##### 



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

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006oro

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

52-2208264(State or other jurisdiction
    of

(I.R.S. employerincorporation or
    organization)

identification number)20425 Seneca Meadows
    ParkwayGermantown, 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
   o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2).
  Large Accelerated
    Filer o     Accelerated
    Filer o     Non-accelerated
    Filer þ   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 



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


Business


2Item 1A.


Risk Factors


18Item 1B.


Unresolved Staff Comments


31Item 2.


Properties


32Item 3.


Legal Proceedings


32Item 4.


Submission of Matters to a Vote of
    Security Holders


32PART IIItem 5.


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


33Item 6.


Selected Financial Data


34Item 7.


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


35Item 7A.


Quantitative and Qualitative
    Disclosures About Market Risk


56Item 8.


Financial Statements and
    Supplementary Data


56Item 9.


Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure


56Item 9A.


Controls and Procedures


56Item 9B.


Other Information


57PART IIIItem 10.


Directors and Executive Officers
    of the Registrant


58Item 11.


Executive Compensation


58Item 12.


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


58Item 13.


Certain Relationships and Related
    Transactions


58Item 14.


Principal Accountant Fees and
    Services


58PART IVItem 15.


Exhibits and Financial Statement
    Schedules


58  1




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##### 



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




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##### 



®
  in-house and/or
        (301) 944-6600. Form 10-K. Form 10-K Legal Proceedings
 3




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##### 



Market
    Opportunity
      Substantial market. (IMS
    World Review 2005)
  Increased resistance to existing
    therapies. Streptococcus
    pneumoniae
  Growing need for improved new
    treatments.
  Difficulties in developing new classes of anti-infective
    compounds.
  Limitations of standard treatment regimens.
  Our
    Proprietary PULSYS Technology
  once-a-day tm
  
    Improved bactericidal activity, or bacteria killing efficiency. 4




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##### 




    Once-daily dosing
    and/or
    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.    24-hour
  
  once-a-day
   5




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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. two-to-four
  Develop sales and marketing functions across multiple
    products.
  Multi-level patent strategy. sub-umbrella
 6




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##### 



License or acquire antibiotic products.
  Our
    Marketed Products
  Keflex
        Keflex Products

Key Indication(s)

Status

Marketing RightsKeflex
    Capsules   250 mg, 333 mg,
    500 mg, and 750 mg(1)

Skin and skin structure
    infections;
    upper respiratory tract infections

FDA-approved

U.S. and Puerto Rico rights     (1)
    
    On May 12, 2006, we received approval of our supplemental
    NDA (sNDA) to the Food & Drug Administration requesting
    marketing approval of Keflex 333 mg and 750 mg
    capsules.  once-a-day once-a-day
 7




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##### 



Our
    Product Pipeline
    PULSYS Product





Targeted PULSYSCandidate/Program

Key Indication(s)

Current Therapy

Added Value

Program Status(1)Amoxicillin  Adult

Pharyngitis/tonsillitis

10-14 days, two or three
    times
    daily

10 days, once-daily, lower
    dose

NDA submitted(2)Keflex
    (cephalexin)  Adult

Skin and skin
    structure infections

7-14 days, two to four
    times
    daily

10 days,  once-daily, lower
    dose,

Phase I (on hold)Pediatric Pharyngitis Program

Pharyngitis/tonsillitis

10-14 days, two or three
    times
    daily

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

Phase I (on hold)     (1)
    
    For an explanation of the terms Preclinical, Phase I,
    Phase I/II and Phase III, please refer to the
    information under the heading Government
    Regulation below. Each of the product candidates above
    is discussed in more detail in the next section below.(2)
    
    Our Amoxicillin PULSYS NDA has been submitted to and is
    currently being evaluated by the FDA. See Pulsatile
    Product Candidates  Amoxicillin PULSYS
    below.  Item 7. Managements Discussion
    and Analysis of Financial Condition and Results of
    Operations
  Pulsatile
    Product Candidates
    
    Once-a-day
    formulation
    Lower dose
    Shorter duration of therapy
    Reduced side effect profile
    Combination product with superior efficacy over either product
    alone
    Improved pediatric dosage form  and/or
  Amoxicillin
    PULSYS
   8




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##### 



(IMS National Prescription
    Audit 2006)
  in vitro Streptococcus
    pneumoniae
  10-day 7-day 10-day
  2005/2006 S. pyogenes test-of-cure test-of-cure
         9




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##### 



Keflex
    (Cephalexin) PULSYS
  (IMS National Prescription Audit 2006)
      Pediatric
    Pharyngitis Program
      Other
    Possible Pulsatile Product Candidates
   10




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##### 



PULSYS
    Preclinical Development Programs
    
    Sinusitis
    Chronic Bronchitis
    Acute Otitis Media
    Urinary Tract Infections
    Community-acquired Methicillin Resistant Staphylococcus
    aureus (MRSA).  Staphylococcus aureus
    Collaboration
    Agreements
  Termination
    of Our Collaboration with Par Pharmaceutical for Amoxicillin
    PULSYS
       11




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##### 



Termination
    of the Collaboration with GlaxoSmithKline
      Collaboration
    with Par Pharmaceutical for Generic Clarithromycin
    Sales and
    Marketing
         12




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##### 



and/or
  Competition
    
    Large pharmaceutical companies, such as Pfizer, GlaxoSmithKline,
    Wyeth, Bristol-Myers Squibb, Merck, Johnson & Johnson,
    Roche, Schering-Plough, Novartis, sanofi-aventis, Abbott
    Laboratories, AstraZeneca, and Bayer, that may develop new drug
    compounds that render our drugs obsolete or noncompetitive.
    Smaller pharmaceutical and biotechnology companies and specialty
    pharmaceutical companies engaged in focused research and
    development of anti-infective drugs, such as Trimeris, Vertex,
    Adams Respiratory Therapeutics, Gilead Sciences, Cubist,
    Basilea, Replidyne, InterMune, Oscient, King, Advanced Life
    Sciences, and others.
    Drug delivery companies, such as Johnson &
    Johnsons Alza division, Biovail, DepoMed, Flamel
    Technologies, 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 13




---



##### 




    marketing
    adaptability to various modes of dosing.          Manufacturing
      scale-up
 14




---



##### 



Patent
    and Intellectual Property Protection
        Government
    Regulation
    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) which includes inspection of manufacturing facilities.  PRECLINICAL:
    PHASE I:
  PHASE II:
 15




---



##### 



PHASE III:
         16




---



##### 



30-months,
    30-month 30-month
  and/or
  Other
    Regulatory Constraints
   17




---



##### 



Foreign
    Regulatory Approval
        Employees
   Item 1A.  Risk
    Factors    Risks
    Related to our Business
  We
    have a history of losses, we expect to incur losses for the
    foreseeable future and we may never become
    profitable.
     18




---



##### 




    obtaining additional financing;
    obtaining FDA approval for our Amoxicillin PULSYS product
    candidate and, if approved, successfully commercializing this
    product;
    increasing sales of our 750 mg Keflex product; and
    successfully developing, gaining FDA approval for and
    commercializing other product candidates.    If we
    are unable to raise additional capital in the near term, we may
    not be able to continue to operate as a going
    concern.
  and/or
    If we
    are unable to increase sales of our 750 mg Keflex product,
    our liquidity will be further adversely affected.
   19




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##### 



Assuming
    we are able to obtain additional capital, our nearer term
    success will depend in large part on our receiving FDA approval
    of our Amoxicillin PULSYS product candidate, and we cannot
    assure you that the FDA will approve this product or, if
    approved, that it will be approved on a timely
    basis.
  7-day 10-day
    Our
    PULSYS technology is based on a finding that could ultimately
    prove to be incorrect, or could have limited
    applicability.
     20




---



##### 



Our
    PULSYS 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 PULSYS antibiotics, the market for our potential
    products would be reduced or eliminated.
    We
    have not conducted an extensive third party patent infringement,
    invalidity and enforceability investigation on pulsatile dosing
    and our PULSYS technology, and we are aware of at least one
    issued patent covering pulsatile delivery.
    
    cease selling, incorporating or using any of our products that
    incorporate the challenged intellectual property; 21




---



##### 




    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 the
    technology used in our PULSYS product candidates.
    If we
    are unable to develop and successfully commercialize our PULSYS
    product candidates, we may never achieve
    profitability.
    If
    clinical trials for our products are unsuccessful or delayed, we
    will be unable to meet our anticipated development and
    commercialization timelines.
        
    lack of efficacy during the clinical trials;
    unforeseen safety issues; 22




---



##### 




    slower than expected rate of patient recruitment; or
    government or regulatory delays.    Even
    if Amoxicillin PULSYS or any of our other PULSYS products are
    approved for commercial sale, we will not be successful if these
    products are not accepted by the market.
    
    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.    We
    have limited sales, marketing, and distribution capabilities,
    and currently depend in large part on a third party contract
    sales force for the marketing of our Keflex 750 mg product.
    If we fail to develop our own sales, marketing and distribution
    capabilities or fail to enter into arrangements with third
    parties, we will not be able to successfully commercialize our
    products.
   23




---



##### 



We
    rely upon a limited number of pharmaceutical wholesalers and
    distributors, which could impact our ability to sell our Keflex
    products or Amoxicillin PULSYS.
    The
    potential success of our products and product candidates,
    including our 750 mg Keflex product and, if approved for
    marketing by the FDA, Amoxicillin PULSYS, will be dependent upon
    successfully pricing the products in the
    marketplace.
    Generic
    pricing plans, such as that being implemented by Wal-Mart, may
    affect the market for our products.
  and/or
  Our
    products are subject to therapeutic equivalent substitution,
    Medicaid reimbursement and price reporting.
    We are
    dependent on our contract manufacturers and suppliers to provide
    us with active pharmaceutical ingredients and finished
    products.
   24




---



##### 



and/or and/or and/or
    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.
      Clinical
    trials for our product candidates may be delayed due to our
    dependence on third parties for the conduct of such
    trials.
    Our
    success may depend on our ability to successfully attract and
    retain collaborative partners.
    
    fund our research and development activities;
    fund manufacturing by third parties;
    seek and obtain regulatory approvals; and
    successfully commercialize our product candidates. 25




---



##### 



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.
  and/or
  We
    could be forced to pay substantial damage awards if product
    liability claims that may be brought against us are
    successful.
    Our
    executive officers and other key personnel are critical to our
    business and our future success depends on our ability to retain
    them.
   26




---



##### 



Risks
    Related to our Industry
  Any
    inability to protect our intellectual property could harm our
    competitive position.
        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,
    Adams Respiratory Therapeutics, Gilead Sciences, Cubist,
    Basilea, Replidyne, InterMune, Oscient, King, Advanced Life
    Sciences, and others. 27




---



##### 




    Drug delivery companies, such as Johnson &
    Johnsons Alza division, Biovail, DepoMed, Flamel
    Technologies, and SkyePharma, which may develop a dosing regimen
    that is more effective than pulsatile dosing.
    Generic drug companies, such as Teva, Ranbaxy, IVAX, Sandoz and
    Stada, which produce low-cost versions of antibiotics that may
    contain the same active pharmaceutical ingredients as our PULSYS
    product candidates.    
    developing products;
    undertaking preclinical testing and human clinical trials;
    obtaining approvals of products from the FDA and other
    regulatory agencies; and
    manufacturing and marketing products.    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; 28




---



##### 




    withdrawals of previously approved marketing
    applications; and
    fines, civil penalties and criminal prosecutions.      The
    manufacture and storage of pharmaceutical and chemical products
    is subject to environmental regulation and risk.
  and/or
  clean-up
  Market
    acceptance of our products will be limited if users of our
    products are unable to obtain adequate reimbursement from
    third-party payors.
       29




---



##### 



Potential
    regulatory changes and the billing and reimbursement process
    applicable to underlying conditions may cause price erosion and
    reduce sales revenue for our products and our products may not
    be accepted by health care providers.
      Other
    Risks
  HealthCare
    Ventures V, L.P., HealthCare Ventures VI, L.P., and
    HealthCare Ventures VII, L.P. have substantial control over our
    business, and the interests of the HealthCare Ventures
    partnerships may not be consistent with the interests of our
    other stockholders.
  day-to-day
  Future
    sales of our common stock, or the perception that these sales
    may occur, could depress our stock price.
   30




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##### 



Our
    certificate of incorporation and provisions of Delaware law
    could discourage a takeover you may consider favorable or could
    cause current management to become entrenched and difficult to
    replace.
      The
    price of our common stock has been and will likely continue to
    be volatile.
    We
    could be forced to pay liquidated damages if we do not maintain
    the effectiveness of our
    S-3
    registration statements.
  Form S-3
  Form S-3s
  Item 1B.
    Unresolved
    Staff Comments   31




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##### 



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


LowDecember 31, 2006:Fourth quarter

$
5.90


$
3.23Third quarter


6.70



2.79Second quarter


3.98



2.50First quarter


3.72



1.23December 31, 2005:Fourth quarter

$
1.69


$
1.20Third quarter


2.75



0.86Second quarter


5.40



1.70First quarter


5.42



3.03      33




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##### 



Item 6.
    Selected
    Financial Data  Form 10-K Form 10-K
  For the Years Ended December 31,2006


2005


2004


2003


2002Statements of Operations
    DataTotal revenue

$
4,810,410


$
16,847,690


$
11,358,032


$
3,625,000


$
Cost and expenses:Cost of product sales


899,601



562,009



169,854







Research and development


25,973,844



39,729,441



33,642,930



16,594,629



10,855,130Selling, general and administrative


21,288,968



10,515,302



12,219,409



6,427,453



3,323,879Total expenses


48,162,413



50,806,752



46,032,193



23,022,082



14,179,009Loss from operations


(43,352,003
)


(33,959,062
)


(34,674,161
)


(19,397,082
)


(14,179,009
)Interest income (expense), net


385,034



954,193



669,448



88,565



102,629Beneficial conversion
    feature  deemed interest














(1,666,667
)


Other income or (expense)


976,815



16,292











(47,615
)Net loss


(41,990,154
)


(32,988,577
)


(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 shareholders














(20,907,620
)


Net loss applicable to common
    stockholders

$
(41,990,154
)

$
(32,988,577
)

$
(34,004,713
)

$
(42,091,977
)

$
(14,197,920
)Basic and diluted net loss per share

$
(1.38
)

$
(1.20
)

$
(1.50
)

$
(7.58
)

$
(16.37
)Shares used in computing net loss
    per share, basic and diluted


30,535,965



27,421,516



22,684,410



5,554,773



867,239Balance Sheet Data at
    Year-End:Unrestricted cash, cash equivalents
    and marketable securities

$
15,379,461


$
29,431,058


$
30,051,937


$
65,087,122


$
4,059,911Total assets


42,005,769



57,796,892



61,142,140



84,174,843



9,058,523Long-term debt, including current
    portion


6,963,889



1,567,412



2,577,387



2,440,588



1,730,934Mandatorily redeemable convertible
    preferred stock


















28,439,295Accumulated deficit


(153,085,462
)


(111,095,308
)


(78,106,731
)


(44,102,018
)


(23,126,834
)Total stockholders equity
    (deficit)


11,872,020



33,342,011



39,738,379



70,149,920



(22,701,459
)  34




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##### 



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Form 10-K. Forward-Looking Statements Factors that May Affect our Business Form 10-K,
  Our
    Business
  once-a-day and/or
  General
  Form 10-K.
  Management
    Overview of Key Developments in 2006
    Amoxicillin
    PULSYS Product Development
  
    In September 2005, after extensive evaluation of the data from
    our unsuccessful Amoxicillin PULSYS Phase III clinical
    trials, we decided to conduct a new Phase III clinical
    trial for adults and adolescents, extending the length of
    treatment from seven days to 10 days, using our existing
    formulation of Amoxicillin PULSYS. Our Phase III trial
    began in November 2005 and was designed to support product
    approval for Amoxicillin PULSYS for the treatment of adolescents
    and adults with acute pharyngitis
    and/or
    tonsillitis 35




---



##### 



due to Group A streptococcal infections. Study enrollment
    concluded on May 31, 2006, with a total of
    620 patients.  
    On August 10, 2006, we announced that our Amoxicillin
    PULSYS Phase III clinical trial achieved its desired
    clinical and microbiological endpoints. The trial demonstrated
    statistical non-inferiority of Amoxicillin PULSYS therapy versus
    the penicillin comparator therapy for the trials primary
    endpoints of bacterial eradication rates for two distinct
    patient populations. The trial also demonstrated Amoxicillin
    PULSYS reached 85 percent bacterial eradication for the
    per protocol group of patients, in accordance with
    FDA guidance for product approval as first-line pharyngitis
    therapy. Based on the successful Phase III trial data, we
    submitted a NDA for Amoxicillin PULSYS on December 14, 2006.
    On February 12, 2007, we received a refusal to
    file letter from the FDA for our Amoxicillin PULSYS NDA,
    requesting additional information on our planned commercial
    manufacturing processes. In its letter, the FDA indicated that
    our application was not sufficiently complete in that it did not
    include a proposed commercial batch record or a detailed
    commercial process description with process parameters and
    in-process controls. We conducted a meeting with the FDA
    regarding our Amoxicillin PULSYS NDA on February 26, 2007.
    In that meeting, we reached agreement with the FDA on the
    additional information that is required for our NDA filing to be
    accepted, which was resubmitted on March 23, 2007. The FDA
    did not raise any clinical or other issues in its communication.  Marketed
    Products  Keflex Capsules (Cephalexin
    USP)
  
    In 2006, net sales of our branded capsule Keflex products were
    approximately $4.8 million.
    On December 20, 2005, we filed a supplemental NDA for two
    new strengths of our Keflex product with the FDA. In April 2006,
    an FDA pre-approval inspection was initiated at our third-party
    contract manufacturing facility operated by Ceph International,
    a subsidiary of Patheon, Inc., in Puerto Rico.
    On May 12, 2006, the FDA approved our supplemental NDA for
    two new strengths of our Keflex antibiotic. We received approval
    to market 333 mg and 750 mg Keflex capsules. We made
    the decision to commercialize only the 750 mg strength
    product.
    In June 2006, we announced that we entered into an agreement
    with Innovex, the commercialization division of Quintiles
    Transnational Corp., to provide us contract sales and marketing
    services in support of the new Keflex 750 mg strength.
    Terms of the agreement include the training, hiring, and
    deployment of 75 contract sales representatives targeting high
    Keflex-prescribing physicians across the United States.
    On July 25, 2006, we announced that Keflex 750 mg
    capsules had been manufactured, packaged, and were shipping to
    pharmacies nationwide. Our contract sales representatives began
    directly promoting Keflex 750 mg capsules to targeted
    physicians as well as providing patient starter samples in late
    July 2006. We believe that Keflex 750 mg is currently
    stocked in a more than 25,000 U.S. pharmacies.
    We continued development work on a PULSYS version of Keflex,
    completing four additional Phase I studies during 2006,
    evaluating the pharmacokinetic profiles of various combinations
    of pulsatile cephalexin formulations.  $12 Million
    Credit Facility
  
    On June 30, 2006, we closed a $12 million secured
    credit facility with Merrill Lynch Capital, consisting of an
    $8 million term loan and a $4 million revolving loan
    facility. The term loan was drawn in its entirety at closing,
    and matures in three years. The revolving loan facility matures
    45 months from the closing date, and credit available under
    this facility will be determined based on a percentage of our
    accounts receivable. We used the proceeds from the credit
    facility for general working capital and plan to repay
    borrowings with cash flow from operations. 36




---



##### 



Private
    Placement of Common Stock
  
    In December 2006, we completed a private placement of
    6,000,000 shares of our common stock at a price of
    $3.00 per share, resulting in net proceeds to us, after the
    deduction of fees and commissions, of $16.7 million.  Advancis
    Corporate Name Change
  
    In October 2006, we jointly submitted a proposed Permanent
    Injunction and Order with sanofi-aventis, pursuant to a
    U.S. Court Opinion and Order issued September 26,
    2006, ruling that the Advancis corporate name is infringing the
    sanofi-aventis trademark. Following this joint submission, we
    have been actively involved in the process of selecting a new
    corporate name. We have made significant progress to date and
    expect to effect an orderly transition to our new corporate
    identity in the first half of 2007.  Focus
    for 2007
    Critical
    Accounting Policies and Estimates
      Revenue
    Recognition
    Product Sales.
 37




---



##### 



Chargebacks and rebates.
  Product returns.
  Contract Revenue.
  Reimbursement of Development Costs.
  Inventories
  first-in, work-in-process
 38




---



##### 



Intangible
    Assets
  Acquired Intangible Assets.
  Impairment.
  Accrued
    Expenses
    Stock-Based
    Compensation
  Share-Based Payment
   39




---



##### 




    We have elected to determine the expected term of share-based
    awards granted subsequent to January 1, 2006 using the
    transition approach provided by Staff Accounting
    Bulletin No. 107, under which an expected term of
    6.25 years may be used for four-year grants with
    ten-year
    contractual terms. We plan to refine our estimate of expected
    term in the future as we obtain more historical data. A shorter
    expected term would result in lower compensation expense.
    To estimate expected future volatility, we considered several
    factors and data sets, including available information from our
    limited trading history, as well as the reported volatility
    rates of other comparable public companies. We have no implied
    volatility data since we have no publicly traded options or
    other financial instruments from which implied volatility can be
    derived. For the expected future volatility factor computed for
    input to the Black-Scholes model, we primarily used a
    combination of our historical volatility together with the
    average of volatility rates of comparable public companies.
    Using a higher volatility input to the Black-Scholes model would
    result in a higher compensation expense.
    The risk-free rate is based on U.S. Treasury yields in
    effect at the time of grant corresponding with the expected term
    of the options. Estimates of fair value are not intended to
    predict actual future events or the value ultimately realized by
    the employees who receive equity awards.  Income
    Taxes
    Recent
    Accounting Pronouncements
  Share-Based Payment, Accounting for Stock-based Compensation.
 40




---



##### 



Accounting for Uncertainty
    in Income Taxes, Accounting for Income
    Taxes.
  Fair Value Measurements
  00-19-2, Accounting for Registration Payment Arrangements, Accounting for Contingencies.
  The Fair Value Option for Financial Assets and
    Financial Liabilities, Including an Amendment of FASB Statement
    No. 115 instrument-by-instrument
  Research
    and Development Expenses
    Summary of Product Development
    Initiatives.
  Our Product Pipeline
  41




---



##### 



Total ExpenseIncurred fromInception(January 1, 2000)


ClinicalYear Ended December 31,


to December 31,


Development2006


2005


2004


2006


PhaseDirect Project
    Costs(1)Amoxicillin PULSYS(2)

$
12,354,000


$
24,294,000


$
15,961,000


$
60,484,000


NDA submittedKeflex Product Development(3)


5,424,000



5,360,000



222,000



11,006,000


Phase I (on hold)Generic Clarithromycin(4)






79,000



5,480,000



15,579,000


SuspendedOther Product Candidates


863,000



1,289,000



4,108,000



16,108,000


PreclinicalTotal Direct Project Costs


18,641,000



31,022,000



25,771,000



103,177,000Indirect Project
    Costs(1)Facility


3,136,000



3,603,000



2,954,000



12,101,000Depreciation


2,441,000



2,610,000



1,928,000



8,319,000Other Indirect Overhead


1,756,000



2,494,000



2,990,000



9,627,000Total Indirect Expense


7,333,000



8,707,000



7,872,000



30,047,000Total Research &
    Development Expense

$
25,974,000


$
39,729,000


$
33,643,000


$
133,224,000     (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)
    
    On August 10, 2006, we announced that our Amoxicillin
    PULSYS Phase III clinical trial achieved its desired
    clinical and microbiological endpoints. The trial demonstrated
    statistical non-inferiority of Amoxicillin PULSYS therapy versus
    the penicillin comparator therapy for the trials primary
    endpoints of bacterial eradication rates for two different
    patient populations. We resubmitted our New Drug Application for
    Amoxicillin PULSYS to the FDA on March 23, 2007. See
    Amoxicillin PULSYSabove. We previously had
    an agreement under which Par Pharmaceutical was to be
    responsible for funding the anticipated future development costs
    of this product. See Termination of Our Collaboration
    with Par Pharmaceutical for Amoxicillin PULSYSabove.(3)
    
    Direct Project Costs for Keflex product development include
    development costs for the non-pulsatile Keflex 750 mg and
    Keflex 333 mg line extension products, which commercially
    launched in July 2006, as well as research and development costs
    for a
    once-a-day
    Keflex PULSYS product, currently in Phase I clinical
    trials. Additional development of Keflex PULSYS is on hold,
    until we have sufficient financial resources.(4)
    
    We have discontinued development efforts for this product. See
    Our Collaboration with Par Pharmaceutical for Generic
    Clarithromycin above.  Net
    Losses
   42




---



##### 



Results
    of Operations
  Fiscal
    Year Ended December 31, 2006 Compared to Fiscal Year Ended
    December 31, 2005
  Revenues.
  2006


2005Keflex product sales 
    net

$
4,810,000


$
4,809,000Amortization of upfront license
    fee  Par amoxicillin






4,028,000Reimbursement of development
    costs  Par amoxicillin






8,011,000Total

$
4,810,000


$
16,848,000         Cost of Product Sales.
  Research and Development Expenses.
 43




---



##### 



Year Ended December 31,Research and Development Expenses

2006


2005Direct project costs:Personnel, benefits and related
    costs

$
6,252,000


$
10,716,000Stock-based compensation


1,435,000



160,000Consultants, supplies, materials
    and other direct costs


4,916,000



7,912,000Clinical studies


6,038,000



12,234,000Total direct costs


18,641,000



31,022,000Indirect project costs


7,333,000



8,707,000Total

$
25,974,000


$
39,729,000         Selling, General and Administrative
    Expenses.
  Year Ended December 31,2006


2005Salaries, benefits and related
    costs

$
2,351,000


$
3,387,000Stock-based compensation


1,970,000



376,000Legal and consulting expenses


2,142,000



1,342,000Other expenses


6,175,000



5,410,000Marketing costs


3,786,000



Contract sales expenses


4,865,000



Total

$
21,289,000


$
10,515,000      44




---



##### 



Net Interest Income (Expense).
  Year Ended December 31,2006


2005Interest income

$
896,000


$
1,075,000Interest expense


(511,000
)


(121,000
)Total, net

$
385,000


$
954,000   Other Income.
  Fiscal
    Year Ended December 31, 2005 Compared to Fiscal Year Ended
    December 31, 2004
  Revenues.
  Year Ended December 31,2005


2004Keflex product sales, net

$
4,809,000


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






1,146,000GSK  acceleration upon
    termination






3,229,000Par  amoxicillin


797,000



972,000Par 
    amoxicillin  acceleration upon termination


3,231,000



Reimbursement of development costs:Par  amoxicillin


5,636,000



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


2,375,000



Total

$
16,848,000


$
11,358,000    45




---



##### 



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

2005


2004Direct project costs:Personnel, benefits and related
    costs

$
10,716,000


$
9,522,000Stock-based compensation


160,000



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


7,912,000



8,595,000Clinical studies


12,234,000



6,481,000Total direct costs


31,022,000



25,771,000Indirect project costs


8,707,000



7,872,000Total

$
39,729,000


$
33,643,000        46




---



##### 



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


2004Salaries, benefits and related
    costs

$
3,387,000


$
2,667,000Stock-based compensation


376,000



2,480,000Legal and consulting expenses


1,342,000



2,694,000Other expenses


5,410,000



4,378,000Total

$
10,515,000


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


2004Interest income

$
1,075,000


$
794,000Interest expense


(121,000
)


(125,000
)Total, net

$
954,000


$
669,000   Liquidity
    and Capital Resources
     47




---



##### 



Cash
    and Marketable Securities
    As of December 31,2006


2005Cash and cash equivalents

$
14,857,000


$
18,117,000Marketable securities


522,000



11,314,000Total

$
15,379,000


$
29,431,000   available-for-sale,
    Cash
    Flow
    Year Ended December 31,2006


2005


2004Net cash used in operating
    activities

$
(36,331,000
)

$
(24,890,000
)

$
(15,487,000
)Net cash provided by (used in)
    investing activities


10,793,000



7,676,000



(11,721,000
)Net cash provided by financing
    activities


22,278,000



24,935,000



153,000Net increase (decrease) in cash
    and cash equivalents

$
(3,260,000
)

$
7,721,000


$
(27,055,000
)  48




---



##### 



Operating
    Activities
    Year Ended December 31,Operating Activities

2006


2005


2004Cash receipts:Cash received from product sales

$
6,120,000


$
5,159,000


$
2,230,000Cash received from collaboration
    partners






14,250,000



17,000,000Interest income received and other


1,568,000



1,622,000



2,185,000Total cash receipts


7,688,000



21,031,000



21,415,000Cash disbursements:Cash paid for employee
    compensation and benefits


9,969,000



11,432,000



10,401,000Cash paid to vendors, suppliers,
    and other


34,050,000



34,489,000



26,501,000Total cash disbursements


44,019,000



45,921,000



36,902,000Net cash used in operating
    activities

$
(36,331,000
)

$
(24,890,000
)

$
(15,487,000
)     Investing
    Activities
    Year Ended December 31,Investing Activities

2006


2005


2004Cash receipts:Sale of marketable securities, net
    of purchases

$
10,590,000


$
8,176,000


$
6,582,000Advance payment received for
    potential sale of Keflex






1,000,000



Sale of fixed assets, restricted
    cash and other


754,000



423,000



Total cash receipts


11,344,000



9,599,000



6,582,000Cash disbursements:Purchase of Keflex brand rights










11,206,000Property and equipment purchases
    and deposits


551,000



1,923,000



6,960,000Change in restricted cash and other










137,000Total cash disbursements


551,000



1,923,000



18,303,000Net cash provided by (used in)
    investing activities

$
10,793,000


$
7,676,000


$
(11,721,000
)  49




---



##### 



agreement-in-principle
    Financing Activities
    Year Ended December 31,Financing Activities

2006


2005


2004Cash receipts:Cash received from private
    placement

$
16,736,000


$
25,844,000


$
Cash received from lines of credit
    and debt


7,793,000







1,390,000Cash received from preferred stock
    and notes










Cash received from exercise of
    stock options


353,000



101,000



16,000Total cash receipts


24,882,000



25,945,000



1,406,000Cash disbursements:Cash paid for debt payments


2,604,000



1,010,000



1,253,000Total cash disbursements


2,604,000



1,010,000



1,253,000Net cash provided by financing
    activities

$
22,278,000


$
24,935,000


$
153,000        50




---



##### 



Borrowings
    Debt Obligations

Interest Rates

Outstanding


AvailableMontgomery County development loan

Fixed rate  5%

$
75,000


$
Merrill Lynch Capital term loan

Variable rate  LIBOR
    plus 5%


6,889,000



Merrill Lynch Capital revolving
    loan

Variable rate  LIBOR
    plus 3.75%






Totals



$
6,964,000


$
           Bulletin 79-3, Subjective Acceleration Clauses in Long-Term Debt
    Agreements.
   51




---



##### 



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

Total


2007


2008


2009


2010


2010


2011(In thousands)Short and long-term debt (includes
    interest)(3)

$
7,913


$
3,328


$
2,976


$
1,609


$



$



$
Minimum purchase commitments(4)


3,143



3,143



















Operating lease obligations


13,906



2,079



2,139



2,156



2,214



2,155



3,163Total contractual cash obligations

$
24,962


$
8,550


$
5,115


$
3,765


$
2,214


$
2,155


$
3,163Other commercial commitments(5)

$
13,009


$
9,680


$
3,329


$



$



$



$
     (1)
    
    This table does not include potential royalty payments, at a
    rate of 10% of sales value, to Eli Lilly and Company, which may
    be due on product line extensions of Keflex, including Keflex
    750 mg. Any such royalties cannot be estimated at this time.(2)
    
    This table does not include a contingent liability to Par
    Pharmaceutical under our amoxicillin development and
    commercialization agreement that was terminated by Par in August
    2005. Under certain circumstances, the termination clauses of
    the agreement may entitle Par to receive a share of future net
    profits, if any, up to one-half of Pars total
    $23.25 million investment in the development of certain
    amoxicillin PULSYS products, should a product covered by the
    agreement be successfully commercialized. Accordingly, we
    retained $11.625 million of deferred revenue in recognition
    of this contingent liability to Par.(3)
    
    Future interest obligation estimated based on interest rate in
    effect at year end of 10.35%.(4)
    
    In the event we were to terminate our Innovex sales contract, we
    would incur minimum costs to exit of approximately
    $1.9 million. The remaining purchase commitments include
    costs of our product manufacturing capability under development
    in Ireland and Puerto Rico.(5)
    
    We have entered into other contractual agreements in connection
    with developing our products and technology and to Innovex, a
    third party contract sales organization. These amounts represent
    the remaining contractual amount due over the remaining Innovex
    contract term, for on
    on-going
    commercialization efforts related to Amoxicillin PULSYS, and for
    manufacturing and research related to our Keflex product line.   52




---



##### 



Off-Balance
    Sheet Arrangements
    Prospective
    Information  Risks and Uncertainties related to Our
    Future Capital Requirements
         53




---



##### 



Safe
    Harbor Statement under the Private Securities Litigation Reform
    Act of 1995
   54




---



##### 



Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk      Item 8.
    Financial
    Statements and Supplementary Data  F-1 F-32.
  Item 9.
    Changes
    and Disagreements with Accountants on Accounting and Financial
    Disclosure    Item 9A.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
  Form 10-K
  Changes
    in Internal Control over Financial Reporting during the
    Quarter
    Managements
    Report on Internal Controls over Financial Reporting
  Rule 13a-15(f)
 55




---



##### 



Internal
    Control  Integrated Framework
  page F-2
  Item 9B.
    Other
    Information   56




---



##### 



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
    Accountant Fees and Services   PART IV  Item 15.
    Exhibits,
    Financial Statements Schedules and Reports on
    Form 8-K      PageNumberReport of PricewaterhouseCoopers
    LLP, Independent Registered Public Accounting Firm


F-2Balance Sheets at December 31,
    2006 and 2005


F-4Statements of Operations for the
    Years Ended December 31, 2006, 2005 and 2004


F-5Statement of Changes in
    Stockholders Equity (Deficit) for the Years Ended
    December 31, 2006, 2005 and 2004


F-6Statements of Cash Flows for the
    Years Ended December 31, 2006, 2005 and 2004


F-7Notes to Financial Statements


F-8     Form 10-K:
   57




---



##### 



Exhibit No.2
.1(1)
    +

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

Certificate of Incorporation3
.2(2)

Bylaws4
.1(2)

Specimen Stock Certificate10
.1(2)

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

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

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

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

Executive Employment Agreement
    between the Registrant and Donald Treacy dated March 19, 200410
.6(10)

Executive Employment Agreement
    between the Registrant and Robert C. Low, dated December 12,
    2005.10
.7(2)

Form of Indemnification Agreement10
.8(4)

Stock Incentive Plan10
.9(2)

Form of Incentive Stock Option
    Agreement10
.10(2)

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

Form of Stock Restriction Agreement10
.12(5)

Employee Stock Purchase Plan10
.13(2)

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

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

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

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

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

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

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

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

Amendment dated July 30, 2003 to
    the Stock Purchase Pledge Agreement and Stock Restriction
    Agreement dated October 15, 2001, as amended, between the
    Registrant and Edward M. Rudnic10
.22(2)

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

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

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

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

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

Consulting Agreement dated August
    18, 2000 between the Registrant and Jenefir Isbister as amended 58




---



##### 



Exhibit No.10
.28(2)

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

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

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

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

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

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

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

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

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

Manufacturing and Supply Agreement
    between the Registrant and Clonmel Healthcare Limited, dated as
    of April 19, 2005.*10
.38(7)
    +

Development and Clinical
    Manufacturing Agreement between the Registrant and Clonmel
    Healthcare Limited, dated as of April 19, 2005.*10
.39(7)
    +

Facility Build-Out Agreement
    between the Registrant and Clonmel Healthcare Limited, dated as
    of April 19, 2005.*10
.40(8)
    +

Form of Purchase Agreement dated
    April 26, 2005, including the form of Warrant attached thereto.**10
.41(9)

Credit and Security Agreement,
    dated June 30, 2006 between the Registrant and Merrill Lynch
    Capital.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.     (1)
    
    Incorporated by reference to our Registration Statement on
    Form S-1
    (File
    No. 333-107599).(2)
    
    Incorporated by reference to our Registration Statement on
    Form S-8
    (File
    No. 333-109728).(3)
    
    Incorporated by reference to our Quarterly Report on
    Form 10-Q
    filed May 7, 2004.(4)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed July 15, 2004.(5)
    
    Incorporated by reference to our Quarterly Report on
    Form 10-Q
    filed August 6, 2004(6)
    
    Incorporated by reference to our Quarterly Report on
    Form 10-Q
    filed November 5, 2004(7)
    
    Incorporated by reference to our Quarterly Report on
    Form 10-Q
    filed August 15, 2005.(8)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed April 27, 2005.(9)
    
    Incorporated by reference to our Quarterly Report on
    Form 10-Q
    filed August 9, 2006.(10)
    
    Incorporated by reference to our Current Report on Form 8-K
    filed December 16, 2005.
    
    The Schedules and certain of the Exhibits to this Asset Purchase
    Agreement have been omitted in reliance upon the rules of the
    Securities and Exchange Commission. A copy will be delivered to
    the Securities and Exchange Commission upon request.+
    
    Confidential treatment 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. 59




---



##### 



SIGNATURES
    ADVANCIS PHARMACEUTICAL CORPORATION
  Edward
    M. Rudnic
   President and Chief Executive Officer
      Signature

Title

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

Chairman of the Board of Directors

March 26, 2007/s/  Edward
    M. RudnicEdward
    M. Rudnic, Ph.D.

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

March 26, 2007/s/  Robert
    C. LowRobert
    C. Low

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

March 26, 2007/s/  James
    H.
    CavanaughJames
    H. Cavanaugh, Ph.D.

Director

March 26, 2007/s/  Richard
    W. DuganRichard
    W. Dugan

Director

March 26, 2007/s/  Wayne
    T.
    HockmeyerWayne
    T. Hockmeyer, Ph.D.

Director

March 26, 2007/s/  Harold
    R. WernerHarold
    R. Werner

Director

March 26, 2007  60




---



##### 



INDEX TO
    FINANCIAL STATEMENTS
  PageNumberReport of Independent Registered
    Public Accounting Firm


F-2Balance Sheets at
    December 31, 2006 and 2005


F-4Statements of Operations for the
    Years ended December 31, 2006, 2005 and 2004


F-5Statement of Changes in
    Stockholders Equity (Deficit) for the Years ended
    December 31, 2006, 2005 and 2004


F-6Statements of Cash Flows for the
    Years ended December 31, 2006, 2005 and 2004


F-7Notes to Financial Statements


F-8  F-1




---



##### 



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




---



##### 



F-3




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  BALANCE
    SHEETS  December 31,2006


2005ASSETSCurrent assets:Cash and cash equivalents

$
14,856,738


$
18,116,968Marketable securities


522,723



11,314,090Restricted cash






418,244Accounts receivable, net


303,514



756,764Notes receivable from officer






121,500Inventories, net


2,077,390



219,451Prepaid expenses and other current
    assets


1,682,685



797,253Total current assets


19,443,050



31,744,270Property and equipment, net


11,764,627



14,450,627Restricted cash


872,180



1,182,680Deposits and other assets


1,548,585



884,312Intangible assets, net


8,377,327



9,535,003Total assets

$
42,005,769


$
57,796,892LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
2,285,736


$
1,686,487Accrued expenses and advances


7,817,224



7,071,731Lines of credit and short term debt


6,888,889



895,204Note payable


75,000



Deferred product revenue


189,000



Total current liabilities


17,255,849



9,653,422Lines of credit 
    noncurrent portion






597,208Note payable






75,000Accrued severance 
    noncurrent portion






1,235,394Deferred contract revenue


11,625,000



11,625,000Deferred rent and credit on lease
    concession


1,252,900



1,268,857Total liabilities


30,133,749



24,454,881Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par
    value; 25,000,000 shares authorized, no shares issued or
    outstanding at December 31, 2006 and 2005






Common stock, $0.01 par value;
    225,000,000 shares authorized, and 36,362,447 and
    29,765,139 shares issued and outstanding at
    December 31, 2006 and 2005, respectively


363,625



297,652Capital in excess of par value


164,593,930



144,766,213Deferred stock-based compensation






(623,051
)Accumulated deficit


(153,085,462
)


(111,095,308
)Accumulated other comprehensive loss


(73
)


(3,495
)Total stockholders equity


11,872,020



33,342,011Total liabilities and
    stockholders equity

$
42,005,769


$
57,796,892    F-4




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
 STATEMENTS
    OF OPERATIONS  Year Ended December 31,2006


2005


2004Revenues:Product sales

$
4,810,410


$
4,809,222


$
2,396,500Contract revenue






4,027,778



5,347,223Reimbursement of development costs






8,010,690



3,614,309Total revenue


4,810,410



16,847,690



11,358,032Cost and expenses:Cost of product sales


899,601



562,009



169,854Research and development


25,973,844



39,729,441



33,642,930Selling, general and administrative


21,288,968



10,515,302



12,219,409Total expenses


48,162,413



50,806,752



46,032,193Loss from operations


(43,352,003
)


(33,959,062
)


(34,674,161
)Interest income


895,685



1,075,084



793,818Interest expense


(510,651
)


(120,891
)


(124,370
)Other income


976,815



16,292



Net loss

$
(41,990,154
)

$
(32,988,577
)

$
(34,004,713
)Basic and diluted net loss per
    share applicable to common stockholders

$
(1.38
)

$
(1.20
)

$
(1.50
)Shares used in calculation of
    basic and diluted net loss per share


30,535,965



27,421,516



22,684,410    F-5




---



##### 



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


TotalCapital in


Deferred





Other


StockholdersCommon


Par


Excess of


Stock-Based


Accumulated


Comprehensive


EquityShares


Value


Par Value


Compensation


Deficit


Income (Loss)


(Deficit)Balance at December 31, 2003


22,639,344


$
226,394


$
120,141,450


$
(6,126,286
)

$
(44,102,018
)

$
10,380


$
70,149,920Exercise of stock options


26,764



268



15,976















16,244Issuance of restricted stock


40,571



405



24,305















24,710Issuance and remeasurement of stock
    options for services










26,370















26,370Stock-based compensation for
    retired director










416,141



73,810











489,951Amortization of deferred
    stock-based compensation














3,296,898











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










(308,293
)


148,331











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


















(34,004,713
)






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






















(101,039
)


(101,039
)Total comprehensive loss


























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


22,706,679



227,067



120,315,949



(2,607,247
)


(78,106,731
)


(90,659
)


39,738,379Exercise of stock options


171,155



1,712



98,783















100,495Issuance of restricted stock


40,570



406



24,305















24,711Issuance and remeasurement of stock
    options for services










(123,149
)














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














1,522,554











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










(1,325,261
)


461,642











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


6,846,735



68,467



25,775,586















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


















(32,988,577
)






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






















87,164



87,164Total comprehensive loss


























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


29,765,139



297,652



144,766,213



(623,051
)


(111,095,308
)


(3,495
)


33,342,011Exercise of stock options


558,377



5,584



347,153















352,737Issuance of restricted stock


38,931



389



23,748















24,137Issuance and remeasurement of stock
    options for services










323,273















323,273Stock-based employee compensation
    expense










3,080,790















3,080,790Elimination of deferred stock-based
    compensation due to adoption of SFAS 123R










(623,051
)


623,051











Proceeds from private placement of
    common stock, net of issuance expenses


6,000,000



60,000



16,675,804















16,735,804Comprehensive income (loss):Net loss


















(41,990,154
)






(41,990,154
)Unrealized gain on marketable
    securities, net






















3,422



3,422Total comprehensive loss


























(41,986,732
)Balance at December 31, 2006


36,362,447


$
363,625


$
164,593,930


$



$
(153,085,462
)

$
(73
)

$
11,872,020    F-6




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
 STATEMENTS
    OF CASH FLOWS  Year Ended December 31,2006


2005


2004Cash flows from operating
    activities:Net loss

$
(41,990,154
)

$
(32,988,577
)

$
(34,004,713
)Adjustments to reconcile net income
    to net cash used in operating activities:Depreciation and amortization


3,919,267



4,044,419



2,714,341Stock-based compensation


3,404,063



535,786



3,653,257Deferred rent and credit on lease
    concession


(15,957
)


47,629



453,469Amortization of premium on
    marketable securities


204,525



253,483



1,297,947(Gain) or loss on disposal of fixed
    assets


23,185



(16,292
)


Recognition of advance payment for
    potential sale of Keflex


(1,000,000
)






Changes in:Accounts and notes receivable


574,751



(406,648
)


2,649,884Inventories


(1,857,939
)


(39,713
)


(179,738
)Prepaid expenses and other current
    assets


(885,432
)


247,136



83,075Deposits other than on property and
    equipment, and other assets


(30,096
)


(62,394
)


(49,142
)Accounts payable


599,249



(2,200,076
)


1,202,850Accrued expenses and advances


534,236



3,483,910



1,653,637Deferred product and contract
    revenue


189,000



2,211,532



5,038,468Net cash used in operating
    activities


(36,331,302
)


(24,889,805
)


(15,486,665
)Cash flows from investing
    activities:Purchase of Keflex intangible assets










(11,205,517
)Advance payment for potential sale
    of Keflex intangible assets






1,000,000



Purchase of marketable securities


(13,764,736
)


(15,029,229
)


(25,918,898
)Sale and maturities of marketable
    securities


24,355,000



23,205,000



32,500,364Purchases of property and equipment


(61,296
)


(1,365,088
)


(6,200,677
)Deposits on property and equipment


(489,633
)


(557,793
)


(759,638
)Proceeds from sale of fixed assets


25,000



111,163



Change in restricted cash


728,744



312,390



(136,745
)Net cash provided by (used in)
    investing activities


10,793,079



7,676,443



(11,721,111
)Cash flows from financing
    activities:Proceeds from lines of credit










1,389,396Proceeds from issuance of debt, net
    of issue costs


7,792,976







Payments on lines of credit


(2,603,524
)


(1,009,975
)


(1,252,597
)Proceeds from private placement of
    common stock, net of issuance costs


16,735,804



25,844,053



Proceeds from exercise of common
    stock options


352,737



100,495



16,244Net cash provided by financing
    activities


22,277,993



24,934,573



153,043Net increase (decrease) in cash and
    cash equivalents


(3,260,230
)


7,721,211



(27,054,733
)Cash and cash equivalents,
    beginning of period


18,116,968



10,395,757



37,450,490Cash and cash equivalents, end of
    period

$
14,856,738


$
18,116,968


$
10,395,757Supplemental disclosure of cash
    flow information:Cash paid for interest

$
386,454


$
120,891


$
127,094Supplemental disclosure of non-cash
    transactions:Reclassification of liability
    related to early exercises of restricted stock to equity upon
    vesting of the restricted stock

$
24,137


$
24,711


$
24,710Equipment and construction costs in
    accrued liabilities

$



$



$
457,189    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 revenue
 F-8




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Contract revenues
  Revenue for reimbursement of development costs
  Deferred product revenue
  Deferred contract revenue
  Research
    and Development
    Cash
    and Cash Equivalents
    Restricted
    Cash
    Marketable
    Securities
  available-for-sale. Available-for-sale
 F-9




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   Fair
    Value of Financial Instruments
    Accounts
    Receivable
    Inventories
  first-in,
  Property
    and Equipment
    Intangible
    Assets
      Impairment
    of Long-Lived Assets
  Accounting for the Impairment
    or Disposal of Long-Lived Assets,
 F-10




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Leases
    Income
    Taxes
    Comprehensive
    Income
  Reporting Comprehensive
    Income, available-for-sale
  Earnings
    Per Share
   F-11




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
     December 31,(Number of Underlying Common Shares)

2006


2005


2004Stock options


4,378,578



4,095,417



3,736,726Nonvested restricted stock


30,052



71,032



237,689Warrants


2,396,357



2,396,357



Total


6,804,987



6,562,806



3,974,415   Segment
    and Geographic Information
  Disclosure
    about Segments of an Enterprise and Related Information,
    Geographic Information

Product Sales


Long-Lived AssetsUnited States

$
4,810,410


$
10,551,686Ireland






1,212,941Total

$
4,810,410


$
11,764,627   Recent
    Accounting Pronouncements
  Share-Based
    Payment, Accounting for Stock-based
    Compensation.
  Accounting for Uncertainty
    in Income Taxes. Accounting for Income Taxes.
 F-12




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   Fair Value Measurements
  00-19-2, Accounting for Registration Payment Arrangements, Accounting for Contingencies.
  The Fair Value Option for Financial Assets and
    Financial Liabilities, Including an Amendment of FASB Statement
    No. 115 instrument-by-instrument
  3.
    Revenue    Product Sales.
  Contract Revenue.
  December 31,Contract Revenue

2006


2005


2004Upfront payment 
    GSK  amortization

$



$



$
1,145,833Upfront payment 
    GSK  acceleration upon termination










3,229,167Upfront payment 
    Par  amortization






796,783



972,223Upfront payment 
    Par  acceleration upon termination






3,230,995



Total

$



$
4,027,778


$
5,347,223     Reimbursement of Development Costs.
  December 31,Reimbursement of Development Costs

2006


2005


2004Reimbursement by Par of period
    costs incurred

$



$
5,635,690


$
3,614,309Acceleration upon termination of
    Par collaboration






2,375,000



Total

$



$
8,010,690


$
3,614,309  F-13




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Collaboration with GlaxoSmithKline (GSK).
  Collaboration with Par Pharmaceutical for Amoxicillin
    PULSYS.
       F-14




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   4.
    Marketable
    Securities    December 31, 2006Gross


GrossAmortized


Unrealized


UnrealizedAvailable-for-sale

Cost


Gains


Losses


Fair ValueMarketable securities:Corporate debt securities:-In unrealized loss position under
    12 months

$
522,796


$



$
(73
)

$
522,723   December 31, 2005Gross


GrossAmortized


Unrealized


UnrealizedAvailable-for-sale

Cost


Gains


Losses


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

$
1,988,491


$
2,173


$



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


7,820,334







(3,095
)


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


1,508,760







(2,573
)


1,506,187$
11,317,585


$
2,173


$
(5,668
)

$
11,314,090   other-than-temporarily
    5.
    Accounts
    Receivable    December 31,


December 31,2006


2005Accounts receivable for product
    sales, gross

$
520,444


$
1,109,684Allowances for discounts and
    chargebacks


(216,930
)


(352,920
)Accounts receivable for product
    sales, net

$
303,514


$
756,764    F-15




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   6.
    Inventories    December 31,


December 31,2006


2005Finished goods

$
2,371,346


$
373,818Reserve for obsolete and
    slow-moving inventory


(293,956
)


(154,367
)Inventories, net

$
2,077,390


$
219,451     7.
    Prepaids
    and Other Current Assets    December 31,


December 31,2006


2005Prepaid insurance

$
804,790


$
771,707New Drug Application filing
    fee  refundable


672,150



Other prepaid costs


205,745



25,546Prepaid expenses and other current
    assets

$
1,682,685


$
797,253     8.
    Property
    and Equipment    EstimatedUseful Life

December 31,(Years)

2006


2005Construction in progress

n/a

$
554,673


$
535,463Computer equipment

3


1,024,149



1,010,757Furniture and fixtures

3-10


1,405,918



1,405,918Equipment

3-10


9,140,957



9,197,693Shorter of
    economicLeasehold improvements

lives or
    lease term


8,738,230



8,719,668Subtotal




20,863,927



20,869,499Less  accumulated
    depreciation




(9,099,300
)


(6,418,872
)Property and equipment, net



$
11,764,627


$
14,450,627  F-16




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    9.
    Intangible
    Assets    December 31, 2006Gross Carrying


Accumulated


Net CarryingAmount


Amortization


AmountKeflex brand rights

$
10,954,272


$
(2,738,580
)

$
8,215,692Keflex non-compete agreement


251,245



(125,610
)


125,635Patents acquired


120,000



(84,000
)


36,000Intangible assets

$
11,325,517


$
(2,948,190
)

$
8,377,327   December 31, 2005Gross Carrying


Accumulated


Net CarryingAmount


Amortization


AmountKeflex brand rights

$
10,954,272


$
(1,643,148
)

$
9,311,124Keflex non-compete agreement


251,245



(75,366
)


175,879Patents acquired


120,000



(72,000
)


48,000Intangible assets

$
11,325,517


$
(1,790,514
)

$
9,535,003         Keflex brand rights

$
10,954,272Keflex non-compete agreement


251,245Total

$
11,205,517      F-17




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   10.
    Borrowings    December 31,2006


2005Merrill Lynch Capital term loan

$
6,888,889


$
Lines of credit 
    equipment lender






1,492,412Montgomery County note payable


75,000



75,000Total

$
6,963,889


$
1,567,412     Year Ending December 31,2007

$
2,741,6672008


2,666,6672009


1,555,555Total borrowings


6,963,889Less: Current portion


(6,963,889
)Noncurrent portion

$
   Merrill
    Lynch Term Loan
         F-18




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Bulletin 79-3, Subjective Acceleration Clauses in Long-Term Debt
    Agreements.
  EITF 95-22, Balance Sheet Classification of Borrowings Outstanding
    under Revolving Credit Agreements that include both a Subjective
    Acceleration Clause and a Lock-box Arrangement,
  Lines
    of Credit
    30-Day 48-month
  30-Day
 F-19




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  36-month 48-month
  Montgomery
    County Note Payable
    11.
    Accrued
    Expenses and Advances    December 31,2006


2005Research and development expenses

$
1,695,628


$
1,546,469Sales and marketing expense


1,598,437



Severance  current
    portion


1,094,375



1,870,479Bonus


1,081,503



849,078Product returns


937,044



791,282Professional fees


734,250



352,445Insurance and benefits


228,009



179,109Liability for exercised unvested
    stock options


18,632



42,770Advance payment for potential sale
    of Keflex assets






1,000,000Other expenses


429,346



440,099Total accrued expenses

$
7,817,224


$
7,071,731   Accrued
    Severance
   F-20




---



##### 



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


Selling, General &Development


AdministrativeExpense


Expense


TotalSeverance  salaries and
    benefits

$
2,847,220


$
1,126,045


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


(182,581
)


(329,907
)


(512,488
)Accrued rent for closed office
    location


105,275



35,091



140,366Total

$
2,769,914


$
831,229


$
3,601,143   December 31, 2004Research &


Selling, General &Development


AdministrativeExpense


Expense


TotalSeverance  salaries and
    benefits

$
377,757


$
119,292


$
497,049Stock-based
    compensation  forfeitures


(60,786
)


(99,176
)


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


49,397







49,397Total

$
366,368


$
20,116


$
386,484   reductions-in-force:
  December 31, 2006Beginning








EndingAccrued Severance  2006 Activity

Balance


Reversal


Cash Paid


Balance2005 Workforce reduction

$
3,105,873


$
(358,530
)

$
(1,652,966
)

$
1,094,377Current portion

$
1,870,479










$
1,094,375Noncurrent portion


1,235,394











$
3,105,873










$
1,094,375   December 31, 2005Beginning








EndingAccrued Severance  2005 Activity

Balance


Charge


Cash Paid


Balance2005 Workforce reduction

$



$
3,973,265


$
(867,392
)

$
3,105,8732004 Workforce reduction


286,515







(286,515
)


$
286,515


$
3,973,265


$
(1,153,907
)

$
3,105,873      F-21




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   Advance
    Payment for Potential Sale of Keflex Assets
    12.
    Preferred
    Stock  Undesignated    13.
    Common
    Stock      Shares Reserved
    for Future Issuance
    14.
    Private
    Placements of Common Stock  Form S-3 Form S-3
  Form S-3
 F-22




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Form S-3
  00-19-2, Accounting for Registration Payment Arrangements. 00-19, Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own
    Stock, 00-19-02, Accounting for
    Contingencies.
  EITF 00-19-02
  15.
    Stock
    Option Plan    4-year
 F-23




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
     Weighted-AverageWeighted-


Remaining


AggregateNumber of


Average


Contractual


IntrinsicOptions


Exercise Price


Term (Yrs)


ValueOutstanding, December 31, 2003


2,235,488


$
3.45Granted


1,660,550



8.00Exercised


(26,764
)


0.61Cancelled


(132,548
)


5.15Outstanding, December 31, 2004


3,736,726



5.43Granted


1,926,350



3.24Exercised


(171,155
)


0.59Cancelled


(1,396,504
)


4.89Outstanding, December 31, 2005


4,095,417



4.79Granted


1,322,870



2.24Exercised


(558,377
)


0.63Cancelled


(481,332
)


6.86Outstanding, December 31, 2006


4,378,578


$
4.30



7.9


$
5,406,124Exercisable, December 31, 2006


2,574,111


$
4.86



7.6


$
3,111,107       Number of


WeightedNonvested


Average GrantStock Options


Date Fair ValueOutstanding, December 31, 2005


2,009,729


$
4.21Granted


1,322,870



1.57Vested


(1,333,053
)


2.73Forfeited


(80,106
)


2.59Outstanding, December 31, 2006


1,919,440


$
3.48  F-24




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Options OutstandingWeighted-Average





Options ExercisableRange of

Number


Remaining


Weighted-Average


Number


Weighted-AverageExercise Prices

Outstanding


Contractual Life


Exercise Price


Exercisable


Exercise PriceDecember 31, 2006$0.35 to $0.93


673,338



7.3


$
0.77



605,966


$
0.78$1.28 to $1.79


1,219,212



8.6



1.51



432,070



1.47$2.75 to $3.59


398,152



9.2



2.98



143,904



2.79$4.05 to $5.57


819,690



8.4



4.37



397,044



4.37$8.40 to $10.00


1,268,186



7.0



9.23



995,127



9.304,378,578



7.9


$
4.30



2,574,111


$
4.86   16.
    Stock-Based
    Compensation    December 31,Stock-Based Compensation Expense:

2006


2005


2004Employees:SFAS 123R fair-value method

$
3,080,790


$



$
APB 25 intrinsic value method






658,935



3,626,887Subtotal  Employees


3,080,790



658,935



3,626,887Nonemployees:Fair value method


323,273



(123,149
)


26,370Total

$
3,404,063


$
535,786


$
3,653,257   December 31,Included in Income Statement Captions as follows:

2006


2005


2004Research and development expense

$
1,434,664


$
159,699


$
1,172,973Selling, general and
    administrative expense


1,969,399



376,087



2,480,284Total

$
3,404,063


$
535,786


$
3,653,257   Employees. Accounting for Stock Issued
    to Employees, Share-Based Payment
 F-25




---



##### 



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


2004Net loss, as reported

$
(32,988,577
)

$
(34,004,713
)Add  Stock-based
    employee compensation expense determined under the intrinsic
    value method


658,935



3,626,887Less  Stock-based
    employee compensation expense determined under the fair value
    based method


(3,298,472
)


(8,491,814
)Pro forma net loss applicable to
    common stockholders

$
(35,628,114
)

$
(38,869,640
)Net loss per share:Basic and diluted, as reported

$
(1.20
)

$
(1.50
)Basic and diluted, pro forma

$
(1.30
)

$
(1.71
)  F-26




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    December 31,2006


2005


2004Expected term (in years)


6.25



5



5Risk-free interest rate


4.57
%


3.81
%


4.09
%Volatility


75.0
%


79.6
%


80.0
%Dividend yield


0
%


0
%


0
%     Nonemployees. No. 96-18 ,
    Accounting for Equity Instruments that are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services.
  Restricted
    Stock
     F-27




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
      17.
    Income
    Taxes      December 31,2006


2005Net operating loss carryforwards

$
47,842,353


$
31,161,022Start-up
    costs


999,992



1,666,653Deferred revenue


4,704,335



4,629,075Depreciation and amortization


80,837



19,269Stock-based compensation


653,822



2,742,775Advance payment for potential sale
    of Keflex brand rights






398,200Accrued severance


300,835



1,236,789Accrued research and development,
    accrued returns and other items


1,331,236



847,868Patent costs


531,175



387,520Research and experimentation tax
    credit


6,126,272



4,941,432Deferred tax assets


62,570,857



48,030,603Valuation allowance


(62,570,857
)


(48,030,603
)Net deferred tax assets

$



$
  F-28




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2006


2005


2004U.S. federal statutory income
    tax rate


(34.0
)%


(34.0
)%


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


(5.8
)%


(5.8
)%


(4.6
)%Permanent items, primarily
    stock-based compensation


2.9
%


0.2
%


0.4
%Research and experimentation tax
    credit


(2.8
)%


(6.3
)%


(4.2
)%Change in valuation allowance


39.7
%


45.9
%


42.4
%Effective tax rate


(0.0
)%


(0.0
)%


(0.0
)%       18.  401(k)
    Savings Plan and Employee Stock Purchase Plan
      19.
    Commitments
    and Contingencies  Leases
  10-year
 F-29




---



##### 



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

Leases2007

$
2,079,4742008


2,139,2502009


2,156,2102010


2,214,3992011


2,155,021Thereafter


3,163,339Total

$
13,907,693   Royalties
    Legal
    Proceedings
     F-30




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
      20.
    Related
    Party Transactions  Loans
    to Executive Officer
    Consulting
    Arrangements
         F-31




---



##### 



ADVANCIS
    PHARMACEUTICAL CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   21.
    Quarterly
    Financial Data (Unaudited)    Net LossNet Loss


Per ShareApplicable to


Applicable toOperating





Common


CommonRevenue


Loss


Net Loss


Stockholders


StockholdersYear endedDecember 31, 2006First quarter

$
860,231


$
(8,866,141
)

$
(7,597,350
)

$
(7,597,350
)

$
(0.25
)Second quarter


336,357



(10,909,876
)


(10,725,547
)


(10,725,547
)


(0.35
)Third quarter


2,369,975



(9,876,760
)


(9,897,162
)


(9,897,162
)


(0.33
)Fourth quarter


1,243,847



(13,699,226
)


(13,770,095
)


(13,770,095
)


(0.44
)Year endedDecember 31, 2005First quarter

$
4,626,656


$
(11,518,582
)

$
(11,388,603
)

$
(11,388,603
)

$
(0.50
)Second quarter


3,200,839



(9,555,757
)


(9,312,832
)


(9,312,832
)


(0.34
)Third quarter


7,401,313



(6,169,988
)


(5,880,240
)


(5,880,240
)


(0.20
)Fourth quarter


1,618,882



(6,714,736
)


(6,406,902
)


(6,406,902
)


(0.22
)  F-32




---



##### 



SCHEDULE II
  ADVANCIS
    PHARMACEUTICAL CORPORATION
  VALUATION
    AND QUALIFYING ACCOUNTS
 Years
    Ended December 31, 2006, 2005, and 2004
  Balance at








Balance atBeginning of








End ofPeriod


Additions


Deductions (1)


PeriodAccounts receivable
    allowances:Year Ended December 31, 2006

$
352,920


$
821,165


$
(957,155
)

$
216,930Year Ended December 31, 2005

$
128,569


$
690,463


$
(466,112
)

$
352,920Year Ended December 31, 2004

$



$
200,553


$
(71,984
)

$
128,569Inventory reserves:Year Ended December 31, 2006

$
154,367


$
140,000


$
(411
)

$
293,956Year Ended December 31, 2005

$



$
154,367


$



$
154,367Year Ended December 31, 2004

$



$



$



$
Deferred tax asset valuation
    reserves:Year Ended December 31, 2006

$
48,030,603


$
14,540,254


$



$
62,570,857Year Ended December 31, 2005

$
31,870,513


$
16,160,090


$



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

$
17,448,221


$
14,422,292


$



$
31,870,513     (1)
    
    Deductions represent utilization of the allowances. For accounts
    receivable, these include the deduction by customers of prompt
    pay discounts from their payments, chargebacks made by
    wholesalers to the Company, and writeoffs of bad debts, if any.