##### 









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31, 2004                                                 
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For 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                                               |  | 20876                                      
|(Address of principal executive offices)                           |  | (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


þ o


þ


o þ




DOCUMENTS INCORPORATED BY REFERENCE












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##### 



ADVANCIS PHARMACEUTICAL CORPORATION


INDEX


FORM 10-K


|         |  |                                                                                                                      |  |      |    |  |  | 
|-------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | -- |  |  | 
|         |  |                                                                                                                      |  | Page |   
|         |  |                                                                                                                      |  |      |   
|PART I  
|Item 1.  |  | Business                                                                                                             |  |      | 2  | 
|Item 2.  |  | Properties                                                                                                           |  |      | 32 | 
|Item 3.  |  | Legal Proceedings                                                                                                    |  |      | 32 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                                              |  |      | 32 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |      | 33 | 
|Item 6.  |  | Selected Financial Data                                                                                              |  |      | 34 | 
|Item 7.  |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |  |      | 35 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |  |      | 51 | 
|Item 8.  |  | Financial Statements and Supplementary
    Data                                                                      |  |      | 51 | 
|Item 9.  |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |  |      | 51 | 
|Item 9A. |  | Controls and Procedures                                                                                              |  |      | 51 | 
|Item 9B. |  | Other Information                                                                                                    |  |      | 52 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the
    Registrant                                                               |  |      | 53 | 
|Item 11. |  | Executive Compensation                                                                                               |  |      | 53 | 
|Item 12. |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |  |      | 53 | 
|Item 13. |  | Certain Relationships and Related
    Transactions                                                                   |  |      | 53 | 
|Item 14. |  | Principal Accounting Fees and Services                                                                               |  |      | 53 | 
|PART IV 
|Item 15. |  | Exhibits and Financial Statement
    Schedules                                                                       |  |      | 53 | 

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 section titled Factors That May Affect
Our Business, 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


tm








2



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Advancis Highlights


Focus on significant unmet needs in the growing antibiotic
market.




Broadly applicable approach with multiple advantages.


Anticipated reduced development risk, cost and timeframe.


3



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##### 





Pipeline of product candidates in clinical and preclinical
trials.


PULSYS commercialization strategy.


Multi-level patent strategy.


Market Opportunity






Substantial market. IMS
World Review 2003


Increased resistance to existing therapies. Streptococcus pneumoniae,


4



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##### 





Growing need for improved new treatments.


Difficulties in developing new classes of anti-infective
compounds.


Reduced development risk and costs. In vitro in vivo


Limitations of standard treatment regimens.


Our Solution




| |                    
| | -------------------
| | Our Novel Discovery





| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | 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.                                                           



| |                                       
| | --------------------------------------
| | Biological Foundation for our Approach



5



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##### 










| |                                             
| | --------------------------------------------
| | Preclinical Research Supporting our Approach





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Pulsed delivery of amoxicillin was demonstrated to have enhanced
    efficacy in studies in an in vitroexperimental
    model system. These studies showed that a pulsatile amoxicillin
    dosing regimen elicited significantly greater bacterial killing
    effects than traditional two- or three-times daily dosing
    against an intermediate-resistant strain of Streptococcus
    pneumoniae. The studies also showed that against a
    susceptible strain of Streptococcus pneumoniae, both
    once-daily pulsatile dosing and traditional dosing of
    amoxicillin exhibited effective bacterial killing. In addition,
    experiments in which significantly lower doses of amoxicillin
    were studied indicated that the bactericidal (bacteria killing)
    effect of a typical clinical amoxicillin dose delivered in
    traditional divided dose regimens could be matched by a 200-fold
    lower dose of amoxicillin given in a pulsatile manner. (Cha R
    and Rybak MJ (2004). Journal of Antimicrobial Chemotherapy,
    54:1067)
|
| |  | In the same experimental model system, a pulsatile
    clarithromycin regimen yielding concentrations that would
    otherwise be considered sub-therapeutic, killed resistant
    Streptococcus pneumoniaemore effectively than
    traditional two- or three-times daily dosing, and the pulsatile
    antibiotic inhibited bacterial re-growth for a longer period of
    time. When amoxicillin and clarithromycin were co-administered,
    the pulsatile combination eradicated resistant Streptococcus
    pneumoniaeto undetectable levels, while the antibiotic
    combination at the same doses was ineffective when given twice-
    and three-times daily. (Leuthner KD, Cheung C, Rybak MJ
    (2004). 44th Interscience Conference on Antimicrobial
    Agents and Chemotherapy, Abstract A1169)                                                                                                                                                                                                                                               
|
| |  | In a different in vitroexperimental system, it was
    demonstrated that metronidazole was rapidly bactericidal when
    administered three times daily or in a pulsatile fashion.
    Sensitive strains of Bacteroides                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

6



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | fragilisand Bacteroides thetaiotamicronwere
    reduced to undetectable levels by 10 hours after dose
    administration was begun, and remained undetectable for the
    remainder of the experiment. The two regimens were also equally
    effective in killing a highly resistant Bacteroides fragilisisolate. These data suggest that a more convenient,
    once-daily alternative to the standard three-times daily regimen
    could be achieved with PULSYS. (Ibrahim K, Gunderson BW,
    Hermsen ED, Hovde LB, Rotschafer JC (2004). Antimicrobial Agents
    and Chemotherapy, 48:4195)                                                                                                                                                                                                                                                                            
|
| |  | In addition to the preclinical research supporting our approach
    with respect to particular antibiotics, we are also working to
    determine the underlying biological mechanism by which PULSYS
    elicits its apparent therapeutic advantage. Early
    in vitroexperiments have shown that, among other
    factors, the gene coding for autolysin, an enzyme responsible
    for rupturing bacterial cells, is over-expressed in
    Streptococcus pneumoniaeexposed to amoxicillin at low
    pulsatile doses. (Isbister J, et al (2004).
    44th Interscience Conference on Antimicrobial Agents and
    Chemotherapy, Abstract F1542; Barzaghi D, et al (2004),
    104th American Society for Microbiology (ASM) General
    Meeting; Molina G, et al (2004), ASM Conference on
    Functional Genomics and Bioinformatics Approaches to Infectious
    Disease).

in vitro




| |                        
| | -----------------------
| | PULSYS Clinical Results









PULSYS  Our Enabling Technology




7



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Our Strategy




Commercialize products with multiple advantages.


Focus initially on existing antibiotics.


Focus on first-line, broad-spectrum antibiotics for community
infections.


Develop sales and marketing functions across multiple
products.


8



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##### 



License or acquire antibiotic products.


Our Marketed Products




| |       
| | ------
| | Keflex







Our Product Pipeline




9



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|                                                 |  |                               |  |                                        |  |                                                               |  |                  
|------------------------------------------------ |  | ----------------------------- |  | -------------------------------------- |  | ------------------------------------------------------------- |  | -----------------
|Advancis                                         |  |                               |  |                                        |  | Targeted PULSYS                                               |  |                  
|PULSYS Product                                   |  | Key Indication(s)             |  | Current Therapy                        |  | Added Value                                                   |  | Program Status(1)
|                                                 |  |                               |  |                                        |  |                                                               |  |                  
|Amoxicillin  Adult                              |  | Pharyngitis/tonsillitis       |  | 10-14 days, two or three times daily   |  | 7 days, once-daily, lower dose(2)                             |  | Phase III        
|Amoxicillin  Pediatric                          |  | Pharyngitis/tonsillitis       |  | 10-14 days, two or three times daily   |  | 7 days, once-daily, lower dose(2)                             |  | Phase III        
|Amoxicillin/ Clavulanate Combination  Pediatric |  | Acute otitis media            |  | 10-14 days, two or three times daily   |  | Once-daily, lower dose of each drug, shorter therapy duration |  | Preclinical(3)   
|Keflex (cephalexin)  Adult                      |  | Skin and skin structure       |  | 7-14 days, two to four times daily     |  | Once-daily, lower dose, shorter therapy duration              |  | Preclinical(3)   
|Amoxicillin/ Clavulanate Combination  Adult     |  | Sinusitis, chronic bronchitis |  | 10-14 days, two or three times daily   |  | Once-daily, lower dose of each drug, shorter therapy duration |  | Preclinical(3)   
|Amoxicillin/ Macrolide Combination               |  | Community-acquired pneumonia  |  | 10-14 days, two to four times daily(4) |  | Once-daily, lower dose of each drug, shorter therapy duration |  | Preclinical(3)   






|    |                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For an explanation of the terms Preclinical 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.
|   
|(2) | Amoxicillin PULSYS is currently being evaluated in
    Phase III trials. See Pulsatile Product
    Candidates  Amoxicillin PULSYSbelow.                                                                                                            
|   
|(3) | In vitrostudies of our preclinical product candidates
    are in process.                                                                                                                                                                             
|   
|(4) | Antibiotic combinations commonly used in clinical practice, but
    for which there are currently no combination products available
    for these indications.                                                                                        



| |                             
| | ----------------------------
| | 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


10



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Prescription Audit 2004


in vitro Streptococcus
pneumoniae Preclinical Research
Supporting our Approach


Our
Collaboration with Par Pharmaceutical for Amoxicillin
PULSYS.










| |                                            
| | -------------------------------------------
| | Amoxicillin/ Clavulanate Combination PULSYS

IMS National Prescription Audit 2004




Haemophilus
influenzae Piglansky L, et al. (2003). The Pediatric
Infectious Disease Journal, 22:405-12. Dagan, R. (2001).
Vaccine, 19:9-16


11



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Our Collaboration with Par
Pharmaceutical for Amoxicillin PULSYS.




| |                           
| | --------------------------
| | Keflex (Cephalexin) PULSYS

IMS National Prescription Audit 2004






| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Combination PULSYS Antibiotics: Amoxicillin/ Macrolide and
    Cephalosporin/ Macrolide

Streptococcus pneumoniae Haemophilus
influenzae


in vitro in vitro Streptococcus
pneumoniae Preclinical
Research Supporting our Approach










| |                                            
| | -------------------------------------------
| | Other Possible Pulsatile Product Candidates



12



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Collaboration Agreements




| |                                                                     
| | --------------------------------------------------------------------
| | Our Collaboration with Par Pharmaceutical for Amoxicillin
    PULSYS









Termination of the
Collaboration with GlaxoSmithKline


13



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| |                                                          
| | ---------------------------------------------------------
| | Termination of the Collaboration with
    GlaxoSmithKline





Our Collaboration with Par Pharmaceutical for
Amoxicillin PULSYS




| |                                                                         
| | ------------------------------------------------------------------------
| | Our Collaboration with Par Pharmaceutical for Generic
    Clarithromycin







14



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Sales and Marketing














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.

15



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| |   |                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, Vicuron, 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.                                                 





| |   |                                           
| | - | ------------------------------------------
| |  | 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   









16



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Manufacturing








Patent and Intellectual Property Protection








Government Regulation




17



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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:








18



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19



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| |                            
| | ---------------------------
| | Foreign Regulatory Approval







Employees




FACTORS THAT MAY AFFECT OUR BUSINESS




Risks Related to Our Business




| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | We expect to incur losses for the foreseeable future and
    may never become profitable.









| |   |                                                         
| | - | --------------------------------------------------------
| |  | 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.                  

20



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| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



21



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| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.



22



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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.



23



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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.



24



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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 present or 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.                                             



25



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| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | We could be forced to pay substantial damage awards if
    product liability claims that may be brought against us are
    successful.





| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | 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.



26



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| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | We are subject to therapeutic equivalent substitution,
    Medicaid reimbursement and price reporting.





| |                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



27



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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, Vicuron, 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;

28



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| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | obtaining approvals of products from the FDA and other
    regulatory agencies; and
|
| |  | manufacturing and marketing products.                                              





| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                 





29



---



##### 







| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | The manufacture and storage of pharmaceutical and chemical
    products is subject to environmental regulation and risk.







| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Market acceptance of our products will be limited if users
    of our products are unable to obtain adequate reimbursement from
    third-party payors.









30



---



##### 



Other Risks




| |                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | HealthCare Ventures V, L.P. and HealthCare
    Ventures VI, 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.





| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | 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.



31



---



##### 










|        |           
|------- | ----------
|Item 2. | Properties














|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings










|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders



32



---



##### 






PART II







|        |                                                                                                                        
|------- | -----------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities



|                   |                |      |   |       |     |  |   |      | 
|------------------ | -------------- | ---- | - | ----- | --- |  | - | ---- | 
|                   |                | HIGH |   |       | LOW | 
|                   |                |      |   |       |     | 
|December 31, 2004: |                |      |   |       |     |  |   |     
|                   | Fourth quarter |      | $ | 8.60  |     |  | $ | 2.50 | 
|                   | Third quarter  |      |   | 9.05  |     |  |   | 6.73 | 
|                   | Second quarter |      |   | 9.74  |     |  |   | 6.58 | 
|                   | First quarter  |      |   | 10.15 |     |  |   | 7.34 | 
|                  
|December 31, 2003: |                |      |   |       |     |  |   |     
|                   | Fourth quarter |      | $ | 10.30 |     |  | $ | 6.78 | 







|                                     |       |   |            |            | 
|------------------------------------ | ----- | - | ---------- | ---------- | 
|Purchase of Keflex intangible assets |       | $ | 11,206,000 |           
|Purchases of property and equipment  |       |   | 3,985,000  |           
|Cash used for debt payments          |       |   | 1,253,000  |           
|Cash used in operating activities    |       |   | 26,131,000 |           
|                                     |       |   |           
|                                     | Total |   | $          | 42,575,000 | 
|                                     |       |   |           



33



---



##### 








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

|                                                                                      |                                     |                                  |             |            |      |   |             |            |  |   |             |            |  |      |            |           |  |   |            |           | 
|------------------------------------------------------------------------------------- | ----------------------------------- | -------------------------------- | ----------- | ---------- | ---- | - | ----------- | ---------- |  | - | ----------- | ---------- |  | ---- | ---------- | --------- |  | - | ---------- | --------- | 
|                                                                                      |                                     | For the Years Ended December 31, |            
|                                                                                      |                                     |                                  |            
|                                                                                      |                                     | 2004                             |             |            | 2003 |   |             | 2002       |  |   | 2001        |            |  | 2000 |           
|                                                                                      |                                     |                                  |             |            |      |   |             |            |  |   |             |            |  |      |           
|Statements of Operations Data:                                                        |                                     |                                  |             |            |      |   |             |            |  |   |             |            |  |      |            |           |  |   |            |          
|Total revenue                                                                         |                                     | $                                | 11,358,032  |            |      | $ | 3,625,000   |            |  | $ |            |            |  | $    |           |           |  | $ |           |          
|                                                                                      |                                     |                                  |             |            |      |   |             |            |  |   |             |            |  |      |           
|Cost and expenses:                                                                    |                                     |                                  |             |            |      |   |             |            |  |   |             |            |  |      |            |           |  |   |            |          
|                                                                                      | Cost of product sales               |                                  |             | 169,854    |      |   |             |           |  |   |             |           |  |      |            |          |  |   |            |          | 
|                                                                                      | Research and development            |                                  |             | 33,642,930 |      |   |             | 16,594,629 |  |   |             | 10,855,130 |  |      |            | 5,295,308 |  |   |            | 1,133,014 | 
|                                                                                      | Selling, general and administrative |                                  |             | 12,219,409 |      |   |             | 6,427,453  |  |   |             | 3,323,879  |  |      |            | 1,958,602 |  |   |            | 751,962   | 
|                                                                                      |                                     |                                  |             |            |      |   |             |            |  |   |             |            |  |      |           
|Total expenses                                                                        |                                     |                                  | 46,032,193  |            |      |   | 23,022,082  |            |  |   | 14,179,009  |            |  |      | 7,253,910  |           |  |   | 1,884,976  |          
|                                                                                      |                                     |                                  |             |            |      |   |             |            |  |   |             |            |  |      |           
|Loss from operations                                                                  |                                     |                                  | (34,674,161 | )          |      |   | (19,397,082 | )          |  |   | (14,179,009 | )          |  |      | (7,253,910 | )         |  |   | (1,884,976 | )        
|Interest income (expense), net                                                        |                                     |                                  | 669,448     |            |      |   | 88,565      |            |  |   | 102,629     |            |  |      | 69,334     |           |  |   | 66,713     |          
|Beneficial conversion feature  deemed interest                                       |                                     |                                  |            |            |      |   | (1,666,667  | )          |  |   |            |            |  |      |           |           |  |   |           |          
|Other expense                                                                         |                                     |                                  |            |            |      |   |            |            |  |   | (47,615     | )          |  |      |           |           |  |   |           |          
|                                                                                      |                                     |                                  |             |            |      |   |             |            |  |   |             |            |  |      |           
|Net loss                                                                              |                                     |                                  | (34,004,713 | )          |      |   | (20,975,184 | )          |  |   | (14,123,995 | )          |  |      | (7,184,576 | )         |  |   | (1,818,263 | )        
|Accretion of issuance costs of mandatorily redeemable
    convertible preferred stock |                                     |                                  |            |            |      |   | (209,173    | )          |  |   | (73,925     | )          |  |      | (37,594    | )         |  |   | (11,887    | )        
|Beneficial conversion feature  deemed dividend to
    preferred shareholders         |                                     |                                  |            |            |      |   | (20,907,620 | )          |  |   |            |            |  |      |           |           |  |   |           |          
|                                                                                      |                                     |                                  |             |            |      |   |             |            |  |   |             |            |  |      |           
|Net loss applicable to common stockholders                                            |                                     | $                                | (34,004,713 | )          |      | $ | (42,091,977 | )          |  | $ | (14,197,920 | )          |  | $    | (7,222,170 | )         |  | $ | (1,830,150 | )        
|                                                                                      |                                     |                                  |             |            |      |   |             |            |  |   |             |            |  |      |           
|Basic and diluted net loss per share                                                  |                                     | $                                | (1.50       | )          |      | $ | (7.58       | )          |  | $ | (16.37      | )          |  | $    | (12.59     | )         |  | $ | (4.38      | )        
|                                                                                      |                                     |                                  |             |            |      |   |             |            |  |   |             |            |  |      |           
|Shares used in computing net loss per share, basic and diluted                        |                                     |                                  | 22,684,410  |            |      |   | 5,554,773   |            |  |   | 867,239     |            |  |      | 573,699    |           |  |   | 417,857    |          
|                                                                                      |                                     |                                  |             |            |      |   |             |            |  |   |             |            |  |      |           
|Balance Sheet Data at Year-End:                                                       |                                     |                                  |             |            |      |   |             |            |  |   |             |            |  |      |            |           |  |   |            |          
|Unrestricted cash, cash equivalents and marketable securities                         |                                     | $                                | 30,051,937  |            |      | $ | 65,087,122  |            |  | $ | 4,059,911   |            |  | $    | 16,472,049 |           |  | $ | 2,061,304  |          
|Total assets                                                                          |                                     |                                  | 60,998,025  |            |      |   | 84,174,843  |            |  |   | 9,058,523   |            |  |      | 18,575,075 |           |  |   | 3,019,888  |          
|Long-term debt, including current portion                                             |                                     |                                  | 2,577,387   |            |      |   | 2,440,588   |            |  |   | 1,730,934   |            |  |      | 1,089,882  |           |  |   |           |          
|Mandatorily redeemable convertible preferred stock                                    |                                     |                                  |            |            |      |   |            |            |  |   | 28,439,295  |            |  |      | 25,391,170 |           |  |   | 4,433,481  |          
|Accumulated deficit                                                                   |                                     |                                  | (78,106,731 | )          |      |   | (44,102,018 | )          |  |   | (23,126,834 | )          |  |      | (9,002,839 | )         |  |   | (1,818,263 | )        
|Total stockholders equity (deficit)                                                  |                                     |                                  | 39,738,379  |            |      |   | 70,149,920  |            |  |   | (22,701,459 | )          |  |      | (8,701,660 | )         |  |   | (1,710,150 | )        

34



---



##### 








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

Forward-Looking Statements Factors that May Affect our Business


Our Business




Management Review of 2004 and Focus for 2005






| |                                                  
| | -------------------------------------------------
| | PULSYS product development and
    collaborations





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In May 2004, we entered into a collaboration agreement with Par
    Pharmaceutical Companies, Inc. (Par) to develop and
    commercialize a pulsatile amoxicillin product for
    pharyngitis/tonsillitis and, subsequently, an
    amoxicillin/clavulanate combination PULSYS product for acute
    otitis media. Under this agreement, we received an upfront
    payment of $5 million and a commitment from Par to fund
    future product development expenses.
|
| |  | Our Phase III program to support regulatory approvals for
    our adult and pediatric Amoxicillin PULSYS products began in
    2004. We selected an amoxicillin formulation for testing, held
    pre-Phase III meetings with the FDA in September and
    December 2004, and initiated dosing in October 2004 for our
    adolescent and adult trial. We began the enrollment for our
    pediatric Phase III trial in January 2005.                               
|
| |  | A number of preclinical studies were conducted in 2004, and an
    amoxicillin and clarithromycin study supporting the efficiency
    of our once-daily pulsatile dosing approach was published in a
    December 2004 industry journal.                                                                                                                                                                                                                            
|
| |  | During 2004, we received cash of $17.0 million from our
    collaboration partners, consisting of $3.0 million from
    GlaxoSmithKline (GSK) for a milestone achievement (for
    which the revenue was reported in the fourth quarter of 2003),
    $5.0 million from Par for the upfront payment for the
    amoxicillin collaboration, and $9.0 million from Par for
    quarterly funding payments under the Amoxicillin PULSYS                                

35



---



##### 



| |  |                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------
| |  | collaboration. We recognized revenue of approximately
    $9.0 million in 2004 resulting from the cash receipts of
    $17.0 million.



| |                  
| | -----------------
| | Marketed Products





| |   |                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On June 30, 2004, we acquired the Keflex brand from Eli
    Lilly for $11.2 million, and commenced product sales. In
    the second half of 2004, we recorded net Keflex product sales of
    $2.4 million.                                                                                                                    
|
| |  | In December 2004, we entered into an agreement for the future
    supply of Keflex with Ceph International Corporation in Puerto
    Rico. This agreement provides us with a long-term availability
    of Keflex manufacturing capacity and replaces the short-term,
    transitional supply agreement that we had with Lilly.
|
| |  | We began pre-clinical work on a once-daily version of Keflex
    PULSYS and also began development of additional non-PULSYS
    Keflex products for potential sale in 2005.                                                                                                                                                    



| |                     
| | --------------------
| | Other Events in 2004



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2004, we continued to build our senior management and hired a
    number of key personnel. These executives included a Chief
    Scientific Officer, a Senior Vice President of Technical
    Operations and a Vice President of Discovery.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | In addition to expanding our staff in 2004, we also expanded our
    research capabilities by leasing additional office and
    laboratory facilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | On October 15, 2004, GSK notified us that they were
    terminating our collaboration for amoxicillin/clavulanate
    (Augmentin), under which we had licensed patents and PULSYS
    technology to them for their own clinical development efforts.
    GSKs continued development efforts could have resulted in
    additional milestone and royalty revenue to us; however, we
    believe that pulsatile amoxicillin/clavulanate remains
    technically and commercially viable. In December 2004, we
    announced that our amoxicillin collaboration with Par was
    revised to include the development of an amoxicillin/clavulanate
    PULSYS product for the treatment of otitis media.                                                             
|
| |  | During 2004, we continued to develop our generic formulation of
    Abbott Laboratories Biaxin XL (clarithromycin extended
    release tablets). We adjusted our formulations of the product to
    modify the release profile to more closely correspond to Biaxin
    XL and meet the standard for bioequivalence. However, both of
    the formulations missed the peak concentration required to
    achieve bioequivalence, and we decided to end further
    development of this product. This was a non-core product which
    did not use our PULSYS technology, and due to the addition of
    other competitors with similar generic product candidates
    nearing release, made generic clarithromycin a less attractive
    development opportunity.
|
| |  | In November 2004 we implemented steps to reduce our expenses, as
    a result of the unexpected GSK termination and the
    discontinuance of our generic Biaxin XL program. These steps
    included a decision to forego certain discretionary
    expenditures, a work force reduction of approximately
    18 percent, and efforts to focus our resources on our most
    promising product candidates. We expect these actions will
    result in our current funds, together with funds expected from
    existing collaborations and Keflex product sales, will be
    adequate to support our existing operations through at least
    early 2006.                                                                                                        



| |               
| | --------------
| | Focus for 2005



36



---



##### 







| |                                  
| | ---------------------------------
| | Research and Development Expenses



Our
Product Pipeline


|                                     |                              |                         |            |            |                   |   |            |               |  |   |            |           |  |       |            |            |  |  |  |             | 
|------------------------------------ | ---------------------------- | ----------------------- | ---------- | ---------- | ----------------- | - | ---------- | ------------- |  | - | ---------- | --------- |  | ----- | ---------- | ---------- |  |  |  | ----------- | 
|                                     |                              |                         |            |            |                   |   |            | Total Expense |  |   |           
|                                     |                              |                         |            |            |                   |   |            | Incurred from |  |   |           
|                                     |                              |                         |            | Inception  |                   |   |           
|                                     |                              | Year Ended December 31, |            |            | (January 1, 2000) |   |            | Clinical      | 
|                                     |                              |                         |            |            | to December 31,   |   |            | Development   | 
|                                     |                              | 2004                    |            |            | 2003              |   |            | 2002          |  |   | 2004       |           |  | Phase |           
|                                     |                              |                         |            |            |                   |   |            |               |  |   |            |           |  |       |           
|Direct Project Costs(1)              |                              |                         |            |            |                   |   |            |               |  |   |            |           |  |       |            |            |  |  |  |            
|                                     | Amoxicillin(2)               |                         | $          | 15,961,000 |                   |   | $          | 4,890,000     |  |   | $          | 1,171,000 |  |       | $          | 23,836,000 |  |  |  | Phase III   | 
|                                     | Clarithromycin               |                         |            | 239,000    |                   |   |            | 1,169,000     |  |   |            | 1,986,000 |  |       |            | 5,354,000  |  |  |  | Phase I/II  | 
|                                     | Metronidazole                |                         |            | 716,000    |                   |   |            | 465,000       |  |   |            | 482,000   |  |       |            | 2,641,000  |  |  |  | Phase I/II  | 
|                                     | Amoxicillin/ Clavulanate(3)  |                         |            | 3,000      |                   |   |            | 28,000        |  |   |            | 61,000    |  |       |            | 92,000     |  |  |  | Preclinical | 
|                                     | Generic Clarithromycin(4)    |                         |            | 5,480,000  |                   |   |            | 5,975,000     |  |   |            | 3,709,000 |  |       |            | 15,500,000 |  |  |  | Suspended   | 
|                                     | Other Product Candidates     |                         |            | 3,372,000  |                   |   |            | 938,000       |  |   |            | 1,646,000 |  |       |            | 6,091,000  |  |  |  | Preclinical | 
|                                     |                              |                         |            |            |                   |   |            |               |  |   |            |           |  |       |           
|                                     | Total Direct Project Costs   |                         |            | 25,771,000 |                   |   |            | 13,465,000    |  |   |            | 9,055,000 |  |       |            | 53,514,000 |  |  |  |             | 
|                                     |                              |                         |            |            |                   |   |            |               |  |   |            |           |  |       |           
|Indirect Project Costs(1)            |                              |                         |            |            |                   |   |            |               |  |   |            |           |  |       |            |            |  |  |  |            
|                                     | Facility                     |                         |            | 2,954,000  |                   |   |            | 1,113,000     |  |   |            | 658,000   |  |       |            | 5,362,000  |  |  |  |             | 
|                                     | Depreciation                 |                         |            | 1,928,000  |                   |   |            | 664,000       |  |   |            | 459,000   |  |       |            | 3,268,000  |  |  |  |             | 
|                                     | Patent                       |                         |            | 396,000    |                   |   |            | 503,000       |  |   |            | 206,000   |  |       |            | 1,252,000  |  |  |  |             | 
|                                     | Other Indirect Overhead      |                         |            | 2,594,000  |                   |   |            | 850,000       |  |   |            | 477,000   |  |       |            | 4,125,000  |  |  |  |             | 
|                                     |                              |                         |            |            |                   |   |            |               |  |   |            |           |  |       |           
|                                     | Total Indirect Project Costs |                         |            | 7,872,000  |                   |   |            | 3,130,000     |  |   |            | 1,800,000 |  |       |            | 14,007,000 |  |  |  |             | 
|                                     |                              |                         |            |            |                   |   |            |               |  |   |            |           |  |       |           
|Total Research & Development Expense |                              | $                       | 33,643,000 |            |                   | $ | 16,595,000 |               |  | $ | 10,855,000 |           |  | $     | 67,521,000 |            |  |  |  |            
|                                     |                              |                         |            |            |                   |   |            |               |  |   |            |           |  |       |           






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 have both pediatric and adult amoxicillin formulations in
    clinical development. We have entered into an agreement under
    which Par Pharmaceutical will be responsible for funding the
    anticipated future development costs of this product. See
    Our Collaboration with Par Pharmaceutical for
    Amoxicillin PULSYS above. Phase III dosing for
    the adolescent/adult formulation commenced October 15, 2004
    and dosing for the pediatric formulation commenced on
    January 5, 2005.

37



---



##### 





|    |                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | We entered into an agreement under which GlaxoSmithKline
    (GSK) was responsible for funding future clinical
    development of this product. GSK has notified us that, effective
    December 15, 2004, it would discontinue its development
    efforts for this product. See Our Collaboration with
    GlaxoSmithKline above.
|   
|(4) | We have discontinued development efforts for this product. See
    Our Collaboration with Par Pharmaceutical for Generic
    Clarithromycin above.                                                                                                                                                                                 



| |                                             
| | --------------------------------------------
| | Selling, General and Administrative Expenses





| |                         
| | ------------------------
| | Stock-Based Compensation

Employees. Accounting for
Stock Issued to Employees,


Non-employee Consultants. Accounting for Stock-Based
Compensation, Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.




| |                              
| | -----------------------------
| | Beneficial Conversion Feature

Application of Issue
No. 98-5 to Certain Convertible Instruments.


38



---



##### 





| |                          
| | -------------------------
| | Interest Income (Expense)





| |           
| | ----------
| | Net Losses



Results of Operations




| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Fiscal Year Ended December 31, 2004 Compared to
    Fiscal Year Ended December 31, 2003

Revenues.


|                                                     |                                                       |                         |           |            |      |   |   |           | 
|---------------------------------------------------- | ----------------------------------------------------- | ----------------------- | --------- | ---------- | ---- | - | - | --------- | 
|                                                     |                                                       | Year Ended December 31, |          
|                                                     |                                                       |                         |          
|                                                     |                                                       | 2004                    |           |            | 2003 |  
|                                                     |                                                       |                         |           |            |      |  
|Keflex product sales, net                            |                                                       | $                       | 2,397,000 |            |      | $ |  |          
|Contract revenue:                                    |                                                       |                         |           |            |      |   |   |          
|                                                     | Achievement of GSK project milestone                  |                         |           |           |      |   |   | 3,000,000 | 
|                                                     | Amortization of upfront GSK payment                   |                         |           | 1,146,000  |      |   |   | 625,000   | 
|                                                     | Recognition 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.


39



---



##### 





|                                  |                                                         |                         |           |            |            |  |           |            |            | 
|--------------------------------- | ------------------------------------------------------- | ----------------------- | --------- | ---------- | ---------- |  | --------- | ---------- | ---------- | 
|                                  |                                                         | Year Ended December 31, |          
|                                  |                                                         |                         |          
|Research and Development Expenses |                                                         | 2004                    |           |            | 2003       | 
|                                  |                                                         |                         |           |            |            | 
|Direct project costs:             |                                                         |                         |           |            |            |  |           |           
|                                  | Personnel, benefits and related costs                   |                         | $         | 9,522,000  |            |  | $         | 5,866,000  |           
|                                  | Stock-based compensation                                |                         |           | 1,173,000  |            |  |           | 1,903,000  |           
|                                  | Consultants, supplies, materials and other direct costs |                         |           | 8,595,000  |            |  |           | 3,737,000  |           
|                                  | Clinical studies                                        |                         |           | 6,481,000  |            |  |           | 1,959,000  |           
|                                  |                                                         |                         |           |            |            | 
|                                  |                                                         | Total direct costs      |           |            | 25,771,000 |  |           |            | 13,465,000 | 
|Indirect project costs            |                                                         |                         | 7,872,000 |            |            |  | 3,130,000 |           
|                                  |                                                         |                         |           |            |            | 
|                                  | Total                                                   |                         | $         | 33,643,000 |            |  | $         | 16,595,000 |           
|                                  |                                                         |                         |           |            |            | 







Selling, General and Administrative Expenses.


|                                     |       |                         |           |            |      |   |           |           | 
|------------------------------------ | ----- | ----------------------- | --------- | ---------- | ---- | - | --------- | --------- | 
|                                     |       | Year Ended December 31, |          
|                                     |       |                         |          
|                                     |       | 2004                    |           |            | 2003 |  
|                                     |       |                         |           |            |      |  
|Salaries, benefits and related costs |       | $                       | 2,667,000 |            |      | $ | 1,847,000 |          
|Stock-based compensation             |       |                         | 2,480,000 |            |      |   | 1,538,000 |          
|Legal and consulting expenses        |       |                         | 2,694,000 |            |      |   | 1,773,000 |          
|Other expenses                       |       |                         | 4,378,000 |            |      |   | 1,269,000 |          
|                                     |       |                         |           |            |      |  
|                                     | Total |                         | $         | 12,219,000 |      |   | $         | 6,427,000 | 
|                                     |       |                         |           |            |      |  



40



---



##### 





Net Interest Income (Expense) and Other Expense.


|                                                        |            |                         |          |         |      |   |            |            |  
|------------------------------------------------------- | ---------- | ----------------------- | -------- | ------- | ---- | - | ---------- | ---------- | -
|                                                        |            | Year Ended December 31, |         
|                                                        |            |                         |         
|                                                        |            | 2004                    |          |         | 2003 |  
|                                                        |            |                         |          |         |      |  
|Interest income                                         |            | $                       | 794,000  |         |      | $ | 254,000    |           
|Interest 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 | )
|                                                        |            |                         |          |         |      |  







| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Fiscal Year Ended December 31, 2003 Compared to
    Fiscal Year Ended December 31, 2002

Revenues.


Research and Development Expenses.


41



---



##### 





|                                  |                                                         |                         |           |            |      |  |           |            | 
|--------------------------------- | ------------------------------------------------------- | ----------------------- | --------- | ---------- | ---- |  | --------- | ---------- | 
|                                  |                                                         | Year Ended December 31, |          
|                                  |                                                         |                         |          
|Research and Development Expenses |                                                         | 2003                    |           |            | 2002 | 
|                                  |                                                         |                         |           |            |      | 
|Direct project costs              |                                                         |                         |           |            |      |  |           |           
|                                  | Personnel, benefits and related costs                   |                         | $         | 5,866,000  |      |  | $         | 3,576,000  | 
|                                  | Stock-based compensation                                |                         |           | 1,903,000  |      |  |           | 142,000    | 
|                                  | Consultants, supplies, materials and other direct costs |                         |           | 3,737,000  |      |  |           | 3,921,000  | 
|                                  | Clinical studies                                        |                         |           | 1,959,000  |      |  |           | 1,416,000  | 
|                                  |                                                         |                         |           |            |      | 
|                                  | Total direct costs                                      |                         |           | 13,465,000 |      |  |           | 9,055,000  | 
|Indirect project costs            |                                                         |                         | 3,130,000 |            |      |  | 1,800,000 |           
|                                  |                                                         |                         |           |            |      | 
|                                  | Total                                                   |                         | $         | 16,595,000 |      |  | $         | 10,855,000 | 
|                                  |                                                         |                         |           |            |      | 





General and Administrative Expenses.


|                                     |       |                         |           |           |      |   |           |           | 
|------------------------------------ | ----- | ----------------------- | --------- | --------- | ---- | - | --------- | --------- | 
|                                     |       | Year Ended December 31, |          
|                                     |       |                         |          
|                                     |       | 2003                    |           |           | 2002 |  
|                                     |       |                         |           |           |      |  
|Salaries, benefits and related costs |       | $                       | 1,847,000 |           |      | $ | 1,730,000 |          
|Stock-based compensation             |       |                         | 1,538,000 |           |      |   | 43,000    |          
|Legal and consulting expenses        |       |                         | 1,773,000 |           |      |   | 883,000   |          
|Other expenses                       |       |                         | 1,269,000 |           |      |   | 668,000   |          
|                                     |       |                         |           |           |      |  
|                                     | Total |                         | $         | 6,427,000 |      |   | $         | 3,324,000 | 
|                                     |       |                         |           |           |      |  



42



---



##### 



Net Interest Income (Expense) and Other Expense.


|                                                        |            |                         |            |            |      |   |          |        | 
|------------------------------------------------------- | ---------- | ----------------------- | ---------- | ---------- | ---- | - | -------- | ------ | 
|                                                        |            | Year Ended December 31, |           
|                                                        |            |                         |           
|                                                        |            | 2003                    |            |            | 2002 |  
|                                                        |            |                         |            |            |      |  
|Interest income                                         |            | $                       | 254,000    |            |      | $ | 338,000  |       
|Interest expense, net of interest capitalized           |            |                         | (165,000   | )          |      |   | (236,000 | )     
|Beneficial conversion feature  deemed interest expense |            |                         | (1,667,000 | )          |      |   |         |       
|Other expense                                           |            |                         |           |            |      |   | (48,000  | )     
|                                                        |            |                         |            |            |      |  
|                                                        | Total, net |                         | $          | (1,578,000 | )    |   | $        | 54,000 | 
|                                                        |            |                         |            |            |      |  









Liquidity and Capital Resources






| |                               
| | ------------------------------
| | Cash and Marketable Securities



|                          |       |                    |            |            |      |   |            |            | 
|------------------------- | ----- | ------------------ | ---------- | ---------- | ---- | - | ---------- | ---------- | 
|                          |       | As of December 31, |           
|                          |       |                    |           
|                          |       | 2004               |            |            | 2003 |  
|                          |       |                    |            |            |      |  
|Cash and cash equivalents |       | $                  | 10,396,000 |            |      | $ | 37,450,000 |           
|Marketable securities     |       |                    | 19,656,000 |            |      |   | 27,637,000 |           
|                          |       |                    |            |            |      |  
|                          | Total |                    | $          | 30,052,000 |      |   | $          | 65,087,000 | 
|                          |       |                    |            |            |      |  



43



---



##### 







| |          
| | ---------
| | Cash Flow



|                                                     |  |                         |             |   |      |   |             |      |  |   |             |  
|---------------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                     |  | Year Ended December 31, |            
|                                                     |  |                         |            
|                                                     |  | 2004                    |             |   | 2003 |   |             | 2002 | 
|                                                     |  |                         |             |   |      |   |             |      | 
|Net cash used in operating activities                |  | $                       | (15,487,000 | ) |      | $ | (11,084,000 | )    |  | $ | (12,796,000 | )
|Net cash provided by (used in) investing activities  |  |                         | (11,721,000 | ) |      |   | (36,413,000 | )    |  |   | 3,041,000   |  
|Net cash provided by financing activities            |  |                         | 153,000     |   |      |   | 80,887,000  |      |  |   | 3,628,000   |  
|                                                     |  |                         |             |   |      |   |             |      | 
|Net increase (decrease) in cash and cash equivalents |  | $                       | (27,055,000 | ) |      | $ | 33,390,000  |      |  | $ | (6,127,000  | )
|                                                     |  |                         |             |   |      |   |             |      | 

Operating
Activities






| |   |                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cash receipts exceeded revenue recognized by $7.8 million,
    due to timing of revenue recognized under collaboration
    agreements for accounting purposes, primarily attributable to
    deferred recognition of contract payments received upfront and
    for reimbursement of development costs;
|
| |  | Cash expenditures were approximately $9.4 million less than
    expenses for accounting purposes, primarily due to noncash
    expenses for depreciation, amortization, and stock-based
    compensation; and                                                                                          
|
| |  | Interest income received in cash was $1.3 million higher
    than interest income for accounting purposes, as the premium
    paid for marketable securities with relatively high interest
    rates is charged against interest income.                                                               





| |   |                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cash receipts exceeded revenue recognized by $1.4 million,
    due to timing of revenue recognized under collaboration
    contracts for accounting purposes, primarily attributable to
    deferred recognition of the $5.0 million upfront payment
    received from GSK;                                                           
|
| |  | Cash expenditures were approximately $6.5 million less than
    expenses for accounting purposes, primarily due to noncash
    expenses for depreciation, amortization, and stock-based
    compensation; and                                                                                                                         
|
| |  | Interest income (expense), net, received in cash was
    $2.0 million higher than interest income (expense) for
    accounting purposes, as the deemed interest on the beneficial
    conversion feature of the convertible notes and the interest
    accrued on the convertible notes prior to conversion were not
    paid in cash.



44



---



##### 



Investing
Activities










| |                     
| | --------------------
| | Financing Activities







45



---



##### 





| |           
| | ----------
| | Borrowings



|                         |        |                                                          |                |           |             |   |         |           |   |   |   |   | 
|------------------------ | ------ | -------------------------------------------------------- | -------------- | --------- | ----------- | - | ------- | --------- | - | - | - | - | 
|                         |        | As of December 31, 2004                                 
|                         |        |                                                         
|                         |        |                                                          |                | Remaining
|                         |        |                                                          |                | Amount    |             |   | Amount 
|Debt Obligations         |        | Interest Rates                                           |                |           | Outstanding |   |         | Available
|                         |        |                                                          |                |           |             |   |         |          
|Fixed rate borrowings    |        |                                                          | 5.00%  11.62% |           |             | $ | 339,000 |           |   | $ |  |  
|Variable rate borrowings |        | LIBOR or Fixed Cost of Funds plus 250  280 basis points |                |           | 2,238,000   |   |         |           |  |  
|                         |        |                                                          |                |           |             |   |         |           |  
|                         | Totals |                                                          |                |           |             |   | $       | 2,577,000 |   |   | $ |  | 
|                         |        |                                                          |                |           |             |   |         |           |  





| |                        
| | -----------------------
| | Contractual Obligations





Payments Due by Period


|                                             |                                    |       |        |        |      |                |       |       |  |   |       |       |  |       |       |       |      |   |       |       |  |   |       |       |  |   |       |       | 
|-------------------------------------------- | ---------------------------------- | ----- | ------ | ------ | ---- | -------------- | ----- | ----- |  | - | ----- | ----- |  | ----- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                             |                                    |       |        |        |      |                |       |       |  |   |       |       |  | After |      
|Contractual Obligations                      |                                    | Total |        |        | 2005 |                |       | 2006  |  |   | 2007  |       |  | 2008  |       |       | 2009 |   |       | 2009  | 
|                                             |                                    |       |        |        |      |                |       |       |  |   |       |       |  |       |       |       |      |   |       |       | 
|                                             |                                    |       |        |        |      | (In thousands) |       |       |  |   |       |       | 
|Short and long-term debt (includes interest) |                                    | $     | 2,753  |        |      | $              | 1,117 |       |  | $ | 949   |       |  | $     | 636   |       |      | $ | 51    |       |  | $ |      |       |  | $ |      |      
|Operating lease obligations                  |                                    |       | 18,306 |        |      |                | 2,288 |       |  |   | 2,123 |       |  |       | 2,072 |       |      |   | 2,132 |       |  |   | 2,157 |       |  |   | 7,534 |      
|                                             |                                    |       |        |        |      |                |       |       |  |   |       |       |  |       |       |       |      |   |       |       | 
|                                             | Total contractual cash obligations |       | $      | 21,059 |      |                | $     | 3,405 |  |   | $     | 3,072 |  |       | $     | 2,708 |      |   | $     | 2,183 |  |   | $     | 2,157 |  |   | $     | 7,534 | 
|                                             |                                    |       |        |        |      |                |       |       |  |   |       |       |  |       |       |       |      |   |       |       | 







| |                        
| | -----------------------
| | Prospective Information



46



---



##### 







Recent Accounting Pronouncements


Consolidation of Variable Interest Entities, an
interpretation of Accounting Research
Bulletin No. 51,


Share-Based Payment, Accounting for Stock-based
Compensation.


Exchange of Nonmonetary Assets, an amendment of APB
Opinion No. 29, Accounting for Nonmonetary
Transactions.


47



---



##### 



Critical Accounting Policies and Estimates








| |                    
| | -------------------
| | Revenue Recognition



Product Sales.


Chargebacks and rebates


Product returns.


Contract Revenue.


48



---



##### 





Reimbursement of Development Costs.




| |                  
| | -----------------
| | Intangible Assets

Acquired Intangible Assets.


Impairment.




| |                 
| | ----------------
| | Accrued Expenses



49



---



##### 







| |                         
| | ------------------------
| | Stock-Based Compensation

Accounting for Stock-Based
Compensation.




| |             
| | ------------
| | Income Taxes



Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995




50



---



##### 










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










|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data








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








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of Disclosure Controls and Procedures




Changes in Internal Control over Financial Reporting during
the Quarter




Managements Annual Report on Internal Control over
Financial Reporting




51



---



##### 





Internal Control  Integrated Framework.









|         |                  
|-------- | -----------------
|Item 9B. | Other Information



52



---



##### 






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 and Financial Statement Schedules





|                                                                                                                 |  |        |     | 
|---------------------------------------------------------------------------------------------------------------- |  | ------ | --- | 
|                                                                                                                 |  | Page   |    
|                                                                                                                 |  | Number |    
|                                                                                                                 |  |        |    
|Report of PricewaterhouseCoopers LLP, Independent Registered
    Public Accounting Firm                          |  |        | F-2 | 
|Balance Sheets at December 31, 2004 and 2003                                                                     |  |        | F-4 | 
|Statements of Operations for the years ended December 31,
    2004, 2003 and 2002                                |  |        | F-5 | 
|Statements of Changes in Stockholders Equity (Deficit) for
    the years ended December 31, 2004, 2003 and 2002 |  |        | F-6 | 
|Statements of Cash Flows for the years ended December 31,
    2004, 2003 and 2002                                |  |        | F-7 | 
|Notes to Financial Statements                                                                                    |  |        | F-8 | 



|    |                              
|--- | -----------------------------
|(2) | Financial Statement Schedules



53



---



##### 





|    |         
|--- | --------
|(3) | Exhibits

|            |    |          |  |                                                                                                                                                                                                                                                                                
|----------- | -- | -------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |          | 
|            |    |          | 
|            | 2  | .1****+ |  | Asset Purchase Agreement dated as of June 30, 2004, by and
    between the Registrant and Eli Lilly and Company                                                                                                                                                                
|            | 3  | .1*      |  | Certificate of Incorporation                                                                                                                                                                                                                                                   
|            | 3  | .2*      |  | Bylaws                                                                                                                                                                                                                                                                         
|            | 4  | .1*      |  | Specimen Stock Certificate                                                                                                                                                                                                                                                     
|            | 10 | .1*      |  | Executive Employment Agreement between the Registrant and Edward
    M. Rudnic dated January 7, 2000                                                                                                                                                                           
|            | 10 | .2*      |  | Executive Employment Agreement between the Registrant and Steven
    A. Shallcross dated February 22, 2002                                                                                                                                                                     
|            | 10 | .3*      |  | Executive Employment Agreement between the Registrant and Colin
    E. Rowlings dated February 22, 2002                                                                                                                                                                        
|            | 10 | .4*      |  | Executive Employment Agreement between the Registrant and Kevin
    S. Sly dated February 25, 2002                                                                                                                                                                             
|            | 10 | .5*      |  | Executive Employment Agreement between the Registrant and Robert
    Guttendorf dated January 3, 2003                                                                                                                                                                          
|            | 10 | .6*      |  | Executive Employment Agreement between the Registrant and Sandra
    E. Wassink dated August 13, 2003                                                                                                                                                                          
|            | 10 | .7*      |  | Executive Employment Agreement between the Registrant and Beth
    A. Burnside dated August 13, 2003                                                                                                                                                                           
|            | 10 | .8*      |  | Executive Employment Agreement between the Registrant and Darren
    Buchwald dated September 1, 2003                                                                                                                                                                          
|            | 10 | .9*      |  | Form of Indemnification Agreement                                                                                                                                                                                                                                              
|            | 10 | .10*++   |  | Amended and Restated Stock Incentive Plan                                                                                                                                                                                                                                      
|            | 10 | .11*     |  | Form of Incentive Stock Option Agreement                                                                                                                                                                                                                                       
|            | 10 | .12*     |  | Form of Non-qualified Stock Option Agreement                                                                                                                                                                                                                                   
|            | 10 | .13*     |  | Form of Stock Restriction Agreement                                                                                                                                                                                                                                            
|            | 10 | .14**    |  | Employee Stock Purchase Plan                                                                                                                                                                                                                                                   
|            | 10 | .15*     |  | Form of Employment Agreement on Ideas, Inventions and
    Confidential Information                                                                                                                                                                                             
|            | 10 | .16*     |  | Construction Services Agreement between the Registrant and
    Barclay White Skanska, Inc. dated July 12, 2002                                                                                                                                                                 
|            | 10 | .17*     |  | 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 | .18*     |  | Standard Form of Agreement between Owner and Architect with
    Standard Form of Architects Services between the
    Registrant and Gaudreau, Inc. dated July 8, 2002                                                                                                         
|            | 10 | .19*     |  | Lease Agreement between the Registrant and Seneca Meadows
    Corporate Center II LLC dated August 1, 2002                                                                                                                                                                     
|            | 10 | .20*     |  | Stock Purchase Pledge Agreement between the Registrant and
    Edward M. Rudnic dated October 15, 2001                                                                                                                                                                         
|            | 10 | .21*     |  | Form of Stock Purchase Promissory Note by Edward M. Rudnic dated
    October 15, 2001                                                                                                                                                                                          
|            | 10 | .22*     |  | Amendment dated June 12, 2002 to Stock Purchase Pledge
    Agreement dated October 15, 2001 between the Registrant and
    Edward M. Rudnic                                                                                                                                    
|            | 10 | .23*     |  | 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                                                                                   
|            | 10 | .24*     |  | 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, 2003

54



---



##### 



|            |    |           |  |                                                                                                                                                          
|----------- | -- | --------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |           | 
|            |    |           | 
|            | 10 | .25*      |  | Form of Convertible Promissory Note dated March 28, 2003                                                                                                 
|            | 10 | .26*      |  | Amendment to Secured Convertible Promissory Note dated
    June 23, 2003                                                                                 
|            | 10 | .27*      |  | Fourth Amended and Restated Stockholders Agreement                                                                                                      
|            | 10 | .28*      |  | Omnibus Addendum and Amendment to Series E Convertible
    Preferred Stock Purchase Agreement and Fourth Amended and
    Restated Stockholders Agreement
|            | 10 | .29*      |  | Consulting Agreement dated August 18, 2000 between the
    Registrant and Jenefir Isbister as amended                                                    
|            | 10 | .30*      |  | Credit Agreement between the Registrant and Manufacturers and
    Traders Trust Company dated July 31, 2003                                              
|            | 10 | .31*      |  | Specific Security Agreement between the Registrant and
    Manufacturers and Traders Trust Company dated July 31, 2003                                   
|            | 10 | .32*+     |  | Development and License Agreement between the Registrant and
    GlaxoSmithKline dated July 18, 2003                                                     
|            | 10 | .33*+     |  | Supply, Distribution and Marketing Agreement between the
    Registrant and Par Pharmaceutical, Inc. dated September 4,
    2003                         
|            | 10 | .34***    |  | Executive Employment Agreement between the Registrant and Barry
    Hafkin, M.D. dated March 15, 2004                                                    
|            | 10 | .35****+  |  | Manufacturing Agreement dated as of June 30, 2004, by and
    between the Registrant and Eli Lilly and Company                                           
|            | 10 | .36****+  |  | Transition Services Agreement dated as of June 30, 2004, by
    and between the Registrant and Eli Lilly and Company                                     
|            | 10 | .37*****+ |  | Development and Commercialization Agreement between the
    Registrant and Par Pharmaceutical, Inc. dated May 28, 2004                                   
|            | 10 | .38*****  |  | Executive Employment Agreement between the Registrant and Donald
    Treacy dated March 19, 2004                                                         
|            | 10 | .39*****  |  | Executive Employment Agreement between the Registrant and David
    Kudla dated July 1, 2004                                                             
|            | 10 | .40****** |  | Executive Employment Agreement between the Registrant and Donald
    C. Anderson, M.D. dated October 15, 2004                                            
|            | 10 | .41+      |  | Commercial Supply Agreement between the Registrant and Ceph
    International Corporation dated December 3, 2004                                         
|            | 10 | .42+      |  | First Amendment to Development and Commercialization Agreement
    between the Registrant and Par Pharmaceutical Corporation dated
    December 14, 2004 
|            | 10 | .43       |  | Agreement of Sublease dated August 4, 2004 between the
    Registrant and Large Scale Biology Corporation                                                
|            | 10 | .44       |  | Executive Employment Agreement between the Registrant and James
    Bruno dated December 1, 2003.                                                        
|            | 10 | .45       |  | Executive Employment Agreement between the Registrant and Joseph
    J. Rogus, P.E. dated August 4, 2004.                                                
|            | 23 | .1        |  | Consent of PricewaterhouseCoopers LLP, Independent Registered
    Public Accounting Firm.                                                                
|            | 31 | .1        |  | Rule 13a-14(a) Certification of Principal Executive Officer.                                                                                             
|            | 31 | .2        |  | Rule 13a-14(a) Certification of Principal Financial Officer.                                                                                             
|            | 32 | .1        |  | Section 1350 Certification of Chief Executive Officer.                                                                                                   
|            | 32 | .2        |  | Section 1350 Certification of Chief Financial Officer.                                                                                                   






| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| | * | Incorporated by reference to our Registration Statement on
    Form S-1 (File No. 333-107599).



| |    |                                                                                               
| | -- | ----------------------------------------------------------------------------------------------
| | ** | Incorporated by reference to our Registration Statement on
    Form S-8 (File No. 333-109728).

55



---



##### 





| |     |                                                                                      
| | --- | -------------------------------------------------------------------------------------
| | *** | Incorporated by reference to our Quarterly Report on
    Form 10-Q filed May 7, 2004.



| |      |                                                                                     
| | ---- | ------------------------------------------------------------------------------------
| | **** | Incorporated by reference to our Current Report on Form 8-K
    filed July 15, 2004.



| |       |                                                                                        
| | ----- | ---------------------------------------------------------------------------------------
| | ***** | Incorporated by reference to our Quarterly Report on
    Form 10-Q filed August 6, 2004



|       |                                                                                          
|------ | -----------------------------------------------------------------------------------------
|****** | Incorporated by reference to our Quarterly Report on
    Form 10-Q filed November 5, 2004



| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 requested 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.



| |    |                                                                                                  
| | -- | -------------------------------------------------------------------------------------------------
| | ++ | Incorporated by reference from Annex B to our Definitive
    Proxy Statement filed April 22, 2004

56



---



##### 



SIGNATURES






| |                                        
| | ---------------------------------------
| | ADVANCIS PHARMACEUTICAL
    CORPORATION



| |     |                     
| | --- | --------------------
| | By: | /s/ Edward M. Rudnic

| |                                     
| | ------------------------------------
| |                                     
| | Edward M. Rudnic, Ph.D.             
| | Chairman of the Board, President and
| | Chief Executive Officer             





|                                                     |  |                                                                                                                   |  |                |  | 
|---------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                            |  | Title                                                                                                             |  | Date          
|                                                     |  |                                                                                                                   |  |               
|                                                    
|/s/ Edward M. RudnicEdward
    M. Rudnic, Ph.D.      |  | Chairman of the Board, President, and
    Chief Executive Officer
    (Principal Executive Officer)               |  | March 10, 2005
|                                                    
|/s/ Steven A.
    ShallcrossSteven
    A. Shallcross |  | Senior Vice President, Chief Financial
    Officer and Treasurer
    (Principal Financial and Accounting Officer) |  | March 10, 2005
|                                                    
|/s/ James H. CavanaughJames
    H. Cavanaugh, Ph.D.  |  | Director                                                                                                          |  | March 10, 2005
|                                                    
|/s/ Elizabeth CzerepakElizabeth
    Czerepak         |  | Director                                                                                                          |  | March 10, 2005
|                                                    
|/s/ R. Gordon DouglasR.
    Gordon Douglas, M.D.     |  | Director                                                                                                          |  | March 10, 2005
|                                                    
|/s/ Richard W. DuganRichard
    W. Dugan             |  | Director                                                                                                          |  | March 10, 2005
|                                                    
|/s/ Wayne T. HockmeyerWayne
    T. Hockmeyer, Ph.D.  |  | Director                                                                                                          |  | March 10, 2005
|                                                    
|/s/ Harold R. WernerHarold
    R. Werner             |  | Director                                                                                                          |  | March 10, 2005

57



---



##### 



INDEX TO FINANCIAL STATEMENTS


|                                                                                                                     |  |        |     | 
|-------------------------------------------------------------------------------------------------------------------- |  | ------ | --- | 
|                                                                                                                     |  | Page   |    
|                                                                                                                     |  | Number |    
|                                                                                                                     |  |        |    
|Report of PricewaterhouseCoopers LLP,
    Independent Registered Public Accounting Firm                              |  |        | F-2 | 
|Balance Sheets at December 31, 2004
    and 2003                                                                     |  |        | F-4 | 
|Statements of Operations for the Years
    ended December 31, 2004, 2003 and 2002                                    |  |        | F-5 | 
|Statements of Changes in Stockholders
    Equity (Deficit) for the Years ended December 31, 2004,
    2003 and 2002 |  |        | F-6 | 
|Statements of Cash Flows for the Years
    ended December 31, 2004, 2003 and 2002                                    |  |        | F-7 | 
|Notes to Financial Statements                                                                                        |  |        | F-8 | 

F-1



---



##### 






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM







Financial statements




Internal control over financial reporting


Internal Control  Integrated
Framework Internal Control  Integrated
Framework




F-2



---



##### 













F-3



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION





BALANCE SHEETS


|                                             |                                           |                                                                                                                                                                               |                                            |            |             |            |            |            |             |            | 
|-------------------------------------------- | ----------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ----------- | ---------- | ---------- | ---------- | ----------- | ---------- | 
|                                             |                                           | December 31,                                                                                                                                                                  |                                           
|                                             |                                           |                                                                                                                                                                               |                                           
|                                             |                                           | 2004                                                                                                                                                                          |                                            |            | 2003        |           
|                                             |                                           |                                                                                                                                                                               |                                            |            |             |           
|ASSETS                                       |                                           |                                                                                                                                                                               |                                            |            |             |            |            |           
|Current assets:                              |                                           |                                                                                                                                                                               |                                            |            |             |            |            |           
|                                             | Cash and cash equivalents                 |                                                                                                                                                                               | $                                          | 10,395,757 |             |            | $          | 37,450,490 |            
|                                             | Marketable securities                     |                                                                                                                                                                               |                                            | 19,656,180 |             |            |            | 27,636,632 |            
|                                             | Accounts receivable                       |                                                                                                                                                                               |                                            | 206,001    |             |            |            | 3,000,000  |            
|                                             | Inventories                               |                                                                                                                                                                               |                                            | 179,738    |             |            |            |           |            
|                                             | Prepaid expenses and other current assets |                                                                                                                                                                               |                                            | 1,044,389  |             |            |            | 1,127,464  |            
|                                             |                                           |                                                                                                                                                                               |                                            |            |             |           
|                                             |                                           |                                                                                                                                                                               | Total current assets                       |            |             | 31,482,065 |            |            |             | 69,214,586 | 
|Property and equipment, net                  |                                           |                                                                                                                                                                               | 16,524,342                                 |            |             |            | 12,512,792 |           
|Restricted cash                              |                                           |                                                                                                                                                                               | 1,913,314                                  |            |             |            | 1,776,569  |           
|Deposits                                     |                                           |                                                                                                                                                                               | 264,125                                    |            |             |            | 477,396    |           
|Notes receivable                             |                                           |                                                                                                                                                                               | 121,500                                    |            |             |            | 121,500    |           
|Intangible assets, net                       |                                           |                                                                                                                                                                               | 10,692,679                                 |            |             |            | 72,000     |           
|                                             |                                           |                                                                                                                                                                               |                                            |            |             |           
|                                             |                                           |                                                                                                                                                                               | Total assets                               |            | $           | 60,998,025 |            |            | $           | 84,174,843 | 
|                                             |                                           |                                                                                                                                                                               |                                            |            |             |           
|                                            
|LIABILITIES AND STOCKHOLDERS EQUITY         |                                           |                                                                                                                                                                               |                                            |            |             |            |            |           
|Current liabilities:                         |                                           |                                                                                                                                                                               |                                            |            |             |            |            |           
|                                             | Accounts payable                          |                                                                                                                                                                               | $                                          | 3,886,563  |             |            | $          | 2,683,713  |            
|                                             | Accrued expenses                          |                                                                                                                                                                               |                                            | 4,161,000  |             |            |            | 3,757,863  |            
|                                             | Lines of credit  current portion         |                                                                                                                                                                               |                                            | 1,009,975  |             |            |            | 953,984    |            
|                                             | Deferred contract revenue                 |                                                                                                                                                                               |                                            | 2,552,357  |             |            |            | 1,250,000  |            
|                                             |                                           |                                                                                                                                                                               |                                            |            |             |           
|                                             |                                           |                                                                                                                                                                               | Total current liabilities                  |            |             | 11,609,895 |            |            |             | 8,645,560  | 
|Lines of credit  noncurrent portion         |                                           |                                                                                                                                                                               | 1,492,412                                  |            |             |            | 1,411,604  |           
|Note payable                                 |                                           |                                                                                                                                                                               | 75,000                                     |            |             |            | 75,000     |           
|Deferred contract revenue                    |                                           |                                                                                                                                                                               | 6,861,111                                  |            |             |            | 3,125,000  |           
|Deferred rent and credit on lease concession |                                           |                                                                                                                                                                               | 1,221,228                                  |            |             |            | 767,759    |           
|                                             |                                           |                                                                                                                                                                               |                                            |            |             |           
|                                             |                                           |                                                                                                                                                                               | Total liabilities                          |            |             | 21,259,646 |            |            |             | 14,024,923 | 
|                                             |                                           |                                                                                                                                                                               |                                            |            |             |           
|Commitments and contingencies                |                                           |                                                                                                                                                                               |                                            |            |             |            |            |           
|                                             | Stockholders equity:                     |                                                                                                                                                                               |                                            |            |             |            |            |            |            
|                                             |                                           | Preferred stock, $0.01 par value; 25,000,000 shares
    authorized; no shares issued or outstanding at December 31,
    2004 and 2003                                         |                                            |            |            |            |            |            |            |           
|                                             |                                           | Common stock, $0.01 par value; 225,000,000 shares
    authorized, and 22,706,679 and 22,639,344 shares issued and
    outstanding at December 31, 2004 and 2003, respectively |                                            |            | 227,067     |            |            |            | 226,394     |           
|                                             |                                           | Capital in excess of par value                                                                                                                                                |                                            |            | 120,315,949 |            |            |            | 120,141,450 |           
|                                             |                                           | Deferred stock-based compensation                                                                                                                                             |                                            |            | (2,607,247  | )          |            |            | (6,126,286  | )         
|                                             |                                           | Accumulated deficit                                                                                                                                                           |                                            |            | (78,106,731 | )          |            |            | (44,102,018 | )         
|                                             |                                           | Accumulated other comprehensive income (loss)                                                                                                                                 |                                            |            | (90,659     | )          |            |            | 10,380      |           
|                                             |                                           |                                                                                                                                                                               |                                            |            |             |           
|                                             |                                           |                                                                                                                                                                               | Total stockholders equity                 |            |             | 39,738,379 |            |            |             | 70,149,920 | 
|                                             |                                           |                                                                                                                                                                               |                                            |            |             |           
|                                             |                                           |                                                                                                                                                                               | Total liabilities and stockholders equity |            | $           | 60,998,025 |            |            | $           | 84,174,843 | 
|                                             |                                           |                                                                                                                                                                               |                                            |            |             |           



F-4



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION





STATEMENTS OF OPERATIONS


|                                                                                      |                                     |                         |             |            |            |   |             |            |            |   |             |            |            | 
|------------------------------------------------------------------------------------- | ----------------------------------- | ----------------------- | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | 
|                                                                                      |                                     | Year Ended December 31, |            
|                                                                                      |                                     |                         |            
|                                                                                      |                                     | 2004                    |             |            | 2003       |   |             | 2002       |           
|                                                                                      |                                     |                         |             |            |            |   |             |            |           
|Revenue:                                                                              |                                     |                         |             |            |            |   |             |            |            |   |             |           
|                                                                                      | Product sales                       |                         | $           | 2,396,500  |            |   | $           |           |            |   | $           |           |           
|                                                                                      | Contract revenue                    |                         |             | 5,347,223  |            |   |             | 3,625,000  |            |   |             |           |           
|                                                                                      | Reimbursement of development costs  |                         |             | 3,614,309  |            |   |             |           |            |   |             |           |           
|                                                                                      |                                     |                         |             |            |            |   |             |            |           
|                                                                                      |                                     | Total revenue           |             |            | 11,358,032 |   |             |            | 3,625,000  |   |             |            |           | 
|                                                                                      |                                     |                         |             |            |            |   |             |            |           
|Cost and expenses:                                                                    |                                     |                         |             |            |            |   |             |            |            |   |             |           
|                                                                                      | Cost of product sales               |                         |             | 169,854    |            |   |             |           |            |   |             |           |           
|                                                                                      | Research and development            |                         |             | 33,642,930 |            |   |             | 16,594,629 |            |   |             | 10,855,130 |           
|                                                                                      | Selling, general and administrative |                         |             | 12,219,409 |            |   |             | 6,427,453  |            |   |             | 3,323,879  |           
|                                                                                      |                                     |                         |             |            |            |   |             |            |           
|                                                                                      |                                     | Total expenses          |             |            | 46,032,193 |   |             |            | 23,022,082 |   |             |            | 14,179,009 | 
|                                                                                      |                                     |                         |             |            |            |   |             |            |           
|Loss from operations                                                                  |                                     |                         | (34,674,161 | )          |            |   | (19,397,082 | )          |            |   | (14,179,009 | )         
|Interest income                                                                       |                                     |                         | 793,818     |            |            |   | 253,504     |            |            |   | 338,135     |           
|Interest expense                                                                      |                                     |                         | (124,370    | )          |            |   | (164,939    | )          |            |   | (235,506    | )         
|Beneficial conversion feature  deemed interest expense                               |                                     |                         |            |            |            |   | (1,666,667  | )          |            |   |            |           
|Other expense                                                                         |                                     |                         |            |            |            |   |            |            |            |   | (47,615     | )         
|                                                                                      |                                     |                         |             |            |            |   |             |            |           
|Net loss                                                                              |                                     |                         | (34,004,713 | )          |            |   | (20,975,184 | )          |            |   | (14,123,995 | )         
|Accretion of issuance costs of mandatorily redeemable
    convertible preferred stock |                                     |                         |            |            |            |   | (209,173    | )          |            |   | (73,925     | )         
|Beneficial conversion feature  deemed dividend to
    preferred stockholders         |                                     |                         |            |            |            |   | (20,907,620 | )          |            |   |            |           
|                                                                                      |                                     |                         |             |            |            |   |             |            |           
|Net loss applicable to common stockholders                                            |                                     | $                       | (34,004,713 | )          |            | $ | (42,091,977 | )          |            | $ | (14,197,920 | )         
|                                                                                      |                                     |                         |             |            |            |   |             |            |           
|Basic and diluted net loss per share applicable to common
    stockholders            |                                     | $                       | (1.50       | )          |            | $ | (7.58       | )          |            | $ | (16.37      | )         
|                                                                                      |                                     |                         |             |            |            |   |             |            |           
|Shares used in calculation of basic and diluted net loss per
    share                |                                     |                         | 22,684,410  |            |            |   | 5,554,773   |            |            |   | 867,239     |           
|                                                                                      |                                     |                         |             |            |            |   |             |            |           



F-5



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION





STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(DEFICIT)


|                                                                                                   |                                                                                             |                                               |            |            |       |            |         |           |          |   |              |             |   |             |            |            |               |   |             |             |             |   |         |   |          |   |             |             |             |  
|-------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | --------------------------------------------- | ---------- | ---------- | ----- | ---------- | ------- | --------- | -------- | - | ------------ | ----------- | - | ----------- | ---------- | ---------- | ------------- | - | ----------- | ----------- | ----------- | - | ------- | - | -------- | - | ----------- | ----------- | ----------- | -
|                                                                                                   |                                                                                             |                                               |            |            |       |            |         |           |          |   |              | Accumulated |   |             | Total      |           
|                                                                                                   |                                                                                             |                                               |            |            |       | Capital in |         |           | Deferred |   |              |             |   | Other       |            |            | Stockholders |  
|                                                                                                   |                                                                                             | Common                                        |            |            | Par   |            |         | Excess of |          |   | Stock-Based  |             |   | Accumulated |            |            | Comprehensive |   |             | Equity      |            
|                                                                                                   |                                                                                             | Shares                                        |            |            | Value |            |         | Par Value |          |   | Compensation |             |   | Deficit     |            |            | Income        |   |             | (Deficit)   |            
|                                                                                                   |                                                                                             |                                               |            |            |       |            |         |           |          |   |              |             |   |             |            |            |               |   |             |             |            
|Balance at December 31, 2001                                                                       |                                                                                             |                                               | 1,342,701  |            |       | $          | 13,427  |           |          | $ | 287,752      |             |   | $           |           |            |               | $ | (9,002,839  | )           |             | $ |        |   |          | $ | (8,701,660  | )          
|                                                                                                   | Issuance of restricted stock                                                                |                                               |            | 33,605     |       |            |         | 336       |          |   |              | 12,497      |   |             |            |           |               |   |             |            |             |   |         |  |          |   |             | 12,833      |            
|                                                                                                   | Accretion of issuance costs of mandatorily redeemable
    convertible preferred stock       |                                               |            |           |       |            |         |          |          |   |              | (73,925     | ) |             |            |           |               |   |             |            |             |   |         |  |          |   |             | (73,925     | )          
|                                                                                                   | Issuance of stock options for services                                                      |                                               |            |           |       |            |         |          |          |   |              | 155,334     |   |             |            |           |               |   |             |            |             |   |         |  |          |   |             | 155,334     |            
|                                                                                                   | Deferred stock-based compensation                                                           |                                               |            |           |       |            |         |          |          |   |              | 132,940     |   |             |            | (132,940   | )             |   |             |            |             |   |         |  |          |   |             |            |            
|                                                                                                   | Amortization of deferred stock-based compensation                                           |                                               |            |           |       |            |         |          |          |   |              |            |   |             |            | 29,954     |               |   |             |            |             |   |         |  |          |   |             | 29,954      |            
|                                                                                                   | Net loss                                                                                    |                                               |            |           |       |            |         |          |          |   |              |            |   |             |            |           |               |   |             | (14,123,995 | )           |   |         |  |          |   |             | (14,123,995 | )          
|                                                                                                   |                                                                                             |                                               |            |            |       |            |         |           |          |   |              |             |   |             |            |            |               |   |             |             |            
|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      |   |             |            |           |               |   |             |            |             |   |         |  |          |   |             | 91,094      |            
|                                                                                                   | Accretion of issuance costs of mandatorily redeemable
    convertible preferred stock       |                                               |            |           |       |            |         |          |          |   |              | (209,173    | ) |             |            |           |               |   |             |            |             |   |         |  |          |   |             | (209,173    | )          
|                                                                                                   | Cashless exercise of warrants                                                               |                                               |            | 27,032     |       |            |         | 271       |          |   |              | (301        | ) |             |            |           |               |   |             |            |             |   |         |  |          |   |             | (30         | )          
|                                                                                                   | Issuance of stock options for services                                                      |                                               |            |           |       |            |         |          |          |   |              | 1,260,117   |   |             |            |           |               |   |             |            |             |   |         |  |          |   |             | 1,260,117   |            
|                                                                                                   | Deferred stock-based compensation                                                           |                                               |            |           |       |            |         |          |          |   |              | 8,204,446   |   |             |            | (8,204,446 | )             |   |             |            |             |   |         |  |          |   |             |            |            
|                                                                                                   | Amortization of deferred stock-based compensation                                           |                                               |            |           |       |            |         |          |          |   |              |            |   |             |            | 2,181,146  |               |   |             |            |             |   |         |  |          |   |             | 2,181,146   |            
|                                                                                                   | Beneficial conversion feature  deemed interest on
    convertible notes                    |                                               |            |           |       |            |         |          |          |   |              | 1,666,667   |   |             |            |           |               |   |             |            |             |   |         |  |          |   |             | 1,666,667   |            
|                                                                                                   | Beneficial conversion feature  deemed dividend on
    issuance of Series E preferred stock |                                               |            |           |       |            |         |          |          |   |              | 20,907,620  |   |             |            |           |               |   |             |            |             |   |         |  |          |   |             | 20,907,620  |            
|                                                                                                   | Accretion 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  |   |             |            |           |               |   |             |            |             |   |         |  |          |   |             | 54,311,900  |            
|                                                                                                   | Conversion of preferred stock to common stock                                               |                                               |            | 15,062,474 |       |            |         | 150,625   |          |   |              | 54,363,837  |   |             |            |           |               |   |             |            |             |   |         |  |          |   |             | 54,514,462  |            
|                                                                                                   | Comprehensive income (loss):                                                                |                                               |            |            |       |            |         |           |          |   |              |             |   |             |            |            |               |   |             |             |             |   |         |   |          |   |             |             |            
|                                                                                                   |                                                                                             | Net loss                                      |            |            |      |            |         |           |         |   |              |             |  |             |            |            |              |   |             |             | (20,975,184 | ) |         |   |         |   |             |             | (20,975,184 | )
|                                                                                                   |                                                                                             | Unrealized gain on marketable securities, net |            |            |      |            |         |           |         |   |              |             |  |             |            |            |              |   |             |             |            |   |         |   | 10,380   |   |             |             | 10,380      |  
|                                                                                                   |                                                                                             |                                               |            |            |       |            |         |           |          |   |              |             |   |             |            |            |               |   |             |             |            
|                                                                                                   |                                                                                             | Total 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  |   |          |   | 70,149,920  |            
|                                                                                                   | Exercise of stock options                                                                   |                                               |            | 26,764     |       |            |         | 268       |          |   |              | 15,976      |   |             |            |           |               |   |             |            |             |   |         |  |          |   |             | 16,244      |            
|                                                                                                   | Issuance of restricted stock                                                                |                                               |            | 40,571     |       |            |         | 405       |          |   |              | 24,305      |   |             |            |           |               |   |             |            |             |   |         |  |          |   |             | 24,710      |            
|                                                                                                   | Issuance of stock options for services                                                      |                                               |            |           |       |            |         |          |          |   |              | 26,370      |   |             |            |           |               |   |             |            |             |   |         |  |          |   |             | 26,370      |            
|                                                                                                   | Stock-based compensation for retired director                                               |                                               |            |           |       |            |         |          |          |   |              | 416,141     |   |             |            | 73,810     |               |   |             |            |             |   |         |   |          |   |             | 489,951     |            
|                                                                                                   | Amortization of deferred stock-based compensation                                           |                                               |            |           |       |            |         |          |          |   |              |            |   |             |            | 3,296,898  |               |   |             |            |             |   |         |  |          |   |             | 3,296,898   |            
|Reversal of deferred stock-based compensation and related
    amortization due to forfeited option |                                                                                             |                                               |           |            |       |            |        |           |          |   | (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 | ) |          | $ | (39,738,379 | )          
|                                                                                                   |                                                                                             |                                               |            |            |       |            |         |           |          |   |              |             |   |             |            |            |               |   |             |             |            



F-6



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION





STATEMENTS OF CASH FLOWS


|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |             |             |            |             |           |             |  
|---------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ----------- | ----------- | ----------- | ---------- | ----------- | ----------- | ----------- | ---------- | ----------- | --------- | ----------- | -
|                                                     |                                                                                 | Year Ended December 31,                                                                                                               |                                      
|                                                     |                                                                                 |                                                                                                                                       |                                      
|                                                     |                                                                                 | 2004                                                                                                                                  |                                       |             | 2003        |             |            | 2002        |            
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            
|Cash flows from operating activities:                |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |             |             |            |            
|                                                     | Net loss                                                                        |                                                                                                                                       | $                                     | (34,004,713 | )           |             | $          | (20,975,184 | )           |             | $          | (14,123,995 | )        
|                                                     | Adjustments to reconcile net loss to net cash used in operating
    activities: |                                                                                                                                       |                                       |             |             |             |            |             |             |             |            |             |          
|                                                     |                                                                                 | Depreciation and amortization                                                                                                         |                                       |             | 2,714,341   |             |            |             | 736,036     |             |            |             | 502,981   |            
|                                                     |                                                                                 | Stock-based compensation                                                                                                              |                                       |             | 3,653,257   |             |            |             | 3,441,263   |             |            |             | 185,288   |            
|                                                     |                                                                                 | Deferred rent and credit on lease concession                                                                                          |                                       |             | 453,469     |             |            |             | (62,251     | )           |            |             |          |            
|                                                     |                                                                                 | Amortization of premium on marketable securities                                                                                      |                                       |             | 1,297,947   |             |            |             | 231,600     |             |            |             |          |            
|                                                     |                                                                                 | Interest accrued on convertible notes                                                                                                 |                                       |             |            |             |            |             | 92,362      |             |            |             |          |            
|                                                     |                                                                                 | Beneficial conversion feature  deemed interest expense                                                                               |                                       |             |            |             |            |             | 1,666,667   |             |            |             |          |            
|                                                     |                                                                                 | Changes in:                                                                                                                           |                                       |             |             |             |            |             |             |             |            |             |           |            
|                                                     |                                                                                 | Accounts receivable                                                                                                                   |                                       |             | 2,793,999   |             |            |             | (3,000,000  | )           |            |             |          |            
|                                                     |                                                                                 | Inventories                                                                                                                           |                                       |             | (179,738    | )           |            |             |            |             |            |             |          |            
|                                                     |                                                                                 | Prepaid expenses and other current assets                                                                                             |                                       |             | 83,075      |             |            |             | (954,952    | )           |            |             | (83,013   | )          
|                                                     |                                                                                 | Deposits other than on property and equipment                                                                                         |                                       |             | (49,142     | )           |            |             | 95,068      |             |            |             | (71,308   | )          
|                                                     |                                                                                 | Accounts payable                                                                                                                      |                                       |             | 1,202,850   |             |            |             | 1,924,940   |             |            |             | 483,714   |            
|                                                     |                                                                                 | Accrued expenses                                                                                                                      |                                       |             | 1,509,522   |             |            |             | 1,345,211   |             |            |             | 310,356   |            
|                                                     |                                                                                 | Deferred contract revenue                                                                                                             |                                       |             | 5,038,468   |             |            |             | 4,375,000   |             |            |             |          |            
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            
|                                                     |                                                                                 |                                                                                                                                       | Net cash used in operating activities |             |             | (15,486,665 | )          |             |             | (11,084,240 | )          |             |           | (12,795,977 | )
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            
|Cash flows from investing activities:                |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |             |             |            |            
|                                                     | Purchase of Keflex intangible assets                                            |                                                                                                                                       |                                       | (11,205,517 | )           |             |            |            |             |             |            |            |          
|                                                     | Purchase of marketable securities                                               |                                                                                                                                       |                                       | (25,918,898 | )           |             |            | (27,857,852 | )           |             |            |            |          
|                                                     | Sale and maturities of marketable securities                                    |                                                                                                                                       |                                       | 32,500,364  |             |             |            |            |             |             |            | 6,202,075   |          
|                                                     | Purchases of property and equipment                                             |                                                                                                                                       |                                       | (6,200,677  | )           |             |            | (8,963,111  | )           |             |            | (1,439,677  | )        
|                                                     | Deposits on property and equipment                                              |                                                                                                                                       |                                       | (759,638    | )           |             |            | (83,610     | )           |             |            | (283,246    | )        
|                                                     | Restricted cash                                                                 |                                                                                                                                       |                                       | (136,745    | )           |             |            | (338,031    | )           |             |            | (1,438,538  | )        
|                                                     | Landlord lease concession                                                       |                                                                                                                                       |                                       |            |             |             |            | 830,010     |             |             |            |            |          
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            
|                                                     |                                                                                 | Net cash from (used in) investing activities                                                                                          |                                       |             | (11,721,111 | )           |            |             | (36,412,594 | )           |            |             | 3,040,614 |            
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            
|Cash flows from financing activities:                |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |             |             |            |            
|                                                     | Proceeds from lines of credit                                                   |                                                                                                                                       |                                       | 1,389,396   |             |             |            | 1,346,061   |             |             |            | 1,019,866   |          
|                                                     | Proceeds from note payable                                                      |                                                                                                                                       |                                       |            |             |             |            |            |             |             |            | 75,000      |          
|                                                     | Payments on lines of credit                                                     |                                                                                                                                       |                                       | (1,252,597  | )           |             |            | (636,407    | )           |             |            | (453,814    | )        
|                                                     | Proceeds from convertible notes payable                                         |                                                                                                                                       |                                       |            |             |             |            | 5,000,000   |             |             |            |            |          
|                                                     | Proceeds from exercise of common stock options                                  |                                                                                                                                       |                                       | 16,244      |             |             |            | 91,094      |             |             |            | 12,833      |          
|                                                     | Proceeds from issuance of preferred stock, net of issuance costs                |                                                                                                                                       |                                       |            |             |             |            | 20,774,765  |             |             |            | 2,974,200   |          
|                                                     | Proceeds from initial public offering, net of issuance costs                    |                                                                                                                                       |                                       |            |             |             |            | 54,311,900  |             |             |            |            |          
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            
|                                                     |                                                                                 | Net cash from financing activities                                                                                                    |                                       |             | 153,043     |             |            |             | 80,887,413  |             |            |             | 3,628,085 |            
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            
|Net increase (decrease) in cash and cash equivalents |                                                                                 |                                                                                                                                       | (27,054,733                           | )           |             |             | 33,390,579 |             |             |             | (6,127,278 | )          
|Cash and cash equivalents, beginning of period       |                                                                                 |                                                                                                                                       | 37,450,490                            |             |             |             | 4,059,911  |             |             |             | 10,187,189 |            
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            
|Cash and cash equivalents, end of period             |                                                                                 | $                                                                                                                                     | 10,395,757                            |             |             | $           | 37,450,490 |             |             | $           | 4,059,911  |            
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            
|Supplemental disclosure of cash flow information:    |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |             |             |            |            
|                                                     |                                                                                 | Cash paid for interest, net of interest capitalized                                                                                   |                                       | $           | 127,094     |             |            | $           | 38,511      |             |            | $           | 211,393   |            
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            
|Supplemental disclosure of non-cash transactions:    |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |             |             |            |            
|                                                     |                                                                                 | Reclassification of liability related to early exercises of
    restricted stock to equity upon vesting of the restricted stock       |                                       | $           | 24,710      |             |            | $           | 3,537       |             |            | $           | 3,101     |            
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            
|                                                     |                                                                                 | Equipment and construction costs in accrued liabilities                                                                               |                                       | $           | 457,189     |             |            | $           | 1,580,509   |             |            | $           |          |            
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            
|                                                     |                                                                                 | Conversion of convertible notes, including accrued interest,
    into Series E mandatorily redeemable convertible preferred
    stock |                                       | $           |            |             |            | $           | 5,092,362   |             |            | $           |          |            
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            
|                                                     |                                                                                 | Accretion of beneficial conversion feature for Series E
    convertible preferred stock                                               |                                       | $           |            |             |            | $           | 20,907,620  |             |            | $           |          |            
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            
|                                                     |                                                                                 | Conversion of preferred stock to common                                                                                               |                                       | $           |            |             |            | $           | 54,514,462  |             |            | $           |          |            
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            
|                                                     |                                                                                 | Accretion of issuance costs of mandatorily redeemable
    convertible preferred stock                                                 |                                       | $           |            |             |            | $           | 209,173     |             |            | $           | 73,925    |            
|                                                     |                                                                                 |                                                                                                                                       |                                       |             |             |             |            |             |            



F-7



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION





NOTES TO FINANCIAL STATEMENTS




|   |                       
|-- | ----------------------
|1. | Nature of the Business





|   |                                           
|-- | ------------------------------------------
|2. | Summary of Significant Accounting Policies



| |                 
| | ----------------
| | Use of Estimates





| |                    
| | -------------------
| | Revenue Recognition

Product Sales.


Contract revenues


Revenue for reimbursement of development costs


Royalties


Deferred Revenue




| |                         
| | ------------------------
| | Research and Development



F-8



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                
| | ---------------
| | Restricted Cash





| |                      
| | ---------------------
| | Marketable Securities





| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |                    
| | -------------------
| | Accounts Receivable





| |            
| | -----------
| | Inventories





F-9



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                       
| | ----------------------
| | Property and Equipment

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


F-10



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)


Employees,




|                                                                                                  |  |              |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                                  |  | December 31, |            
|                                                                                                  |  |              |            
|                                                                                                  |  | 2004         |             |   | 2003 |   |             | 2002 | 
|                                                                                                  |  |              |             |   |      |   |             |      | 
|Net loss, as reported                                                                             |  | $            | (34,004,713 | ) |      | $ | (20,975,184 | )    |  | $ | (14,123,995 | )
|Add  Stock-based employee compensation expense
    determined under the intrinsic value method   |  |              | 3,626,887   |   |      |   | 2,181,146   |      |  |   | 29,954      |  
|Less  Stock-based employee compensation expense
    determined under the fair value based method |  |              | (8,491,814  | ) |      |   | (2,677,989  | )    |  |   | (161,755    | )
|                                                                                                  |  |              |             |   |      |   |             |      | 
|Pro forma net loss                                                                                |  |              | (38,869,640 | ) |      |   | (21,472,027 | )    |  |   | (14,255,796 | )
|Accretion of issuance costs of mandatorily redeemable
    convertible preferred stock             |  |              |            |   |      |   | (209,173    | )    |  |   | (73,925     | )
|Beneficial conversion feature-deemed dividend to preferred
    stockholders                       |  |              |            |   |      |   | (20,907,620 | )    |  |   |            |  
|                                                                                                  |  |              |             |   |      |   |             |      | 
|Pro forma net loss applicable to common stockholders                                              |  | $            | (38,869,640 | ) |      | $ | (42,588,820 | )    |  | $ | (14,329,721 | )
|                                                                                                  |  |              |             |   |      |   |             |      | 
|Net loss per share:                                                                               |  |              |             |   |      |   |             |      |  |   |             |  
|Basic and diluted, as reported                                                                    |  | $            | (1.50       | ) |      | $ | (7.58       | )    |  | $ | (16.37      | )
|                                                                                                  |  |              |             |   |      |   |             |      | 
|Basic and diluted, pro forma                                                                      |  | $            | (1.71       | ) |      | $ | (7.67       | )    |  | $ | (16.52      | )
|                                                                                                  |  |              |             |   |      |   |             |      | 



|                         |  |              |  |       |  |              
|------------------------ |  | ------------ |  | ----- |  | -------------
|                         |  | December 31,
|                         |  |             
|                         |  | 2004         |  | 2003  |  | 2002         
|                         |  |              |  |       |  |              
|Expected life (in years) |  | 5            |  | 5     |  | 5            
|Risk-free interest rate  |  | 4.09%        |  | 3.28% |  | 3.19% to 4.7%
|Volatility               |  | 80%          |  | 80%   |  | 80%          
|Dividend yield           |  | 0%           |  | 0%    |  | 0%           

F-11



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |             
| | ------------
| | Income Taxes





| |                     
| | --------------------
| | Comprehensive Income

Reporting Comprehensive
Income,




| |                   
| | ------------------
| | Earnings Per Share





|                                     |  |              |           |  |      |  |           |      |  |  |            | 
|------------------------------------ |  | ------------ | --------- |  | ---- |  | --------- | ---- |  |  | ---------- | 
|                                     |  | December 31, |          
|                                     |  |              |          
|(Number of Underlying Common Shares) |  | 2004         |           |  | 2003 |  |           | 2002 | 
|                                     |  |              |           |  |      |  |           |      | 
|Preferred stock                      |  |              |          |  |      |  |          |      |  |  | 8,748,251  | 
|Stock options                        |  |              | 3,736,726 |  |      |  | 2,235,488 |      |  |  | 844,198    | 
|Nonvested restricted stock           |  |              | 237,689   |  |      |  | 424,290   |      |  |  | 496,153    | 
|Warrants                             |  |              |          |  |      |  |          |      |  |  | 36,524     | 
|                                     |  |              |           |  |      |  |           |      | 
|Total                                |  |              | 3,974,415 |  |      |  | 2,659,778 |      |  |  | 10,125,126 | 
|                                     |  |              |           |  |      |  |           |      | 



| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements

Consolidation of Variable Interest Entities, an
interpretation of Accounting Research
Bulletin No. 51,


F-12



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)


Share-Based Payment, Accounting for Stock-based
Compensation.


Exchange of Nonmonetary Assets, an amendment of APB
Opinion No. 29, Accounting for Nonmonetary
Transactions.




|   |        
|-- | -------
|3. | Revenue



Product Sales.


Contract Revenue.


|                                                                 |       |              |           |           |      |   |           |           |  |   |   |   | 
|---------------------------------------------------------------- | ----- | ------------ | --------- | --------- | ---- | - | --------- | --------- |  | - | - | - | 
|                                                                 |       | December 31,
|                                                                 |       |             
|Contract Revenue                                                 |       | 2004         |           |           | 2003 |   |           | 2002     
|                                                                 |       |              |           |           |      |   |           |          
|Upfront payment  GSK  amortization                             |       | $            | 1,145,833 |           |      | $ | 625,000   |           |  | $ |  |  
|Upfront payment  GSK  acceleration upon
    termination        |       |              | 3,229,167 |           |      |   |          |           |  |   |  |  
|Milestone achievement  GSK                                      |       |              |          |           |      |   | 3,000,000 |           |  |   |  |  
|Upfront payment  Par amoxicillin collaboration
    amortization |       |              | 972,223   |           |      |   |          |           |  |   |  |  
|                                                                 |       |              |           |           |      |   |           |           | 
|                                                                 | Total |              | $         | 5,347,223 |      |   | $         | 3,625,000 |  |   | $ |  | 
|                                                                 |       |              |           |           |      |   |           |           | 

Collaboration with GlaxoSmithKline (GSK).


F-13



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)




Collaboration with Par Pharmaceutical for Amoxicillin
PULSYS.




|   |                      
|-- | ---------------------
|4. | Marketable Securities



|                       |                              |                   |            |            |            |       |            |   |  |            |         |         |   |   |            |            | 
|---------------------- | ---------------------------- | ----------------- | ---------- | ---------- | ---------- | ----- | ---------- | - |  | ---------- | ------- | ------- | - | - | ---------- | ---------- | 
|                       |                              | December 31, 2004 |           
|                       |                              |                   |           
|                       |                              |                   |            | Gross      |            | Gross |            |   | 
|                       |                              | Amortized         |            |            | Unrealized |       | Unrealized |   |  |           
|Available-for-sale     |                              | Cost              |            |            | Gains      |       | Losses     |   |  | Fair Value |        
|                       |                              |                   |            |            |            |       |            |   |  |            |        
|Marketable securities: |                              |                   |            |            |            |       |            |   |  |            |         |         |   |   |            |           
|                       | Corporate debt securities    |                   | $          | 16,736,347 |            |       | $          |  |  |            | $       | (72,670 | ) |   | $          | 16,663,677 | 
|                       | Government agency securities |                   |            | 3,010,492  |            |       |            |  |  |            |         | (17,989 | ) |   |            | 2,992,503  | 
|                       |                              |                   |            |            |            |       |            |   |  |            |         |        
|                       |                              | $                 | 19,746,839 |            |            | $     |           |   |  | $          | (90,659 | )       |   | $ | 19,656,180 |           
|                       |                              |                   |            |            |            |       |            |   |  |            |         |        



F-14



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)


|                       |                              |                   |            |            |            |   |        |            |  |   |            |         |   |   |            |            | 
|---------------------- | ---------------------------- | ----------------- | ---------- | ---------- | ---------- | - | ------ | ---------- |  | - | ---------- | ------- | - | - | ---------- | ---------- | 
|                       |                              | December 31, 2003 |           
|                       |                              |                   |           
|                       |                              |                   |            | Gross      |            |   | Gross  |            |  |  
|                       |                              | Amortized         |            |            | Unrealized |   |        | Unrealized |  |   |           
|Available-for-sale     |                              | Cost              |            |            | Gains      |   |        | Losses     |  |   | Fair Value |        
|                       |                              |                   |            |            |            |   |        |            |  |   |            |        
|Marketable securities: |                              |                   |            |            |            |   |        |            |  |   |            |         |   |   |            |           
|                       | Corporate debt securities    |                   | $          | 24,613,413 |            |   | $      | 6,113      |  |   | $          | (12,897 | ) |   | $          | 24,606,629 | 
|                       | Government agency securities |                   |            | 3,012,839  |            |   |        | 17,164     |  |   |            |        |   |   |            | 3,030,003  | 
|                       |                              |                   |            |            |            |   |        |            |  |   |            |        
|                       |                              | $                 | 27,626,252 |            |            | $ | 23,277 |            |  | $ | (12,897    | )       |   | $ | 27,636,632 |           
|                       |                              |                   |            |            |            |   |        |            |  |   |            |        



|                                     |                    |                   |            |            |            |   |            |            | 
|------------------------------------ | ------------------ | ----------------- | ---------- | ---------- | ---------- | - | ---------- | ---------- | 
|                                     |                    | December 31, 2004 |           
|                                     |                    |                   |           
|                                     |                    | Amortized         |            |            |           
|Available-for-sale                   |                    | Cost              |            |            | Fair Value |  
|                                     |                    |                   |            |            |            |  
|Maturities of marketable securities: |                    |                   |            |            |            |   |            |           
|                                     | Less than one year |                   | $          | 18,226,538 |            |   | $          | 18,152,138 | 
|                                     | One to two years   |                   |            | 1,520,301  |            |   |            | 1,504,042  | 
|                                     |                    |                   |            |            |            |  
|                                     |                    | $                 | 19,746,839 |            |            | $ | 19,656,180 |           
|                                     |                    |                   |            |            |            |  



|   |                    
|-- | -------------------
|5. | Accounts Receivable



|                                                   |                                            |              |          |         |              |   |           |           | 
|-------------------------------------------------- | ------------------------------------------ | ------------ | -------- | ------- | ------------ | - | --------- | --------- | 
|                                                   |                                            | December 31, |          |         | December 31, |  
|                                                   |                                            | 2004         |          |         | 2003         |  
|                                                   |                                            |              |          |         |              |  
|Accounts receivable for product sales, gross       |                                            | $            | 478,684  |         |              | $ |          |          
|Allowances for discounts, returns, and chargebacks |                                            |              | (272,683 | )       |              |   |          |          
|                                                   |                                            |              |          |         |              |  
|                                                   | Accounts receivable for product sales, net |              |          | 206,001 |              |   |           |          | 
|Receivable for contract milestone achieved         |                                            |              |         |         |              |   | 3,000,000 |          
|                                                   |                                            |              |          |         |              |  
|                                                   | Accounts receivable, net                   |              | $        | 206,001 |              |   | $         | 3,000,000 | 
|                                                   |                                            |              |          |         |              |  



F-15



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)




|   |                       
|-- | ----------------------
|6. | Property and Equipment



|                                |          |                                         |      |  |              |   |            |            |           |   |            |            | 
|------------------------------- | -------- | --------------------------------------- | ---- |  | ------------ | - | ---------- | ---------- | --------- | - | ---------- | ---------- | 
|                                |          | Estimated                               |      |  | December 31, |  
|                                |          | Useful Life                             |      |  |              |  
|                                |          | (Years)                                 |      |  | 2004         |   |            | 2003       |          
|                                |          |                                         |      |  |              |   |            |            |          
|Construction in progress        |          |                                         |      |  |              | $ | 459,148    |            |           | $ | 2,526,977  |           
|Computer equipment              |          |                                         | 3    |  |              |   | 1,003,229  |            |           |   | 645,310    |           
|Furniture and fixtures          |          |                                         | 3-10 |  |              |   | 1,355,643  |            |           |   | 1,073,915  |           
|Equipment                       |          |                                         | 3-10 |  |              |   | 8,589,960  |            |           |   | 2,886,199  |           
|Leasehold improvements          |          | Shorter of economic lives or lease term |      |  | 8,715,920    |   |            |            | 6,850,448 |  
|                                |          |                                         |      |  |              |   |            |            |          
|                                | Subtotal |                                         |      |  |              |   |            | 20,123,900 |           |   |            | 13,982,849 | 
|Less  accumulated depreciation |          |                                         |      |  |              |   | (3,599,558 | )          |           |   | (1,470,057 | )         
|                                |          |                                         |      |  |              |   |            |            |          
|                                | Total    |                                         |      |  |              |   | $          | 16,524,342 |           |   | $          | 12,512,792 | 
|                                |          |                                         |      |  |              |   |            |            |          







|   |                  
|-- | -----------------
|7. | Intangible Assets



|                             |                   |                   |            |            |              |   |          |              |   |   |            |            | 
|---------------------------- | ----------------- | ----------------- | ---------- | ---------- | ------------ | - | -------- | ------------ | - | - | ---------- | ---------- | 
|                             |                   | December 31, 2004 |           
|                             |                   |                   |           
|                             |                   | Gross Carrying    |            |            | Accumulated  |   |          | Net Carrying |  
|                             |                   | Amount            |            |            | Amortization |   |          | Amount       |  
|                             |                   |                   |            |            |              |   |          |              |  
|Keflex brand rights          |                   | $                 | 10,954,272 |            |              | $ | (547,716 | )            |   | $ | 10,406,556 |           
|Keflex non-compete agreement |                   |                   | 251,245    |            |              |   | (25,122  | )            |   |   | 226,123    |           
|Patents acquired             |                   |                   | 120,000    |            |              |   | (60,000  | )            |   |   | 60,000     |           
|                             |                   |                   |            |            |              |   |          |              |  
|                             | Intangible assets |                   | $          | 11,325,517 |              |   | $        | (632,838     | ) |   | $          | 10,692,679 | 
|                             |                   |                   |            |            |              |   |          |              |  

|                 |  |                   |         |  |              |   |         |              |  |   |        | 
|---------------- |  | ----------------- | ------- |  | ------------ | - | ------- | ------------ |  | - | ------ | 
|                 |  | December 31, 2003 |        
|                 |  |                   |        
|                 |  | Gross Carrying    |         |  | Accumulated  |   |         | Net Carrying | 
|                 |  | Amount            |         |  | Amortization |   |         | Amount       | 
|                 |  |                   |         |  |              |   |         |              | 
|Patents acquired |  | $                 | 120,000 |  |              | $ | (48,000 | )            |  | $ | 72,000 | 
|                 |  |                   |         |  |              |   |         |              | 



F-16



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                             |       |   |            |            | 
|---------------------------- | ----- | - | ---------- | ---------- | 
|Keflex brand rights          |       | $ | 10,954,272 |           
|Keflex non-compete agreement |       |   | 251,245    |           
|                             |       |   |           
|                             | Total |   | $          | 11,205,517 | 
|                             |       |   |           







|   |           
|-- | ----------
|8. | Borrowings



|                               |       |              |           |           |      |   |           |           | 
|------------------------------ | ----- | ------------ | --------- | --------- | ---- | - | --------- | --------- | 
|                               |       | December 31, |          
|                               |       |              |          
|                               |       | 2004         |           |           | 2003 |  
|                               |       |              |           |           |      |  
|Lines of credit                |       | $            | 2,502,387 |           |      | $ | 2,365,588 |          
|Montgomery County note payable |       |              | 75,000    |           |      |   | 75,000    |          
|                               |       |              |           |           |      |  
|                               | Total |              | $         | 2,577,387 |      |   | $         | 2,440,588 | 
|                               |       |              |           |           |      |  



|                         |                    |   |            |           | 
|------------------------ | ------------------ | - | ---------- | --------- | 
|Year Ending December 31, |                    |  
|                         |                    |  
|2005                     |                    | $ | 1,009,975  |          
|2006                     |                    |   | 895,204    |          
|2007                     |                    |   | 672,208    |          
|                         |                    |   |           
|                         | Total borrowings   |   |            | 2,577,387 | 
|Less: Current portion    |                    |   | (1,009,975 | )        
|                         |                    |   |           
|                         | Noncurrent portion |   | $          | 1,567,412 | 
|                         |                    |   |           



| |                          
| | -------------------------
| | Convertible Notes Payable





| |                
| | ---------------
| | Lines of Credit



F-17



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)












| |                               
| | ------------------------------
| | Montgomery County Note Payable







| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $25,000 will be forgiven if the Company has made a capital
    investment in Montgomery County exceeding $7.5 million by
    the third anniversary date of loan disbursement date.
|
| |  | $25,000 will be forgiven if the Company generates at least 80%
    of the specified projected headcount of new full time employees
    by the end of 2004.                        
|
| |  | $25,000 will be forgiven if the Company maintains a specified
    number of full time employees through 2006.                                                                     

F-18



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)






|   |                 
|-- | ----------------
|9. | Accrued Expenses



|                                               |                        |              |           |           |      |   |           |           | 
|---------------------------------------------- | ---------------------- | ------------ | --------- | --------- | ---- | - | --------- | --------- | 
|                                               |                        | December 31, |          
|                                               |                        |              |          
|                                               |                        | 2004         |           |           | 2003 |  
|                                               |                        |              |           |           |      |  
|Bonus                                          |                        | $            | 895,000   |           |      | $ | 994,989   |          
|Professional fees                              |                        |              | 381,501   |           |      |   | 519,567   |          
|Relocation                                     |                        |              | 120,305   |           |      |   | 149,397   |          
|Severance                                      |                        |              | 286,515   |           |      |   |          |          
|Insurance and benefits                         |                        |              | 178,624   |           |      |   | 334,788   |          
|Liability for exercised unvested stock options |                        |              | 67,481    |           |      |   | 92,191    |          
|Research and development expenses              |                        |              | 1,543,164 |           |      |   | 29,753    |          
|Other expenses                                 |                        |              | 231,221   |           |      |   | 56,669    |          
|Equipment and construction costs               |                        |              | 457,189   |           |      |   | 1,580,509 |          
|                                               |                        |              |           |           |      |  
|                                               | Total accrued expenses |              | $         | 4,161,000 |      |   | $         | 3,757,863 | 
|                                               |                        |              |           |           |      |  



|               |                            |   |          |         | 
|-------------- | -------------------------- | - | -------- | ------- | 
|Initial charge |                            | $ | 497,049  |        
|Cash payments  |                            |   | (210,534 | )      
|               |                            |   |         
|               | Balance, December 31, 2004 |   | $        | 286,515 | 
|               |                            |   |         





|    |                                                   
|--- | --------------------------------------------------
|10. | Mandatorily Redeemable Convertible Preferred Stock







F-19



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)






|    |                               
|--- | ------------------------------
|11. | Preferred Stock  Undesignated





|    |             
|--- | ------------
|12. | Common Stock







| |                    
| | -------------------
| | Reverse Stock Split





| |                        
| | -----------------------
| | Initial Public Offering





|    |         
|--- | --------
|13. | Warrants





F-20



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)








|    |                               
|--- | ------------------------------
|14. | Beneficial Conversion Features



| |                                                                          
| | -------------------------------------------------------------------------
| | Beneficial Conversion Feature  Interest Expense
    on Convertible Notes





| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | Beneficial Conversion Feature  Series E
    Mandatorily Redeemable Convertible Preferred Stock

Application of Issue No. 98-5 to Certain
Convertible Instruments




|    |                  
|--- | -----------------
|15. | Stock Option Plan





F-21



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)






|                               |  |           |           |   |                  |   |      | 
|------------------------------ |  | --------- | --------- | - | ---------------- | - | ---- | 
|                               |  | Number of |           |   | Weighted-Average |  
|                               |  | Options   |           |   | Exercise Price   |  
|                               |  |           |           |   |                  |  
|Outstanding, December 31, 2001 |  |           | 573,281   |   |                  | $ | 0.44 | 
|Granted                        |  |           | 365,066   |   |                  |   | 0.62 | 
|Exercised                      |  |           | (50,817   | ) |                  |   | 0.44 | 
|Cancelled                      |  |           | (43,332   | ) |                  |   | 0.38 | 
|                               |  |           |           |   |                  |  
|Outstanding, December 31, 2002 |  |           | 844,198   |   |                  |   | 0.53 | 
|Granted                        |  |           | 1,741,057 |   |                  |   | 4.30 | 
|Exercised                      |  |           | (306,446  | ) |                  |   | 0.91 | 
|Cancelled                      |  |           | (43,321   | ) |                  |   | 1.32 | 
|                               |  |           |           |   |                  |  
|Outstanding, December 31, 2003 |  |           | 2,235,488 |   |                  |   | 3.45 | 
|Granted                        |  |           | 1,660,550 |   |                  |   | 8.00 | 
|Exercised                      |  |           | (26,764   | ) |                  |   | 0.61 | 
|Cancelled                      |  |           | (132,548  | ) |                  |   | 5.15 | 
|                               |  |           |           |   |                  |  
|Outstanding, December 31, 2004 |  |           | 3,736,726 |   |                  | $ | 5.43 | 
|                               |  |           |           |   |                  |  



|                   |  |                     |           |           |                     |  |           |                |  |   |             |           |  |                |           |  |  |   |       | 
|------------------ |  | ------------------- | --------- | --------- | ------------------- |  | --------- | -------------- |  | - | ----------- | --------- |  | -------------- | --------- |  |  | - | ----- | 
|                   |  | Options Outstanding |           |           | Options Exercisable | 
|                   |  |                     |           |           |                     | 
|                   |  |                     |           | Weighted- |                     |  |           |                | 
|                   |  |                     |           | Average   |                     |  | Weighted- |                |  |   |             | Weighted- | 
|Range of           |  | Number              |           |           | Remaining           |  |           | Average        |  |   | Number      |           |  | Average        |          
|Exercise Prices    |  | Outstanding         |           |           | Contractual Life    |  |           | Exercise Price |  |   | Exercisable |           |  | Exercise Price |          
|                   |  |                     |           |           |                     |  |           |                |  |   |             |           |  |                |          
|December 31, 2004: |  |                     |           |           |                     |  |           |                |  |   |             |           |  |                |           |  |  |   |       | 
|$0.28 to $0.62     |  |                     | 1,157,197 |           |                     |  | 8.1       |                |  | $ | 0.57        |           |  |                | 542,715   |  |  | $ | 0.55  | 
|$1.41 to $2.81     |  |                     | 508,990   |           |                     |  | 9.0       |                |  |   | 1.85        |           |  |                | 127,557   |  |  |   | 1.42  | 
|$8.40 to $10.00    |  |                     | 2,070,539 |           |                     |  | 9.1       |                |  |   | 9.03        |           |  |                | 621,747   |  |  |   | 9.35  | 
|                   |  |                     |           |           |                     |  |           |                |  |   |             |           |  |                |          
|                   |  |                     | 3,736,726 |           |                     |  | 8.5       |                |  | $ | 5.43        |           |  |                | 1,292,019 |  |  | $ | 4.87  | 
|                   |  |                     |           |           |                     |  |           |                |  |   |             |           |  |                |          
|December 31, 2003: |  |                     |           |           |                     |  |           |                |  |   |             |           |  |                |           |  |  |   |       | 
|$0.28 to $0.62     |  |                     | 1,224,835 |           |                     |  | 8.2       |                |  | $ | 0.57        |           |  |                | 172,713   |  |  | $ | 0.49  | 
|$1.41              |  |                     | 361,414   |           |                     |  | 9.7       |                |  |   | 1.41        |           |  |                | 2,732     |  |  |   | 1.41  | 
|$10.00             |  |                     | 649,239   |           |                     |  | 9.8       |                |  |   | 10.00       |           |  |                | 40,702    |  |  |   | 10.00 | 
|                   |  |                     |           |           |                     |  |           |                |  |   |             |           |  |                |          
|                   |  |                     | 2,235,488 |           |                     |  | 8.9       |                |  | $ | 3.45        |           |  |                | 216,147   |  |  | $ | 2.29  | 
|                   |  |                     |           |           |                     |  |           |                |  |   |             |           |  |                |          
|December 31, 2002: |  |                     |           |           |                     |  |           |                |  |   |             |           |  |                |           |  |  |   |       | 
|$0.28 to $0.62     |  |                     | 844,198   |           |                     |  | 8.3       |                |  | $ | 0.53        |           |  |                | 117,672   |  |  | $ | 0.48  | 
|                   |  |                     |           |           |                     |  |           |                |  |   |             |           |  |                |          



F-22



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)






| |                 
| | ----------------
| | Restricted Stock



Issues Related to the Accounting for Stock Compensation
under APB Opinion No. 25 and FASB Interpretation
No. 44,




F-23



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)




|    |             
|--- | ------------
|16. | Income Taxes





|                                        |                         |              |             |   |      |   |             |   | 
|--------------------------------------- | ----------------------- | ------------ | ----------- | - | ---- | - | ----------- | - | 
|                                        |                         | December 31, |            
|                                        |                         |              |            
|                                        |                         | 2004         |             |   | 2003 |  
|                                        |                         |              |             |   |      |  
|Net operating loss carryforwards        |                         | $            | 20,053,953  |   |      | $ | 10,274,352  |  
|Start-up costs                          |                         |              | 2,262,998   |   |      |   | 2,909,568   |  
|Deferred revenue                        |                         |              | 3,635,481   |   |      |   | 1,689,625   |  
|Depreciation and amortization           |                         |              | 227,171     |   |      |   | (76,547     | )
|Stock-based compensation                |                         |              | 2,511,904   |   |      |   | 1,151,932   |  
|Accrued expenses and other items        |                         |              | 469,897     |   |      |   | 198,033     |  
|Research and experimentation tax credit |                         |              | 2,709,109   |   |      |   | 1,301,258   |  
|                                        |                         |              |             |   |      |  
|Deferred tax assets                     |                         |              | 31,870,513  |   |      |   | 17,448,221  |  
|Valuation allowance                     |                         |              | (31,870,513 | ) |      |   | (17,448,221 | )
|                                        |                         |              |             |   |      |  
|                                        | Net deferred tax assets |              | $           |  |      |   | $           |  | 
|                                        |                         |              |             |   |      |  



|                                                        |  |                         |       |    |      |  |       |      |  |  |       |   
|------------------------------------------------------- |  | ----------------------- | ----- | -- | ---- |  | ----- | ---- |  |  | ----- | --
|                                                        |  | Year Ended December 31, |      
|                                                        |  |                         |      
|                                                        |  | 2004                    |       |    | 2003 |  |       | 2002 | 
|                                                        |  |                         |       |    |      |  |       |      | 
|U.S. federal statutory income tax rate                  |  |                         | (34.0 | )% |      |  | (34.0 | )%   |  |  | (34.0 | )%
|State income taxes, net of federal tax benefit          |  |                         | (4.6  | )  |      |  | (4.1  | )    |  |  | (4.6  | ) 
|Beneficial conversion feature  deemed interest expense |  |                         |      |    |      |  | 2.7   |      |  |  |      |   
|Permanent items                                         |  |                         | 0.4   |    |      |  | 0.7   |      |  |  | 0.2   |   
|Research and experimentation tax credit                 |  |                         | (4.2  | )  |      |  | (2.1  | )    |  |  | (4.6  | ) 
|Change in valuation allowance                           |  |                         | 42.4  |    |      |  | 36.8  |      |  |  | 43.0  |   
|                                                        |  |                         |       |    |      |  |       |      | 
|Effective tax rate                                      |  |                         | (0.0  | )% |      |  | (0.0  | )%   |  |  | (0.0  | )%
|                                                        |  |                         |       |    |      |  |       |      | 





F-24



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)


17.     401(k) Savings Plan and
Employee Stock Purchase Plan








|    |                              
|--- | -----------------------------
|18. | Commitments and Contingencies



| |       
| | ------
| | Leases









F-25



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                         |       |           |           |            | 
|------------------------ | ----- | --------- | --------- | ---------- | 
|                         |       | Operating |          
|Year Ending December 31, |       | Leases    |          
|                         |       |           |          
|2005                     |       | $         | 2,288,396 |           
|2006                     |       |           | 2,122,790 |           
|2007                     |       |           | 2,071,700 |           
|2008                     |       |           | 2,131,561 |           
|2009                     |       |           | 2,157,113 |           
|Thereafter               |       |           | 7,534,389 |           
|                         |       |           |          
|                         | Total |           | $         | 18,305,949 | 
|                         |       |           |          



| |                  
| | -----------------
| | Legal Proceedings





|    |                           
|--- | --------------------------
|19. | Related Party Transactions



| |                           
| | --------------------------
| | Loans to Executive Officer





| |                        
| | -----------------------
| | Consulting Arrangements







F-26



---



##### 



ADVANCIS PHARMACEUTICAL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)








|    |                                     
|--- | ------------------------------------
|20. | Quarterly Financial Data (Unaudited)



|                             |                  |         |   |           |      |  |   |               |        |           |               |             |   |              |   |             |   |  |   |        |  
|---------------------------- | ---------------- | ------- | - | --------- | ---- |  | - | ------------- | ------ | --------- | ------------- | ----------- | - | ------------ | - | ----------- | - |  | - | ------ | -
|                             |                  |         |   |           |      |  |   |               |        | Basic and |              
|                             |                  |         |   |           |      |  |   |               |        | Diluted   |              
|                             |                  |         |   |           |      |  |   |               |        | Net Loss  |              
|                             |                  |         |   |           |      |  |   | Net Loss      |        |           | Per Share     |            
|                             |                  |         |   |           |      |  |   | Applicable to |        |           | Applicable to |            
|                             |                  |         |   | Operating |      |  |   |               | Common |           |               | Common      |  
|                             |                  | Revenue |   |           | Loss |  |   | Net Loss      |        |           | Stockholders  |             |   | Stockholders |  
|                             |                  |         |   |           |      |  |   |               |        |           |               |             |   |              |  
|Year ended December 31, 2004 |                  |         |   |           |      |  |   |               |        |           |               |             |   |              |   |             |   |  |   |       
|                             | First 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  | )
|Year ended December 31, 2003 |                  |         |   |           |      |  |   |               |        |           |               |             |   |              |   |             |   |  |   |       
|                             | First quarter    |         | $ |          |      |  | $ | (3,237,382    | )      |           | $             | (3,253,184  | ) |              | $ | (3,271,762  | ) |  | $ | (3.33  | )
|                             | Second quarter   |         |   |          |      |  |   | (4,153,926    | )      |           |               | (4,236,279  | ) |              |   | (4,255,062  | ) |  |   | (4.04  | )
|                             | Third quarter(a) |         |   | 312,500   |      |  |   | (6,534,493    | )      |           |               | (8,152,710  | ) |              |   | (29,135,970 | ) |  |   | (20.19 | )
|                             | Fourth quarter   |         |   | 3,312,500 |      |  |   | (5,471,281    | )      |           |               | (5,333,011  | ) |              |   | (5,429,183  | ) |  |   | (0.29  | )



|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note (a): | The third quarter of fiscal 2003 was the Companys first
    quarter of revenue recognition. Also in the third quarter of
    fiscal 2003, a beneficial conversion feature for deemed interest
    expense of $1,666,667 was included in Operating Loss and an
    additional $20,907,620 for a beneficial conversion feature for a
    deemed dividend to preferred stockholders was included in the
    calculation of the Net Loss Applicable to Common Stockholders.

F-27