology
  once-a-day tm
  
    Improved bactericidal activity, or bacteria killing efficiency.
    Once-daily dosing and shorter length of treatment resulting in
    increased patient convenience and compliance.
    Lower overall drug dose with a possibly reduced side effect
    profile.
    Decreased emergence of antibiotic resistant bacteria.   4




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24-hour
  
  once-a-day
    Our
    Strategy
    Commercialize products with multiple
    advantages.
 5




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Focus initially on existing antibiotics.
  Focus on first-line, broad-spectrum antibiotics for community
    infections. two-to-four
  Develop sales and marketing functions across multiple
    products.
  Multi-level patent strategy.
  License or acquire antibiotic products.
  Our
    Marketed Products
  Keflex
   6




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Keflex Products

Key Indication(s)

Status

Marketing RightsKeflex
    Capsules  
    250 mg and 500 mg

Skin and skin structure
    infections; upper respiratory tract infections

FDA-approved

U.S. and Puerto Rico rightsKeflex Powder for Oral
    Suspension  125 mg and 250 mg

Skin and skin structure
    infections; upper respiratory tract infections

FDA-approved

U.S. and Puerto Rico rightsKeflex Line Extension
    products(1)

Skin and skin structure
    infections; upper respiratory tract infections

Pending FDA
    approval (1)

U.S. and Puerto Rico rights     (1)
    
    On December 20, 2005, we submitted a supplemental NDA
    (sNDA) to the Food & Drug Administration requesting
    approval of certain Keflex line extension products.  once-a-day once-a-day
  Our
    Product Pipeline
    PULSYS Clinical Development
    ProgramsPULSYS Product





Targeted PULSYS

ProgramCandidate / Program

Key Indication(s)

Current Therapy

Added Value

Status(1)Amoxicillin  Adult

Pharyngitis/tonsillitis

10-14 days, two or three
    times daily

10 days, once-daily,
    lower dose(2)

Phase IIIKeflex
    (cephalexin)  Adult

Skin and skin 
    structure infections

7-14 days, two to four times
    daily

Once-daily, lower 
    dose,

Phase IPediatric Pharyngitis 
    Program

Pharyngitis/tonsillitis

10-14 days, two or three
    times daily

10 days, once-daily,
    lower dose, improved convenience

Phase I     (1)
    
    For an explanation of the terms Preclinical, Phase I,
    Phase I/II and Phase III, please refer to the
    information under the heading Government
    Regulationbelow. Each of the product candidates above
    is discussed in more detail in the next section below. 7




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(2)
    
    Amoxicillin PULSYS is currently being evaluated in a
    Phase III trial. See Pulsatile Product
    Candidates  Amoxicillin PULSYSbelow.  Item 7.  Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations
  
 Pulsatile
    Product Candidates
    
    Once-a-day
    formulation
    Lower dose
    Shorter duration of therapy
    Reduced side effect profile
    Combination product with superior efficacy over either product
    alone
    Improved pediatric dosage form    Amoxicillin
    PULSYS
  IMS National Prescription Audit 2005
  in vitro Streptococcus
    pneumoniae.
     8




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Keflex
    (Cephalexin) PULSYS
  IMS National
    Prescription Audit 2005
    Pediatric
    Pharyngitis Program
     9




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Other
    Possible Pulsatile Product Candidates
    PULSYS Preclinical Development Programs
  Advancis has identified several additional opportunities to
    apply PULSYS technology to develop individual and combination
    antibiotic products which we believe could have application
    against the following indications:
  
    Sinusitis
    Chronic Bronchitis
    Acute Otitis Media
    Urinary Tract Infections
    Community-acquired Methicillin Resistant Staphylococcus
    aureus (MRSA)      Collaboration
    Agreements
  Termination
    of Our Collaboration with Par Pharmaceutical for Amoxicillin
    PULSYS
   10




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Termination
    of the Collaboration with GlaxoSmithKline
      Collaboration
    with Par Pharmaceutical for Generic Clarithromycin
    Sales and
    Marketing
   11




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Competition
    
    Large pharmaceutical companies, such as Pfizer, GlaxoSmithKline,
    Wyeth, Bristol-Myers Squibb, Merck, Johnson & Johnson,
    Roche, Schering-Plough, Novartis, sanofi-aventis, Abbott
    Laboratories, AstraZeneca, and Bayer, that may develop new drug
    compounds that render our drugs obsolete or noncompetitive.
    Smaller pharmaceutical and biotechnology companies and specialty
    pharmaceutical companies engaged in focused research and
    development of anti-infective drugs, such as Trimeris, Vertex,
    Gilead Sciences, Cubist, Basilea, InterMune, King, and others.
    Drug delivery companies, such as Johnson &
    Johnsons Alza division, Biovail and SkyePharma, which may
    develop a dosing regimen that is more effective than pulsatile
    dosing. 12




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
    Generic drug companies, such as Teva, Ranbaxy, IVAX, Sandoz and
    Stada, which produce low-cost versions of antibiotics that may
    contain the same active pharmaceutical ingredients as our PULSYS
    product candidates.    
    efficacy
    safety
    tolerability
    acceptance by doctors
    patient compliance and acceptance
    patent protection
    convenience
    price
    insurance and other reimbursement coverage
    distribution
    marketing
    adaptability to various modes of dosing          Manufacturing
   13




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scale-up
    Patent
    and Intellectual Property Protection
        Government
    Regulation
   14




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New
    Drug Application Process
    
    Completion of preclinical laboratory and animal testing.
    Submission of an investigational new drug application (IND)
    which must become effective before the commencement of clinical
    trials.
    Performance of adequate and well-controlled human clinical
    trials to establish the safety and efficacy of the proposed drug
    products intended use.
    Submission to and approval by the FDA of a New Drug Application
    (NDA).  PRECLINICAL:
    PHASE I:
  PHASE II:
  PHASE III:
       15




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30-months,
  30-month 30-month
    Other
    Regulatory Constraints
   16




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Foreign
    Regulatory Approval
        Employees
   Item 1A.  Risk
    Factors    Risks
    Related to our Business
  We
    expect to incur losses for the foreseeable future and may never
    become profitable.
   17




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
    developing and testing product candidates;
    achieving milestones under our collaboration agreements;
    receiving regulatory approvals;
    developing proprietary antibiotic products;
    commercializing our products; and
    establishing our competitive position.    Substantially
    all of our product candidates are based on a finding that could
    ultimately prove to be incorrect, or could have limited
    applicability.
      Our
    delivery technology may not be effective, which would prevent us
    from commercializing products that are more effective than those
    of our competitors.
    If a
    competitor produces and commercializes an antibiotic that is
    superior to our pulsatile antibiotics, the market for our
    potential products would be reduced or eliminated.
   18




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We
    have not commissioned an extensive third party patent
    infringement, invalidity and enforceability investigation on
    pulsatile dosing and we are aware of one issued patent covering
    pulsatile delivery.
    
    cease selling, incorporating or using any of our products that
    incorporate the challenged intellectual property;
    obtain a license from the holder of the infringed intellectual
    property right, which license may be costly or may not be
    available on reasonable terms, if at all; or
    redesign our products, which would be costly and time-consuming
    and may not be possible.  We
    have not sought patent protection for certain aspects of our
    technology.
    If we
    are unable to develop and successfully commercialize our product
    candidates, we may never achieve profitability.
   19




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If we
    do not successfully attract and retain collaborative partners,
    or our partners do not satisfy their obligations, we will be
    unable to develop our partnered product
    candidates.
    
    fund our research and development activities;
    fund manufacturing by third parties;
    seek and obtain regulatory approvals; and
    successfully commercialize our product candidates.    If we
    cannot enter into new licensing arrangements or otherwise gain
    access to products, our ability to develop a diverse product
    portfolio could be limited.
   20




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Our
    executive officers and other key personnel are critical to our
    business and our future success depends on our ability to retain
    them.
    Our
    ability to complete clinical trials and ultimately commercialize
    products will be delayed if we are unable to obtain sufficient
    APIs or finished products from certain suppliers.
    Clinical
    trials for our product candidates may be delayed due to our
    dependence on third parties for the conduct of such
    trials.
    If
    clinical trials for our products are unsuccessful or delayed, we
    will be unable to meet our anticipated development and
    commercialization timelines.
     21




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
    lack of efficacy during the clinical trials;
    unforeseen safety issues;
    slower than expected rate of patient recruitment; or
    government or regulatory delays.    We
    will need additional capital in the future. If additional
    capital is not available, we may be forced to delay or curtail
    the development of our product candidates.
    
    payments received under future collaborative partner agreements;
    continued progress of research and development of our pulsatile
    drugs;
    our ability to acquire or license drugs from others for use with
    PULSYS;
    costs associated with protecting our intellectual property
    rights;
    development of sales and marketing capabilities; and
    market acceptance of our products.    We
    could be forced to pay substantial damage awards if product
    liability claims that may be brought against us are
    successful.
   22




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If our
    PULSYS products are not accepted by the market, our revenues and
    profitability will suffer.
    
    demonstration of clinical efficacy and safety;
    cost-effectiveness;
    potential advantages over alternative therapies;
    reimbursement policies of government and third-party
    payors; and
    effectiveness of our marketing and distribution capabilities and
    the effectiveness of such capabilities of our collaborative
    partners.    Because
    we depend on a single manufacturer for Keflex, we may be unable
    to obtain sufficient quantities of these products at
    commercially acceptable rates.
    We
    rely upon a limited number of pharmaceutical wholesalers and
    distributors, which could impact our ability to sell our Keflex
    product.
    We are
    subject to therapeutic equivalent substitution, Medicaid
    reimbursement and price reporting.
   23




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Our
    ability to conduct clinical trials will be impaired if we fail
    to qualify our clinical supply manufacturing facility and we are
    unable to maintain relationships with current clinical supply
    manufacturers or enter into relationships with new
    manufacturers.
      If we
    fail to establish sales, marketing, and distribution
    capabilities, or fail to enter into arrangements with third
    parties, we will not be able to commercialize our
    products.
    Risks
    Related to our Industry
  Any
    inability to protect our intellectual property could harm our
    competitive position.
     24




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If we
    do not compete successfully in the development and
    commercialization of products and keep pace with rapid
    technological change, we will be unable to capture and sustain a
    meaningful market position.
      
    Large pharmaceutical companies, such as Pfizer, GlaxoSmithKline,
    Wyeth, Bristol-Myers Squibb, Merck, Johnson & Johnson,
    Roche, Schering-Plough, Novartis, sanofi-aventis, Abbott
    Laboratories, AstraZeneca, and Bayer, that may develop new drug
    compounds that render our drugs obsolete or noncompetitive.
    Smaller pharmaceutical and biotechnology companies and specialty
    pharmaceutical companies engaged in focused research and
    development of anti-infective drugs, such as Trimeris, Vertex,
    Gilead Sciences, Cubist, Basilea, Intermune, King, and others.
    Drug delivery companies, such as Johnson &
    Johnsons Alza division, Biovail and SkyePharma, which may
    develop a dosing regimen that is more effective than pulsatile
    dosing.
    Generic drug companies, such as Teva, Ranbaxy, IVAX, Sandoz and
    Stada, which produce low-cost versions of antibiotics that may
    contain the same active pharmaceutical ingredients as our PULSYS
    product candidates.    
    developing products;
    undertaking preclinical testing and human clinical trials;
    obtaining approvals of products from the FDA and other
    regulatory agencies; and
    manufacturing and marketing products.   25




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If we
    experience delays in obtaining regulatory approvals, or are
    unable to obtain or maintain regulatory approvals, we may be
    unable to commercialize any products.
    
    adversely affect the commercialization of any drugs that we or
    our collaborative partners develop;
    impose costly procedures on us or our collaborative partners;
    diminish any competitive advantages that we or our collaborative
    partners may attain; and
    adversely affect our receipt of revenues or royalties.      
    delays in clinical trials or commercialization;
    product recalls or seizures;
    suspension of production and/or distribution;
    withdrawals of previously approved marketing
    applications; and
    fines, civil penalties and criminal prosecutions.     26




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The
    manufacture and storage of pharmaceutical and chemical products
    is subject to environmental regulation and risk.
    clean-up
  Market
    acceptance of our products will be limited if users of our
    products are unable to obtain adequate reimbursement from
    third-party payors.
          Other
    Risks
  HealthCare
    Ventures V, L.P., HealthCare Ventures VI, L.P. and HealthCare
    Ventures VII, L.P. have substantial control over our business
    and the interests of the HealthCare Ventures partnerships may
    not be consistent with the interests of our other
    stockholders.
   27




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day-to-day
  Future
    sales of our common stock, or the perception that these sales
    may occur, could depress our stock price.
      Our
    certificate of incorporation and provisions of Delaware law
    could discourage a takeover you may consider favorable or could
    cause current management to become entrenched and difficult to
    replace.
      The
    price of our common stock has been and will likely continue to
    be volatile.
    We
    could be forced to pay liquidated damages if we do not maintain
    the effectiveness of our
    S-3 registration
    statement.
   28




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Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties         Item 3.  Legal
    Proceedings      Item 4.
    Submission
    of Matters to a Vote of Security Holders   29




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PART
    II  Item 5.
    Market
    for Registrants Common Equity and Related Stockholder
    Matters and Issuer Purchases of Equity Securities    HIGH


LOWDecember 31, 2005:Fourth quarter

$
1.69


$
1.20Third quarter


2.75



0.86Second quarter


5.40



1.70First quarter


5.42



3.03December 31, 2004:Fourth quarter

$
8.60


$
2.50Third quarter


9.05



6.73Second quarter


9.74



6.58First quarter


10.15



7.34       Form S-1 No. 333-107599),
  Purchase of Keflex intangible
    assets

$
11,206,000Purchases of property and equipment


4,768,000Cash used for debt payments


1,513,000Cash used in operating activities


36,825,000Total

$
54,312,000  30




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Item 6.
    Selected
    Financial Data  Form 10-K Form 10-K
  For the Years Ended December
    31,2005


2004


2003


2002


2001Statements of Operations
    DataTotal revenue

$
16,847,690


$
11,358,032


$
3,625,000


$



$
Cost and expenses:Cost of product sales


562,009



169,854











Research and development


39,729,441



33,642,930



16,594,629



10,855,130



5,295,308Selling, general and administrative


10,515,302



12,219,409



6,427,453



3,323,879



1,958,602Total expenses


50,806,752



46,032,193



23,022,082



14,179,009



7,253,910Loss from operations


(33,959,062
)


(34,674,161
)


(19,397,082
)


(14,179,009
)


(7,253,910
)Interest income (expense), net


954,193



669,448



88,565



102,629



69,334Beneficial conversion
    feature  deemed interest










(1,666,667
)






Other income or (expense)


16,292











(47,615
)


Net loss


(32,988,577
)


(34,004,713
)


(20,975,184
)


(14,123,995
)


(7,184,576
)Accretion of issuance costs of
    mandatorily redeemable convertible preferred stock










(209,173
)


(73,925
)


(37,594
)Beneficial conversion
    feature  deemed dividend to preferred
    shareholders










(20,907,620
)






Net loss applicable to common
    stockholders

$
(32,988,577
)

$
(34,004,713
)

$
(42,091,977
)

$
(14,197,920
)

$
(7,222,170
)Basic and diluted net loss per share

$
(1.20
)

$
(1.50
)

$
(7.58
)

$
(16.37
)

$
(12.59
)Shares used in computing net loss
    per share, basic and diluted


27,421,516



22,684,410



5,554,773



867,239



573,699Balance Sheet Data at
    Year-End:Unrestricted cash, cash equivalents
    and marketable securities

$
29,431,058


$
30,051,937


$
65,087,122


$
4,059,911


$
16,472,049Total assets


57,796,892



61,142,140



84,174,843



9,058,523



18,575,075Long-term debt, including current
    portion


1,567,412



2,577,387



2,440,588



1,730,934



1,089,882Mandatorily redeemable convertible
    preferred stock














28,439,295



25,391,170Accumulated deficit


(111,095,308
)


(78,106,731
)


(44,102,018
)


(23,126,834
)


(9,002,839
)Total stockholders equity
    (deficit)


33,342,011



39,738,379



70,149,920



(22,701,459
)


(8,701,660
)  31




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Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Form 10-K. Forward-Looking
    Statements Factors that May Affect our
    Business Form 10-K,
  Our
    Business
  once-a-day
  Management
    Overview of Key Developments in 2005
    PULSYS
    product development and collaborations
  
    On July 21, 2005, we announced that our pediatric
    Amoxicillin PULSYS Phase III clinical trial failed to achieve
    its desired microbiological and clinical endpoints. This pivotal
    program was designed as a 500-patient, investigator-blind,
    non-inferiority Phase III trial for a sprinkle
    formulation of Amoxicillin PULSYS for the treatment of
    pharyngitis/tonsillitis due to Group A streptococcal infections.
    We had previously announced on June 15, 2005 that our
    Amoxicillin PULSYS Phase III clinical trial for the treatment of
    pharyngitis/tonsillitis in adults and adolescents failed to
    achieve its desired microbiological and clinical endpoints. This
    pivotal program was designed as a 500 patient, double-blind,
    double-dummy, non-inferiority Phase III trial for a tablet
    formulation of Amoxicillin PULSYS for the treatment of
    pharyngitis/tonsillitis due to Group A streptococcal infections.
    Subsequent to the announcement of our unsuccessful Phase III
    trial results, we reduced our workforce by approximately 38% in
    order to reduce operating expenses. We recorded a charge of
    approximately $4.0 million in the third quarter for
    severance costs related to salaries and benefits.
    In each of January, April and August 2005, we received payments
    of $4.75 million from Par Pharmaceutical for its quarterly
    funding due under our Amoxicillin PULSYS collaboration. In
    August 2005, Par decided to terminate the collaboration. As a
    result of the termination, we recognized revenue in the third
    quarter of $5.6 million that had previously been deferred.
    In September 2005, after extensive study of the data from our
    recently-concluded unsuccessful Amoxicillin PULSYS Phase III
    clinical trials, we decided to conduct a new Phase III trial for
    adults and adolescents, 32




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extending the length of treatment from seven days to
    10 days, using the current formulation of Amoxicillin
    PULSYS.  
    In November 2005, we held a pre-Phase III meeting with the FDA
    to discuss our Phase III trial and regulatory strategy to
    support product approval for Amoxicillin PULSYS. Based on the
    outcome of the meeting, we believe that our Phase III trial
    design and regulatory strategy for approval of Amoxicillin
    PULSYS for adults and adolescents with pharyngitis/tonsillitis
    were acceptable to the FDA.
    In November 2005, we began enrolling patients into our new Phase
    III trial for Amoxicillin PULSYS for adults and adolescents with
    strep throat. We expect to enroll at least 600 patients into the
    trial and announce top-line results during the third quarter of
    2006.
    In December 2005, we commenced a Phase I clinical trial for
    development of a once-daily PULSYS version of Keflex.  Marketed
    Products  Keflex
  
    In 2005, the first full year of our ownership of the Keflex
    brand, net sales of our branded capsule and powder for oral
    suspension Keflex products were approximately $4.8 million.
    An agreement in principle was reached in August 2005 to sell the
    U.S. rights to the Keflex brand of cephalexin to a private
    company. We received a $1.0 million advance payment from
    the potential buyer which ensured its exclusive negotiating
    rights to the product through December 31, 2005. A
    definitive agreement was never entered into between the parties,
    and in January 2006, we decided to retain the brand. The
    agreement in principle expired February 28, 2006.
    We continued development of additional non-PULSYS Keflex line
    extension products. In December 2005, we filed a supplemental
    NDA for line extension products. The application was accepted by
    the FDA in February 2006.  Other
    Events
  
    In April 2005, we completed a private placement of
    6,846,735 shares of our common stock at a price of $3.98
    per share, and warrants to purchase a total of
    2,396,357 shares of common stock at an exercise price of
    $4.78 per share, resulting in net proceeds to us, after the
    deduction of fees and commissions, of $25.8 million.  Focus
    for 2006
    Critical
    Accounting Policies and Estimates
     33




---



##### Table of Contents



Revenue
    Recognition
    Product Sales.
  Chargebacks and rebates.
  Product returns.
  Contract Revenue.
  Reimbursement of Development Costs.
 34




---



##### Table of Contents



Inventories
  work-in-process
  Intangible
    Assets
  Acquired Intangible Assets.
  Impairment.
  Accrued
    Expenses
    Stock-Based
    Compensation
   35




---



##### Table of Contents



Accounting for Stock-Based Compensation. No. 96-18.
  Income
    Taxes
    Recent
    Accounting Pronouncements
  Share-Based Payment, Accounting for Stock-based
    Compensation.
  No. 05-4, The Effect of a Liquidated Damages Clause on a
    Freestanding Financial Instrument Subject to EITF Issue
    No. 00-19,
    Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own
    Stock.
 36




---



##### Table of Contents



Accounting
    Changes and Error Corrections  a Replacement of
    APB Opinion No. 20 and FASB Statement No. 3.
  FAS 115-1, The Meaning of
    Other-Than-Temporary
    Impairment and Its Application to Certain Investments. FSP FAS 115-1 other-than-temporary other-than-temporary FSP FAS 115-1
  Research
    and Development Expenses
    Our
    Product Pipeline
  Total ExpenseIncurred fromInception(January 1, 2000)


ClinicalYear Ended December
    31,


to December 31,


Development2005


2004


2003


2005


PhaseDirect Project
    Costs(1)Amoxicillin(2)

$
24,294,000


$
15,961,000


$
4,890,000


$
48,130,000


Phase IIIKeflex and Cephalexin PULSYS


5,360,000



222,000







5,582,000


Phase IGeneric Clarithromycin(3)


79,000



5,480,000



5,975,000



15,579,000


SuspendedOther Product Candidates


1,289,000



4,108,000



2,600,000



15,245,000


PreclinicalTotal Direct Project Costs


31,022,000



25,771,000



13,465,000



84,536,000Indirect Project
    Costs(1)Facility


3,603,000



2,954,000



1,113,000



8,965,000Depreciation


2,610,000



1,928,000



664,000



5,878,000Other Indirect Overhead


2,494,000



2,990,000



1,353,000



7,871,000Total Indirect Project Costs


8,707,000



7,872,000



3,130,000



22,714,000Total Research &
    Development Expense

$
39,729,000


$
33,643,000


$
16,595,000


$
107,250,000  37




---



##### Table of Contents



(1)
    
    Many of our research and development costs are not attributable
    to any individual project because we share resources across
    several development projects. We record direct costs, including
    personnel costs and related benefits and stock-based
    compensation, on a
    project-by-project
    basis. We record indirect costs that support a number of our
    research and development activities in the aggregate.(2)
    
    We currently have an adult and adolescent amoxicillin
    formulation in a Phase III clinical trial, which commenced
    enrollment in November 2005. We previously conducted Phase III
    clinical trials for the adolescent/adult formulation which
    commenced October 15, 2004 and for the pediatric
    formulation which commenced on January 5, 2005. These two
    previous Phase III trials failed to achieve their desired
    microbiological and clinical endpoints. See Amoxicillin
    PULSYS Clinical Resultsabove. We previously had an
    agreement under which Par Pharmaceutical was be responsible for
    funding the anticipated future development costs of this
    product. See Termination of Our Collaboration with Par
    Pharmaceutical for Amoxicillin PULSYSabove.(3)
    
    We have discontinued development efforts for this product. See
    Our Collaboration with Par Pharmaceutical for Generic
    Clarithromycin above.  Net
    Losses
    Results
    of Operations
  Fiscal
    Year Ended December 31, 2005 Compared to Fiscal Year Ended
    December 31, 2004
  Revenues.
  Year Ended
    December 31,2005


2004Keflex product sales, net

$
4,809,000


$
2,397,000Contract
    revenue  amortization of upfront licensing fees:GSK






1,146,000GSK  acceleration
    upon termination






3,229,000Par  amoxicillin


797,000



972,000Par  amoxicillin  acceleration
    upon termination


3,231,000



Reimbursement of development costs:Par  amoxicillin


5,636,000



3,614,000Par  amoxicillin  acceleration
    upon termination


2,375,000



Total

$
16,848,000


$
11,358,000      38




---



##### Table of Contents



Cost of Product Sales.
  Research and Development Expenses.
    Year Ended
    December 31,Research and Development
    Expenses

2005


2004Direct project costs:Personnel, benefits and related
    costs

$
10,716,000


$
9,522,000Stock-based compensation


160,000



1,173,000Consultants, supplies, materials
    and other direct costs


7,912,000



8,595,000Clinical studies


12,234,000



6,481,000Total direct costs


31,022,000



25,771,000Indirect project costs


8,707,000



7,872,000Total

$
39,729,000


$
33,643,000    39




---



##### Table of Contents



Selling, General and Administrative
    Expenses.
  Year Ended
    December 31,2005


2004Salaries, benefits and related
    costs

$
3,387,000


$
2,667,000Stock-based compensation


376,000



2,480,000Legal and consulting expenses


1,342,000



2,694,000Other expenses


5,410,000



4,378,000Total

$
10,515,000


$
12,219,000       Net Interest Income (Expense).
  Year Ended
    December 31,2005


2004Interest income

$
1,075,000


$
794,000Interest expense


(121,000
)


(125,000
)Total, net

$
954,000


$
669,000  40




---



##### Table of Contents



Fiscal
    Year Ended December 31, 2004 Compared to Fiscal Year Ended
    December 31, 2003
  Revenues.
  Year Ended
    December 31,2004


2003Keflex product sales, net

$
2,397,000


$
Contract revenue:Achievement of GSK project
    milestone






3,000,000Amortization of upfront GSK payment


1,146,000



625,000Recognition of remaining GSK
    payment upon termination


3,229,000



Amortization of upfront Par payment


972,000



Reimbursement of development
    costs  Par amoxicillin


3,614,000



Total

$
11,358,000


$
3,625,000         Cost of Product Sales.
  Research and Development Expenses.
    Year Ended
    December 31,Research and Development
    Expenses

2004


2003Direct project costs:Personnel, benefits and related
    costs

$
9,522,000


$
5,866,000Stock-based compensation


1,173,000



1,903,000Consultants, supplies, materials
    and other direct costs


8,595,000



3,737,000Clinical studies


6,481,000



1,959,000Total direct costs


25,771,000



13,465,000Indirect project costs


7,872,000



3,130,000Total

$
33,643,000


$
16,595,000    41




---



##### Table of Contents



Selling, General and Administrative
    Expenses.
  Year Ended
    December 31,2004


2003Salaries, benefits and related
    costs

$
2,667,000


$
1,847,000Stock-based compensation


2,480,000



1,538,000Legal and consulting expenses


2,694,000



1,773,000Other expenses


4,378,000



1,269,000Total

$
12,219,000


$
6,427,000     Net Interest Income (Expense).
  Year Ended
    December 31,2004


2003Interest income

$
794,000


$
254,000Interest expense, net of interest
    capitalized


(125,000
)


(165,000
)Beneficial conversion
    feature  deemed interest expense






(1,667,000
)Total, net

$
669,000


$
(1,578,000
)    42




---



##### Table of Contents



Liquidity
    and Capital Resources
    Cash
    and Marketable Securities
    As of
    December 31,2005


2004Cash and cash equivalents

$
18,117,000


$
10,396,000Marketable securities


11,314,000



19,656,000Total

$
29,431,000


$
30,052,000     available-for-sale, A1+/P1.
    Cash
    Flow
    Year Ended
    December 31,2005


2004


2003Net cash used in operating
    activities

$
(24,890,000
)

$
(15,487,000
)

$
(11,084,000
)Net cash provided by (used in)
    investing activities


7,676,000



(11,721,000
)


(36,413,000
)Net cash provided by financing
    activities


24,935,000



153,000



80,887,000Net increase (decrease) in cash
    and cash equivalents

$
7,721,000


$
(27,055,000
)

$
33,390,000  43




---



##### Table of Contents



Operating
    Activities
    Year Ended
    December 31,Operating Activities

2005


2004


2003Cash receipts:Cash received from product sales

$
5,159,000


$
2,230,000


$
Cash received from collaboration
    partners


14,250,000



17,000,000



5,000,000Interest income received and other


1,622,000



2,185,000



581,000Total cash receipts


21,031,000



21,415,000



5,581,000Cash disbursements:Cash paid for employee
    compensation and benefits


11,432,000



10,401,000



6,826,000Cash paid to vendors, suppliers,
    and other


34,489,000



26,501,000



9,839,000Total cash disbursements


45,921,000



36,902,000



16,665,000Net cash used in operating
    activities

$
(24,890,000
)

$
(15,487,000
)

$
(11,084,000
)     Investing
    Activities
    Year Ended
    December 31,Investing Activities

2005


2004


2003Cash receipts:Sale of marketable securities, net
    of purchases

$
8,176,000


$
6,582,000


$
Advance payment received for
    potential sale of Keflex


1,000,000







Sale of fixed assets, restricted
    cash and other


423,000







830,000Total cash receipts


9,599,000



6,582,000



830,000Cash disbursements:Purchase of marketable securities










27,858,000Purchase of Keflex brand rights






11,206,000



Property and equipment purchases
    and deposits


1,923,000



6,960,000



9,047,000Change in restricted cash and other






137,000



338,000Total cash disbursements


1,923,000



18,303,000



37,243,000Net cash used in investing
    activities

$
7,676,000


$
(11,721,000
)

$
(36,413,000
)    44




---



##### Table of Contents



Financing
    Activities
    Year Ended
    December 31,Financing Activities

2005


2004


2003Cash receipts:Cash received from private
    placement

$
25,844,000


$



$
Cash received from lines of credit






1,390,000



1,346,000Cash received from initial public
    offering










54,312,000Cash received from preferred stock
    and notes










25,775,000Cash received from exercise of
    stock options


101,000



16,000



91,000Total cash receipts


25,945,000



1,406,000



81,524,000Cash disbursements:Cash paid for debt payments


1,010,000



1,253,000



637,000Total cash disbursements


1,010,000



1,253,000



637,000Net cash provided by financing
    activities

$
24,935,000


$
153,000


$
80,887,000         Borrowings
   45




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##### Table of Contents



As of December 31,
    2005RemainingAmount


AmountDebt Obligations

Interest Rates

Outstanding


AvailableFixed rate borrowings

5.00%  11.62%

$
190,000


$
Variable rate borrowings

LIBOR or Fixed Cost of Funds
    plus 250  280 basis points


1,377,000



Totals



$
1,567,000


$
     Stock
    Issuances
    Contractual
    Obligations
    Payments
    Due by Period
  AfterContractual Obligations (1),
    (2)

Total


2006


2007


2008


2009


2010


2010(In thousands)Short and long-term debt (includes
    interest)

$
1,636


$
949


$
636


$
51


$



$



$
Minimum purchase
    commitments (3)


1,239



1,239



















Operating lease obligations


16,033



2,126



2,080



2,139



2,156



2,214



5,318Total contractual cash obligations

$
18,908


$
4,314


$
2,716


$
2,190


$
2,156


$
2,214


$
5,318Other commercial commitments(4)

$
4,545


$
4,545


$



$



$



$



$
     (1)
    
    This table does not include potential royalty payments, at a
    rate of 10% of sales value, to Eli Lilly and Company, which may
    be due on product line extensions of Keflex. Any such royalties
    cannot be estimated at this time.(2)
    
    This table does not include a contingent liability to Par
    Pharmaceutical under our amoxicillin development and
    commercialization agreement that was terminated by Par in August
    2005. Under certain circumstances, the termination clauses of
    the agreement may entitle Par to receive a share of future net
    profits, if any, up to one-half of Pars total
    $23.25 million investment in the development of certain
    amoxicillin PULSYS products, should a product covered by the
    agreement be successfully commercialized. Accordingly, we
    retained $11.625 million of deferred revenue in recognition
    of this contingent liability to Par.(3)
    
    We have entered into a manufacturing agreement with Ceph
    International for the manufacturing of our Keflex products. This
    agreement contains a provision for minimum purchase requirements.(4)
    
    We have entered into other contractual agreements in connection
    with developing our products and technology and to perform
    clinical trials. This amount represents the remaining
    contractual amount due for our on-going Phase III clinical
    trial. Although the contract could be cancelled by us, in which
    case we would be liable to the 46




---



##### Table of Contents



vendor for work performed to the date of cancellation, it is our
    intent to complete the clinical trial at the remaining cost of
    approximately $4.5 million.      Off-Balance
    Sheet Arrangements
    Prospective
    Information
         47




---



##### Table of Contents



Safe
    Harbor Statement under the Private Securities Litigation Reform
    Act of 1995
    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk      Item 8.
    Financial
    Statements and Supplementary Data  F-1 F-30.
 48




---



##### Table of Contents



Item 9.
    Changes
    and Disagreements with Accountants on Accounting and Financial
    Disclosure    Item 9A.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
  Form 10-K
  Changes
    in Internal Control over Financial Reporting during the
    Quarter
    Managements
    Report on Internal Controls over Financial Reporting
  Rule 13a-15(f)
    Internal
    Control  Integrated Framework.
  page F-2
  Item 9B.
    Other
    Information   49




---



##### Table of Contents



PART III  Item 10.
    Directors
    and Executive Officers of the Registrant    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management 
    and Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions    Item 14.
    Principal
    Accounting Fees and Services   PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules, and Reports on
    Form 8-K      PageNumberReport of PricewaterhouseCoopers
    LLP, Independent Registered Public Accounting Firm


F-2Balance Sheets at December 31,
    2005 and 2004


F-4Statements of Operations for the
    Years ended December 31, 2005, 2004 and 2003


F-5Statement of Changes in
    Stockholders Equity (Deficit) for the Years ended
    December 31, 2005, 2004 and 2003


F-6Statements of Cash Flows for the
    Years ended December 31, 2005, 2004 and 2003


F-7Notes to Financial Statements


F-8     Form 10-K:
   50




---



##### Table of Contents



Exhibit No.2
.1(1)+

Asset Purchase Agreement dated as
    of June 30, 2004, by and between the Registrant and Eli
    Lilly and Company3
.1(2)

Certificate of Incorporation3
.2(2)

Bylaws4
.1(2)

Specimen Stock Certificate10
.1(2)

Executive Employment Agreement
    between the Registrant and Edward M. Rudnic dated
    January 7, 200010
.2(2)

Executive Employment Agreement
    between the Registrant and Sandra E. Wassink dated
    August 13, 200310
.3(2)

Executive Employment Agreement
    between the Registrant and Beth A. Burnside dated
    August 13, 200310
.4(2)

Executive Employment Agreement
    between the Registrant and Darren Buchwald dated
    September 1, 200310
.5(3)

Executive Employment Agreement
    between the Registrant and Donald Treacy dated March 19,
    200410
.6

Executive Employment Agreement
    between the Registrant and Robert C. Low dated December 12,
    200510
.7(2)

Form of Indemnification Agreement10
.8(4)

Amended and Restated Stock
    Incentive Plan10
.9(2)

Form of Incentive Stock Option
    Agreement10
.10(2)

Form of Non-qualified Stock Option
    Agreement10
.11(2)

Form of Stock Restriction Agreement10
.12(5)

Employee Stock Purchase Plan10
.13(2)

Form of Employment Agreement on
    Ideas, Inventions and Confidential Information10
.14(2)

Construction Services Agreement
    between the Registrant and Barclay White Skanska, Inc. dated
    July 12, 200210
.15(2)

Amendment No. 1 dated
    April 7, 2003 to Agreement between Owner and Construction
    Manager dated July 12, 2002 between the Registrant and
    Skanska USA Building, Inc. successor by merger to Barclay White
    Skanska, Inc.10
.16(2)

Standard Form of Agreement between
    Owner and Architect with Standard Form of Architects
    Services between the Registrant and Gaudreau, Inc. dated
    July 8, 200210
.17(2)

Lease Agreement between the
    Registrant and Seneca Meadows Corporate Center II LLC dated
    August 1, 200210
.18(2)

Stock Purchase Pledge Agreement
    between the Registrant and Edward M. Rudnic dated
    October 15, 200110
.19(2)

Form of Stock Purchase Promissory
    Note by Edward M. Rudnic dated October 15, 200110
.20(2)

Amendment dated June 12, 2002
    to Stock Purchase Pledge Agreement dated October 15, 2001
    between the Registrant and Edward M. Rudnic10
.21(2)

Amendment dated July 30, 2003
    to the Stock Purchase Pledge Agreement and Stock Restriction
    Agreement dated October 15, 2001, as amended, between the
    Registrant and Edward M. Rudnic 51




---



##### Table of Contents



Exhibit No.10
.22(2)

Note Issuance Agreement
    between the Registrant and HealthCare Ventures VI, L.P., Rho
    Management Trust, I, Steven Ostrofsky, Private Equity
    Holdings L.L.C., Targeted Entrepreneurial Services, LLC and the
    DC 1998 NFA Trust FBO Lee Casty dated March 28, 200310
.23(2)

Form of Convertible Promissory
    Note dated March 28, 200310
.24(2)

Amendment to Secured Convertible
    Promissory Note dated June 23, 200310
.25(2)

Fourth Amended and Restated
    Stockholders Agreement10
.26(2)

Omnibus Addendum and Amendment to
    Series E Convertible Preferred Stock Purchase Agreement and
    Fourth Amended and Restated Stockholders Agreement10
.27(2)

Consulting Agreement dated
    August 18, 2000 between the Registrant and Jenefir Isbister
    as amended10
.28(2)

Credit Agreement between the
    Registrant and Manufacturers and Traders Trust Company dated
    July 31, 200310
.29(2)

Specific Security Agreement
    between the Registrant and Manufacturers and Traders Trust
    Company dated July 31, 200310
.30(2)+

Development and License Agreement
    between the Registrant and GlaxoSmithKline dated July 18,
    200310
.31(2)+

Supply, Distribution and Marketing
    Agreement between the Registrant and Par Pharmaceutical, Inc.
    dated September 4, 200310
.32(2)+

Manufacturing Agreement dated as
    of June 30, 2004, by and between the Registrant and Eli
    Lilly and Company10
.33(2)+

Transition Services Agreement
    dated as of June 30, 2004, by and between the Registrant
    and Eli Lilly and Company10
.34(5)+

Development and Commercialization
    Agreement between the Registrant and Par Pharmaceutical, Inc.
    dated May 28, 200410
.35(6)+

Commercial Supply Agreement
    between the Registrant and Ceph International Corporation dated
    December 3, 200410
.36(6)+

First Amendment to Development and
    Commercialization Agreement between the Registrant and Par
    Pharmaceutical Corporation dated December 14, 200410
.37(7)+

Manufacturing and Supply Agreement
    between the Registrant and Clonmel Healthcare Limited, dated as
    of April 19, 2005.10
.38(7)+

Development and Clinical
    Manufacturing Agreement between the Registrant and Clonmel
    Healthcare Limited, dated as of April 19, 2005.10
.39(7)+

Facility Build-Out Agreement
    between the Registrant and Clonmel Healthcare Limited, dated as
    of April 19, 2005.10
.40(8)+

Form of Purchase Agreement dated
    April 26, 2005, including the form of Warrant attached
    thereto.23
.1

Consent of PricewaterhouseCoopers
    LLP, Independent Registered Public Accounting Firm31
.1

Rule 13a-14(a)
    Certification of Principal Executive Officer31
.2

Rule 13a-14(a)
    Certification of Principal Financial Officer32
.1

Section 1350 Certification of
    Chief Executive Officer32
.2

Section 1350 Certification of
    Chief Financial Officer     (1)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed July 15, 2004.(2)
    
    Incorporated by reference to our Registration Statement on
    Form S-1
    (File
    No. 333-107599).(3)
    
    Incorporated by reference to our Quarterly Report on
    Form 10-Q
    filed August 6, 2004(4)
    
    Incorporated by reference to our definitive proxy statement
    filed April 22, 2005.(5)
    
    Incorporated by reference to our Registration Statement on
    Form S-8
    (File
    No. 333-109728). 52




---



##### Table of Contents



(6)
    
    Incorporated by reference to our Annual Report on
    Form 10-K
    filed March 10, 2005(7)
    
    Incorporated by reference to our Quarterly Report on
    Form 10-Q
    filed August 15, 2005.(8)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    dated April 27, 2005.
    
    The Schedules and certain of the Exhibits to this Asset Purchase
    Agreement have been omitted in reliance upon the rules of the
    Securities and Exchange Commission. A copy will be delivered to
    the Securities and Exchange Commission upon request.+
    
    Confidential treatment has been granted for certain portions of
    this Exhibit pursuant to Rule 406 under the Securities Act,
    which portions are omitted and filed separately with the
    Securities and Exchange Commission. 53




---



##### Table of Contents



SIGNATURES
      Edward
    M. Rudnic
   President and Chief Executive Officer
      Signature

Title

Date/s/  R.
    Gordon DouglasR.
    Gordon Douglas, M.D.

Chairman of the Board of Directors

March 27, 2006/s/  Edward
    M. RudnicEdward
    M. Rudnic, Ph.D.

President, Chief Executive Officer
    and Director
    (Principal Executive Officer)

March 27, 2006/s/  Robert
    C. LowRobert
    C. Low

Vice
    President  Finance, Acting Chief Financial
    Officer, Treasurer and Controller
    (Principal Financial and Accounting Officer)

March 27, 2006/s/  James
    H. CavanaughJames
    H. Cavanaugh, Ph.D.

Director

March 27, 2006/s/  Richard
    W. DuganRichard
    W. Dugan

Director

March 27, 2006/s/  Wayne
    T. HockmeyerWayne
    T. Hockmeyer, Ph.D.

Director

March 27, 2006/s/  Harold
    R. WernerHarold
    R. Werner

Director

March 27, 2006  54




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##### Table of Contents



INDEX TO
    FINANCIAL STATEMENTS
  PageNumberReport of
    PricewaterhouseCoopers LLP, Independent Registered Public
    Accounting Firm


F-2Balance Sheets at
    December 31, 2005 and 2004


F-4Statements of
    Operations for the Years ended December 31, 2005, 2004 and
    2003


F-5Statement of
    Changes in Stockholders Equity (Deficit) for the Years
    ended December 31, 2005, 2004 and 2003


F-6Statements of Cash
    Flows for the Years ended December 31, 2005, 2004 and
    2003


F-7Notes to Financial
    Statements


F-8  F-1




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM       Financial statements and financial statement schedule
    Internal control over financial reporting
  Internal Control  Integrated Framework Internal Control  Integrated Framework
   F-2




---



##### Table of Contents



F-3




---



##### Table of Contents



ADVANCIS
    PHARMACEUTICAL CORPORATION
  BALANCE SHEETS
  December 31,2005


2004ASSETSCurrent assets:Cash and cash equivalents

$
18,116,968


$
10,395,757Marketable securities


11,314,090



19,656,180Restricted cash


418,244



Accounts receivable, net


756,764



350,116Notes receivable from officer


121,500



Inventories, net


219,451



179,738Prepaid expenses and other current
    assets


797,253



1,044,389Total current assets


31,744,270



31,626,180Property and equipment, net


14,450,627



16,524,342Restricted cash


1,182,680



1,913,314Deposits


884,312



264,125Notes receivable from officer






121,500Intangible assets, net


9,535,003



10,692,679Total assets

$
57,796,892


$
61,142,140LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,686,487


$
3,886,563Accrued expenses and advances


7,071,731



4,305,115Lines of
    credit  current portion


895,204



1,009,975Deferred contract revenue






2,552,357Total current liabilities


9,653,422



11,754,010Lines of
    credit  noncurrent portion


597,208



1,492,412Note payable


75,000



75,000Accrued
    severance  noncurrent portion


1,235,394



Deferred contract revenue


11,625,000



6,861,111Deferred rent and credit on lease
    concession


1,268,857



1,221,228Total liabilities


24,454,881



21,403,761Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par
    value; 25,000,000 shares authorized; no shares issued or
    outstanding at December 31, 2005 and 2004






Common stock, $0.01 par value;
    225,000,000 shares authorized, and 29,765,139 and
    22,706,679 shares issued and outstanding at
    December 31, 2005 and 2004, respectively


297,652



227,067Capital in excess of par value


144,766,213



120,315,949Deferred stock-based compensation


(623,051
)


(2,607,247
)Accumulated deficit


(111,095,308
)


(78,106,731
)Accumulated other comprehensive loss


(3,495
)


(90,659
)Total stockholders equity


33,342,011



39,738,379Total liabilities and
    stockholders equity

$
57,796,892


$
61,142,140    F-4




---



##### Table of Contents



ADVANCIS
    PHARMACEUTICAL CORPORATION
  STATEMENTS OF OPERATIONS
  Year Ended
    December 31,2005


2004


2003Revenue:Product sales

$
4,809,222


$
2,396,500


$
Contract revenue


4,027,778



5,347,223



3,625,000Reimbursement of development costs


8,010,690



3,614,309



Total revenue


16,847,690



11,358,032



3,625,000Costs and expenses:Cost of product sales


562,009



169,854



Research and development


39,729,441



33,642,930



16,594,629Selling, general and administrative


10,515,302



12,219,409



6,427,453Total expenses


50,806,752



46,032,193



23,022,082Loss from operations


(33,959,062
)


(34,674,161
)


(19,397,082
)Interest income


1,075,084



793,818



253,504Interest expense


(120,891
)


(124,370
)


(164,939
)Beneficial conversion
    feature  deemed interest expense










(1,666,667
)Other income


16,292







Net loss


(32,988,577
)


(34,004,713
)


(20,975,184
)Accretion of issuance costs of
    mandatorily redeemable convertible preferred stock










(209,173
)Beneficial conversion
    feature  deemed dividend to preferred
    stockholders










(20,907,620
)Net loss applicable to common
    stockholders

$
(32,988,577
)

$
(34,004,713
)

$
(42,091,977
)Basic and diluted net loss per
    share applicable to common stockholders

$
(1.20
)

$
(1.50
)

$
(7.58
)Shares used in calculation of
    basic and diluted net loss per share


27,421,516



22,684,410



5,554,773    F-5




---



##### Table of Contents



ADVANCIS
    PHARMACEUTICAL CORPORATION
  STATEMENT OF CHANGES IN STOCKHOLDERS
    EQUITY (DEFICIT)
  TotalCapital in


Deferred





Accumulated Other


StockholdersCommon


Par


Excess of


Stock-Based


Accumulated


Comprehensive


EquityShares


Value


Par Value


Compensation


Deficit


Income (Loss)


(Deficit)Balance at December 31, 2002


1,376,306


$
13,763


$
514,598


$
(102,986
)

$
(23,126,834
)

$



$
(22,701,459
)Issuance of restricted stock


173,532



1,735



89,359















91,094Accretion of issuance costs of
    mandatorily redeemable convertible preferred stock










(209,173
)














(209,173
)Cashless exercise of warrants


27,032



271



(301
)














(30
)Issuance and remeasurement of stock
    options for services










1,260,117















1,260,117Deferred stock-based compensation










8,204,446



(8,204,446
)










Amortization of deferred stock-
    based compensation














2,181,146











2,181,146Beneficial conversion
    feature  deemed interest on convertible notes










1,666,667















1,666,667Beneficial conversion
    feature  deemed dividend on issuance of
    Series E preferred stock










20,907,620















20,907,620Accretion of beneficial conversion
    feature  deemed dividend










(20,907,620
)














(20,907,620
)Issuance of common stock in public
    offering, net of issuance costs


6,000,000



60,000



54,251,900















54,311,900Conversion of preferred stock to
    common stock


15,062,474



150,625



54,363,837















54,514,462Comprehensive income (loss):Net loss


















(20,975,184
)






(20,975,184
)Unrealized gain on marketable
    securities, net






















10,380



10,380Total comprehensive loss


























(20,964,804
)Balance at December 31, 2003


22,639,344



226,394



120,141,450



(6,126,286
)


(44,102,018
)


10,380



70,149,920Exercise of stock options


26,764



268



15,976















16,244Issuance of restricted stock


40,571



405



24,305















24,710Issuance and remeasurement of stock
    options for services










26,370















26,370Stock-based compensation for
    retired director










416,141



73,810











489,951Amortization of deferred
    stock-based compensation














3,296,898











3,296,898Reversal of deferred stock-based
    compensation and related amortization due to forfeited options










(308,293
)


148,331











(159,962
)Comprehensive income (loss):Net loss


















(34,004,713
)






(34,004,713
)Unrealized loss on marketable
    securities, net






















(101,039
)


(101,039
)Total comprehensive loss


























(34,105,752
)Balance at December 31, 2004


22,706,679



227,067



120,315,949



(2,607,247
)


(78,106,731
)


(90,659
)


39,738,379Exercise of stock options


171,155



1,712



98,783















100,495Issuance of restricted stock


40,570



406



24,305















24,711Issuance and remeasurement of stock
    options for services










(123,149
)














(123,149
)Amortization of deferred
    stock-based compensation














1,522,554











1,522,554Reversal of deferred stock-based
    compensation and related amortization due to forfeited options










(1,325,261
)


461,642











(863,619
)Proceeds from private placement of
    common stock and warrants, net of issuance expenses


6,846,735



68,467



25,775,586















25,844,053Comprehensive income (loss):Net loss


















(32,988,577
)






(32,988,577
)Unrealized gain on marketable
    securities, net






















87,164



87,164Total comprehensive loss


























(32,901,413
)Balance at December 31, 2005


29,765,139


$
297,652


$
144,766,213


$
(623,051
)

$
(111,095,308
)

$
(3,495
)

$
33,342,011    F-6




---



##### Table of Contents



ADVANCIS
    PHARMACEUTICAL CORPORATION
  STATEMENTS OF CASH FLOWS
  Year Ended
    December 31,2005


2004


2003Cash flows from operating
    activities:Net loss

$
(32,988,577
)

$
(34,004,713
)

$
(20,975,184
)Adjustments to reconcile net loss
    to net cash used in operating activities:Depreciation and amortization


4,044,419



2,714,341



736,036Stock-based compensation


535,786



3,653,257



3,441,263Deferred rent and credit on lease
    concession


47,629



453,469



(62,251
)Amortization of premium on
    marketable securities


253,483



1,297,947



231,600Interest accrued on convertible
    notes










92,362Beneficial conversion
    feature  deemed interest expense










1,666,667Gain on disposal of fixed assets


(16,292
)






Changes in:Accounts receivable


(406,648
)


2,649,884



(3,000,000
)Inventories


(39,713
)


(179,738
)


Prepaid expenses and other current
    assets


247,136



83,075



(954,952
)Deposits other than on property and
    equipment


(62,394
)


(49,142
)


95,068Accounts payable


(2,200,076
)


1,202,850



1,924,940Accrued expenses and accrued
    severance


3,483,910



1,653,637



1,345,211Deferred contract revenue


2,211,532



5,038,468



4,375,000Net cash used in operating
    activities


(24,889,805
)


(15,486,665
)


(11,084,240
)Cash flows from investing
    activities:Purchase of Keflex intangible assets






(11,205,517
)


Advance payment for potential sale
    of Keflex intangible assets


1,000,000







Purchase of marketable securities


(15,029,229
)


(25,918,898
)


(27,857,852
)Sale and maturities of marketable
    securities


23,205,000



32,500,364



Purchases of property and equipment


(1,365,088
)


(6,200,677
)


(8,963,111
)Deposits on property and equipment


(557,793
)


(759,638
)


(83,610
)Proceeds from sale of fixed assets


111,163







Restricted cash


312,390



(136,745
)


(338,031
)Landlord lease concession










830,010Net cash from (used in) investing
    activities


7,676,443



(11,721,111
)


(36,412,594
)Cash flows from financing
    activities:Proceeds from lines of credit






1,389,396



1,346,061Payments on lines of credit


(1,009,975
)


(1,252,597
)


(636,407
)Proceeds from convertible notes
    payable










5,000,000Proceeds from exercise of common
    stock options


100,495



16,244



91,094Proceeds from private placement of
    common stock and warrants, net of issuance costs


25,844,053







Proceeds from issuance of preferred
    stock, net of issuance costs










20,774,765Proceeds from initial public
    offering, net of issuance costs










54,311,900Net cash from financing activities


24,934,573



153,043



80,887,413Net increase (decrease) in cash and
    cash equivalents


7,721,211



(27,054,733
)


33,390,579Cash and cash equivalents,
    beginning of period


10,395,757



37,450,490



4,059,911Cash and cash equivalents, end of
    period

$
18,116,968


$
10,395,757


$
37,450,490Supplemental disclosure of cash
    flow information:Cash paid for interest, net of
    interest capitalized

$
120,891


$
127,094


$
38,511Supplemental disclosure of non-cash
    transactions:Reclassification of liability
    related to early exercises of restricted stock to equity upon
    vesting of the restricted stock

$
24,711


$
24,710


$
3,537Equipment and construction costs in
    accrued liabilities

$



$
457,189


$
1,580,509Conversion of convertible notes,
    including accrued interest, into Series E mandatorily
    redeemable convertible preferred stock

$



$



$
5,092,362Accretion of beneficial conversion
    feature for Series E convertible preferred stock

$



$



$
20,907,620Conversion of preferred stock to
    common

$



$



$
54,514,462Accretion of issuance costs of
    mandatorily redeemable convertible preferred stock

$



$



$
209,173   The accompanying notes are an
    integral part of these financial statements.
 F-7




---



##### Table of Contents



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS
  1.
    Nature of
    the Business  anti-infective
    2.
    Summary
    of Significant Accounting Policies  Use of
    Estimates and Reclassifications
      Revenue
    Recognition
  Product sales revenue
  Contract revenues
  Revenue for reimbursement of development costs
  Deferred contract revenue
  Research
    and Development
   F-8




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Cash
    and Cash Equivalents
    Restricted
    Cash
    Marketable
    Securities
  available-for-sale. Available-for-sale
  Fair
    Value of Financial Instruments
    Accounts
    Receivable, net
    Inventories,
    net
  first-in,
  Property
    and Equipment
   F-9




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Capitalization of Interest Cost
  Intangible
    Assets
      Impairment
    of Long-Lived Assets
  Accounting for the Impairment
    or Disposal of Long-Lived Assets,
  Leases
    Accounting
    for Stock-Based Compensation
  Accounting for Stock Issued to Employees,
 F-10




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
      December 31,2005


2004


2003Net loss, as reported

$
(32,988,577
)

$
(34,004,713
)

$
(20,975,184
)Add  Stock-based
    employee compensation expense determined under the intrinsic
    value method


658,935



3,626,887



2,181,146Less  Stock-based
    employee compensation expense determined under the fair value
    based method


(3,298,472
)


(8,491,814
)


(2,677,989
)Pro forma net loss


(35,628,114
)


(38,869,640
)


(21,472,027
)Accretion of issuance costs of
    mandatorily redeemable convertible preferred stock










(209,173
)Beneficial conversion
    feature-deemed dividend to preferred stockholders










(20,907,620
)Pro forma net loss applicable to
    common stockholders

$
(35,628,114
)

$
(38,869,640
)

$
(42,588,820
)Net loss per share:Basic and diluted, as reported

$
(1.20
)

$
(1.50
)

$
(7.58
)Basic and diluted, pro forma

$
(1.30
)

$
(1.71
)

$
(7.67
)     December 31,2005


2004


2003Expected life (in years)


5



5



5Risk-free interest rate


3.81
%


4.09
%


3.28
%Volatility


79.6
%


80.0
%


80.0
%Dividend yield


0
%


0
%


0
%     Income
    Taxes
   F-11




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Comprehensive
    Income
  Reporting Comprehensive
    Income, available-for-sale
  Earnings
    Per Share
      December 31,(Number of Underlying Common
    Shares)

2005


2004


2003Stock options


4,095,417



3,736,726



2,235,488Nonvested restricted stock


71,032



237,689



424,290Warrants


2,396,357







Total


6,562,806



3,974,415



2,659,778   Segment
    and Geographic Information
  Disclosure
    about Segments of an Enterprise and Related Information,
 F-12




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
     Long-LivedGeographic Information

Product Sales


AssetsUnited States

$
4,809,222


$
13,065,518Ireland






1,385,109Total

$
4,809,222


$
14,450,627   Recent
    Accounting Pronouncements
  Share-Based Payment, Accounting for Stock-based
    Compensation.
  No. 05-4, The Effect of a Liquidated Damages Clause on a
    Freestanding Financial Instrument Subject to EITF Issue
    No. 00-19,
    Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own
    Stock. 
  Accounting
    Changes and Error Corrections  a Replacement of
    APB Opinion No. 20 and FASB Statement No. 3.
  FAS 115-1, The Meaning of
    Other-Than-Temporary
    Impairment and Its Application to Certain Investments. FSP FAS 115-1 other-than-temporary other-than-temporary
 F-13




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  FSP FAS 115-1
  3.
    Revenue    Product Sales.
  Contract Revenue.
  December 31,Contract Revenue

2005


2004


2003Upfront
    payment  GSK  amortization

$



$
1,145,833


$
625,000Upfront
    payment  GSK  acceleration upon
    termination






3,229,167



Milestone
    achievement  GSK










3,000,000Upfront
    payment  Par  amortization


796,783



972,223



Upfront
    payment  Par  acceleration upon
    termination


3,230,995







Total

$
4,027,778


$
5,347,223


$
3,625,000     Reimbursement of Development Costs.
  December 31,Reimbursement of Development
    Costs

2005


2004


2003Reimbursement by Par of period
    costs incurred

$
5,635,690


$
3,614,309


$
Acceleration upon termination of
    Par collaboration


2,375,000







Total

$
8,010,690


$
3,614,309


$
   Collaboration with GlaxoSmithKline (GSK).
  Collaboration with Par Pharmaceutical for Amoxicillin
    PULSYS.
 F-14




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
          4.
    Marketable
    Securities    December 31, 2005Gross


GrossAmortized


Unrealized


UnrealizedAvailable-for-sale

Cost


Gains


Losses


Fair ValueMarketable securities:Corporate debt securities:-In unrealized gain position

$
1,988,491


$
2,173


$



$
1,990,664-In unrealized loss position under
    12 months


7,820,334







(3,095
)


7,817,239-In unrealized loss position over
    12 months


1,508,760







(2,573
)


1,506,187$
11,317,585


$
2,173


$
(5,668
)

$
11,314,090   F-15




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  December 31, 2004Gross


GrossAmortized


Unrealized


UnrealizedAvailable-for-sale

Cost


Gains


Losses


Fair ValueMarketable securities:Corporate debt securities

$
16,736,347


$



$
(72,670
)

$
16,663,677Government agency securities


3,010,492







(17,989
)


2,992,503$
19,746,839


$



$
(90,659
)

$
19,656,180   other-than-temporarily
    5.
    Accounts
    Receivable    December 31,


December 31,2005


2004Accounts receivable for product
    sales, gross

$
1,109,685


$
478,684Allowances for discounts,
    wholesaler rebates, and chargebacks


(352,920
)


(128,568
)Accounts receivable for product
    sales, net

$
756,765


$
350,116     6.
    Inventories    December 31,


December 31,2005


2004Finished goods

$
373,818


$
179,738Reserve for obsolete and
    slow-moving inventory


(154,367
)


Inventories, net

$
219,451


$
179,738    F-16




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   7.
    Property
    and Equipment    EstimatedUseful Life

December 31,(Years)

2005


2004Construction in progress

n/a

$
535,463


$
459,148Computer equipment

3


1,010,757



1,003,229Furniture and fixtures

3-10


1,405,918



1,355,643Equipment

3-10


9,197,693



8,589,960Leasehold improvements

Shorter of
    economic
    life or
    lease term


8,719,668



8,715,920Subtotal




20,869,499



20,123,900Less  accumulated
    depreciation




(6,418,872
)


(3,599,558
)Total



$
14,450,627


$
16,524,342     8.
    Intangible
    Assets    December 31, 2005Gross Carrying


Accumulated


Net CarryingAmount


Amortization


AmountKeflex brand rights

$
10,954,272


$
(1,643,148
)

$
9,311,124Keflex non-compete agreement


251,245



(75,366
)


175,879Patents acquired


120,000



(72,000
)


48,000Intangible assets

$
11,325,517


$
(1,790,514
)

$
9,535,003   December 31, 2004Gross Carrying


Accumulated


Net CarryingAmount


Amortization


AmountKeflex brand rights

$
10,954,272


$
(547,716
)

$
10,406,556Keflex non-compete agreement


251,245



(25,122
)


226,123Patents acquired


120,000



(60,000
)


60,000Intangible assets

$
11,325,517


$
(632,838
)

$
10,692,679      F-17




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
      Keflex brand rights

$
10,954,272Keflex non-compete agreement


251,245Total

$
11,205,517       9.
    Borrowings    December 31,2005


2004Lines of credit

$
1,492,412


$
2,502,387Montgomery County note payable


75,000



75,000Total

$
1,567,412


$
2,577,387     Year Ending
    December 31,2006

$
895,2042007


621,7552008


50,453Total borrowings


1,567,412Less: Current portion


(895,204
)Noncurrent portion

$
672,208   Lines
    of Credit
   F-18




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
     30-Day 48-month
  30-Day 36-month 48-month
  Montgomery
    County Note Payable
     F-19




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   10.
    Accrued
    Expenses and Advances    December 31,2005


2004Bonus

$
849,078


$
895,000Professional fees


352,445



381,501Relocation






120,305Severance  current
    portion


1,870,479



286,515Insurance and benefits


179,109



178,624Liability for exercised unvested
    stock options


42,770



67,481Research and development expenses


1,546,469



1,543,164Product returns


791,282



144,115Other expenses


440,099



231,221Advance payment for potential sale
    of Keflex assets


1,000,000



Equipment and construction costs






457,189Total accrued expenses and advances

$
7,071,731


$
4,305,115   Accrued
    Severance
      December 31, 2005Research &


Selling, General &Development


AdministrativeExpense


Expense


TotalSeverance  salaries
    and benefits

$
2,847,220


$
1,126,045


$
3,973,265Stock-based
    compensation-forfeitures


(182,581
)


(329,907
)


(512,488
)Accrued rent for closed office
    location


105,275



35,091



140,366Total

$
2,769,914


$
831,229


$
3,601,143   F-20




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##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  December 31, 2004Research &


Selling, General &Development


AdministrativeExpense


Expense


TotalSeverance  salaries
    and benefits

$
377,757


$
119,292


$
497,049Stock-based
    compensation  forfeitures


(60,786
)


(99,176
)


(159,962
)Stock-based
    compensation  modification of options


49,397







49,397Total

$
366,368


$
20,116


$
386,484   reductions-in-force:
  December 31, 2005Beginning








EndingAccrued
    Severance  2005 Activity

Balance


Charge


Cash Paid


Balance2005 Workforce reduction

$



$
3,973,265


$
(867,392
)

$
3,105,8732004 Workforce reduction


286,515







(286,515
)


$
286,515


$
3,973,265


$
(1,153,907
)

$
3,105,873Current portion

$
286,515










$
1,870,479Noncurrent portion














1,235,394$
286,515










$
3,105,873 December 31, 2004Beginning








EndingAccrued
    Severance  2004 Activity

Balance


Charge


Cash Paid


Balance2004 Workforce reduction

$



$
497,049


$
(210,534
)

$
286,515     Advance
    Payment for Potential Sale of Keflex Assets
   F-21




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##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   11.
    Stock-Based
    Compensation    December 31,2005


2004


2003Employees:Amortization of deferred
    stock-based compensation

$
1,522,554


$
3,296,898


$
2,181,146Forfeitures of unvested stock
    options


(863,619
)


(159,962
)


Modification of
    options  retirement of director






489,951



Subtotal  Employees


658,935



3,626,887



2,181,146Nonemployee consultants:Amortization of variable
    stock-based compensation


(123,149
)


26,370



549,960Modification of options for
    consultant










710,157Subtotal  Nonemployee
    Consultants


(123,149
)


26,370



1,260,117Total

$
535,786


$
3,653,257


$
3,441,263   December 31,Included in Income Statement
    Captions as follows:

2005


2004


2003Research & Development
    Expense

$
159,699


$
1,172,973


$
1,902,913Selling, General and
    Administrative Expense


376,087



2,480,284



1,538,350Total

$
535,786


$
3,653,257


$
3,441,263   Employees. Accounting for Stock Issued
    to Employees,
  Non-employee Consultants. Accounting for Stock-Based
    Compensation, No. 96-18 ,
    Accounting for Equity Instruments that are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services.
 F-22




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    12.
    Preferred
    Stock  Undesignated    13.
    Common
    Stock      Shares Reserved
    for Future Issuance
    Reverse
    Stock Split
    Initial
    Public Offering
    14.
    Private
    Placement of Common Stock   F-23




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Form S-3 Form S-3
  No. 05-4, The Effect of a Liquidated Damages Clause on a
    Freestanding Financial Instrument Subject to EITF Issue
    No. 00-19,
    Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own
    Stock.  EITF 00-19, Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own
    Stock,
  60-day S-3 12-month Accounting for
    Contingencies,
  15.
    Beneficial
    Conversion Features  Beneficial
    Conversion Feature  Interest Expense on
    Convertible Notes
    Beneficial
    Conversion Feature- Series E Mandatorily Redeemable
    Convertible Preferred Stock
  No. 00-27,
 F-24




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Application of Issue
    No. 98-5
    to Certain Convertible Instruments
  16.
    Stock
    Option Plan    4-year
    Weighted-Number of


AverageOptions


Exercise PriceOutstanding, December 31, 2002


844,198


$
0.53Granted


1,741,057



4.30Exercised


(306,446
)


0.91Cancelled


(43,321
)


1.32Outstanding, December 31, 2003


2,235,488



3.45Granted


1,660,550



8.00Exercised


(26,764
)


0.61Cancelled


(132,548
)


5.15Outstanding, December 31, 2004


3,736,726



5.43Granted


1,926,350



3.24Exercised


(171,155
)


0.59Cancelled


(1,396,504
)


4.89Outstanding, December 31, 2005


4,095,417


$
4.79  F-25




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
     Options Outstanding


Options ExercisableWeighted-


Weighted





WeightedRange of

Number


Average Remaining


-Average


Number


-AverageExercise Prices

Outstanding


Contractual Life


Exercise Price


Exercisable


Exercise PriceDecember 31, 2005$0.28 to $0.62


829,853



5.9


$
0.56



678,820


$
0.55$0.93 to $1.41


800,201



9.0



1.18



204,282



1.32$2.81 to $4.80


873,991



9.1



4.19



349,006



4.27$8.40 to $10.00


1,591,372



8.1



9.14



1,053,324



9.194,095,417



8.0


$
4.79



2,285,432


$
5.17   Restricted
    Stock
    No. 00-23, Issues Related to the Accounting for Stock Compensation
    under APB Opinion No. 25 and FASB Interpretation
    No. 44,
   F-26




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   17.
    Income
    Taxes      December 31,2005


2004Net operating loss carryforwards

$
31,161,022


$
20,053,953Start-up costs


1,666,653



2,262,998Deferred revenue


4,629,075



3,635,481Depreciation and amortization


19,269



(57,645
)Stock-based compensation


2,742,775



2,511,904Advance payment for potential sale
    of Keflex brand rights


398,200



Accrued severance


1,236,789



110,652Other accrued expenses and other
    items


847,868



359,245Patent costs


387,520



284,816Research and experimentation tax
    credit


4,941,432



2,709,109Deferred tax assets


48,030,603



31,870,513Valuation allowance


(48,030,603
)


(31,870,513
)Net deferred tax assets

$



$
     Year Ended
    December 31,2005


2004


2003U.S. federal statutory income
    tax rate


(34.0
)%


(34.0
)%


(34.0
)%State income taxes, net of federal
    tax benefit


(5.8
)%


(4.6
)%


(4.1
)%Beneficial conversion
    feature  deemed interest expense










2.7
%Permanent items


0.2
%


0.4
%


0.7
%Research and experimentation tax
    credit


(6.3
)%


(4.2
)%


(2.1
)%Change in valuation allowance


45.9
%


42.4
%


36.8
%Effective tax rate


(0.0
)%


(0.0
)%


(0.0
)%      F-27




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    18.
    401(k)
    Savings Plan and Employee Stock Purchase Plan      19.
    Commitments
    and Contingencies  Leases
  10-year
       F-28




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
     OperatingYear Ending
    December 31,

Leases2006

$
2,125,8082007


2,079,4742008


2,139,2502009


2,156,2102010


2,214,399Thereafter


5,318,359Total

$
16,033,500   Royalties
    Legal
    Proceedings
    20.
    Related
    Party Transactions  Loans
    to Executive Officer
   F-29




---



##### Table of Contents



ADVANCIS PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   Consulting
    Arrangements
          21.
    Quarterly
    Financial Data (Unaudited)    Basic andDilutedNet LossNet Loss


Per ShareApplicable to


Applicable toOperating





Common


CommonRevenue


Loss


Net Loss


Stockholders


StockholdersYear ended December 31, 2005First quarter

$
4,626,656


$
(11,518,582
)

$
(11,388,603
)

$
(11,388,603
)

$
(0.50
)Second quarter


3,200,839



(9,555,757
)


(9,312,832
)


(9,312,832
)


(0.34
)Third quarter


7,401,313



(6,169,988
)


(5,880,240
)


(5,880,240
)


(0.20
)Fourth quarter


1,618,882



(6,714,736
)


(6,406,902
)


(6,406,902
)


(0.22
)Year ended December 31, 2004First quarter

$
312,500


$
(10,810,926
)

$
(10,620,800
)

$
(10,620,800
)

$
(0.47
)Second quarter


854,454



(8,646,781
)


(8,490,152
)


(8,490,152
)


(0.37
)Third quarter


3,073,740



(9,405,491
)


(9,228,081
)


(9,228,081
)


(0.41
)Fourth quarter


7,117,338



(5,810,963
)


(5,665,680
)


(5,665,680
)


(0.25
)  F-30




---



##### Table of Contents



SCHEDULE II
  ADVANCIS
    PHARMACEUTICAL CORPORATION
  VALUATION
    AND QUALIFYING ACCOUNTS
 Years Ended December 31, 2005, 2004, and 2003
  Balance at








Balance atBeginning of








End ofPeriod


Additions


Deductions(1)


PeriodAccounts receivable
    allowances:Year Ended December 31, 2005

$
128,569


$
690,463


$
(466,112
)

$
352,920Year Ended December 31, 2004

$



$
200,553


$
(71,984
)

$
128,569Year Ended December 31, 2003

$



$



$



$
Inventory reserves:Year Ended December 31, 2005

$



$
154,367


$



$
154,367Year Ended December 31, 2004

$



$



$



$
Year Ended December 31, 2003

$



$



$



$
Deferred tax asset valuation
    reserves:Year Ended December 31, 2005

$
31,870,513


$
16,160,090


$



$
48,030,603Year Ended December 31, 2004

$
17,448,221


$
14,422,292


$



$
31,870,513Year Ended December 31, 2003

$
9,716,217


$
7,732,004


$



$
17,448,221     (1)
    
    Deductions represent utilization of the allowances. For accounts
    receivable, these include the deduction by customers of prompt
    pay discounts from their payments, chargebacks made by
    wholesalers to the Company, and writeoffs of bad debts, if any.