##### 





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 1934For the fiscal year ended
    December 31, 2007ORo

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
 MIDDLEBROOK PHARMACEUTICALS,
    INC.
 (Exact name of Registrant as
    specified in its Charter)
  Delaware

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

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

20876(Zip Code)   (301) 944-6600
 (Registrants telephone
    number, including area code)
  None
 (Former name, former address and
    former
 fiscal year  if
    changed since last report)
  Securities registered pursuant to Section 12(b) of the
    Act:
 None
  Securities registered pursuant to Section 12(g) of the
    Act:
 Common Stock, par value $0.01 per share
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
    Large accelerated
    filer o

Accelerated
    filer o

Non-accelerated
    filer þ
    (Do not check if a smaller reporting company)

Smaller reporting
    company o   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Portions of MiddleBrook Pharmaceuticals, Inc.s Notice
    of Annual Stockholders Meeting and Proxy Statement, to be
    filed within 120 days after the end of the
    registrants fiscal year, are incorporated by reference
    into Part III of this Annual Report.




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##### 





MIDDLEBROOK
    PHARMACEUTICALS, INC.
    INDEXFORM 10-K
  PagePART IItem 1.


Business


1Item 1A.


Risk Factors


19Item 1B.


Unresolved Staff Comments


32Item 2.


Properties


32Item 3.


Legal Proceedings


32Item 4.


Submission of Matters to a Vote of Security Holders


33PART IIItem 5.


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


33Item 6.


Selected Financial Data


36Item 7.


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


37Item 7A.


Quantitative and Qualitative Disclosures About Market Risk


58Item 8.


Financial Statements and Supplementary Data


59Item 9.


Changes in and Disagreements with Accountants on Accounting and
    Financial Disclosure


59Item 9A.


Controls and Procedures


59Item 9B.


Other Information


60PART IIIItem 10.


Directors, Executive Officers and Corporate Governance


60Item 11.


Executive Compensation


60Item 12.


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


60Item 13.


Certain Relationships and Related Transactions, and Director
    Independence


61Item 14.


Principal Accountant Fees and Services


61PART IVItem 15.


Exhibits and Financial Statement Schedules


61Signatures


65




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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  Corporate
    Overview
  once-a-day ®
  tm
     1




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##### 



(301) 944-6600. Form 10-K. Form 10-K Legal
    Proceedings,
  Infectious
    Disease Market
      Substantial market.
  Increased resistance to existing
    therapies.
 2




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##### 



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 ®
  
    Improved bactericidal activity, or bacteria killing efficiency.
    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.   3




---



##### 



24-hour
  
  once-a-day
    Our
    Strategy
    Commercialize products with multiple
    advantages.
 4




---



##### 



Focus initially on existing antibiotics.
  Focus on first-line, broad-spectrum antibiotics for community
    infections.
  Multi-level patent strategy.
  License or acquire antibiotic products.
  Our
    Approved and Marketed Products
  Products

Key Indication(s)

Status

Marketing RightsMOXATAGtm
(amoxicillin extended-release) Tablets 
775 mg

Pharyngitis/tonsillitis

FDA-approved (January 23, 2008)

Worldwide rights (100% ownership  no royalties due to
    any third party)Keflex®
    (cephalexin capsules, USP)   250 mg,
    333 mg, 500 mg, and 750 mg

Skin and skin structure infections; upper respiratory tract
    infections

Marketing

U.S. and Puerto Rico rights (royalties to Eli Lilly and to
    Deerfield)   Our Lead
    Product:
    MOXATAGtm(amoxicillin extended-release) Tablets
  tm and/or Streptococcus pyogenes
  once-a-day
 5




---



##### 



and/or ®
    Clinical
    Development of MOXATAG
  10-day 7-day
      MOXATAG
    U.S. Market Opportunity
    and/or
   6




---



##### 



and/or
    MOXATAG
    International Market Opportunity
    Marketed
    Products  Keflex (non-PULSYS)
       7




---



##### 



once-a-day once-a-day
  Keflex
    Agreements  Deerfield Transaction
  Our
    Product Pipeline
    PULSYS Product





Targeted PULSYSCandidate/Program

Key Indication(s)

Current Therapy

Added Value

Program Status(1)Keflex (cephalexin)  Adult

Skin and skin structure infections

7-14 days, two to four times daily

10-days, once-daily, lower dose

Phase III-ready (on-hold)Amoxicillin Pediatric Pharyngitis  sprinkle

Pharyngitis/tonsillitis

10-14 days, two or three times daily

Shorter course of therapy, once-daily

Phase II-ready (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.  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 8




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##### 




    Reduced side effect profile
    Combination product with superior efficacy over either product
    alone
    Improved pediatric dosage form  and/or
  Keflex
    (Cephalexin) PULSYS
      Staphylococcus
    aureus Streptococcus pyogenes
      Amoxicillin
    Pediatric Pharyngitis Program
   9




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##### 



and/or
  Other
    Possible Pulsatile Product Candidates
    PULSYS
    Preclinical Development Programs
    
    Sinusitis
    Chronic Bronchitis
    Acute Otitis Media
    Urinary Tract Infections
    Community-acquired Methicillin Resistant Staphylococcus aureus
    (MRSA).      Patent
    and Intellectual Property Protection
   10




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##### 



Number of patents.
  Multi-level patent strategy for PULSYS. once-a-day
  Expiration dates for key patents.
  No royalties on PULSYS patents.
  Sales and
    Marketing
    and/or
     11




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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 (acquired by Reckitt Benckiser),
    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
    marketing
    adaptability to various modes of dosing. 12




---



##### 



Manufacturing
      scale-up
   13




---



##### 



Collaboration
    Agreements
    Termination
    of Our Collaboration with Par Pharmaceutical for Amoxicillin
    PULSYS
      Termination
    of the Collaboration with GlaxoSmithKline
    Collaboration
    with Par Pharmaceutical for Generic Clarithromycin
    Keflex
    Agreements  Deerfield Transaction
   14




---



##### 



First
    Closing
  ,
  Second
    Closing
    Repurchase
    Right
      Government
    Regulation
   15




---



##### 



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:
  PHASE III:
       16




---



##### 



30-months,
    30-month 30-month
 17




---



##### 



and/or
  Other
    Regulatory Constraints
    Foreign
    Regulatory Approval
       18




---



##### 



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.
        
    obtaining additional financing;
    commercializing our MOXATAG (extended-release amoxicillin)
    Tablets product, which was approved for marketing by the FDA on
    January 23, 2008;
    maintaining sales of our Keflex 750 mg product; and
    successfully developing, gaining FDA approval for, and
    commercializing other product candidates.    If we
    are unable to complete a strategic transaction, we may, if
    possible, enter into arrangements to raise additional capital
    which may dilute the ownership of our equity
    investors.
     19




---



##### 



and/or
    If we
    are unable to maintain sales of our 750 mg Keflex product,
    our liquidity will be further adversely affected.
   20




---



##### 



Our
    PULSYS technology is based on a finding that could ultimately
    prove to be incorrect, or could have limited
    applicability.
      Our
    PULSYS delivery technology may not be effective for product
    candidates other than MOXATAG, 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.
   21




---



##### 




    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 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.
     22




---



##### 




    lack of efficacy during the clinical trials;
    unforeseen safety issues;
    slower than expected rate of patient recruitment; or
    government or regulatory delays.    Although
    our MOXATAG product has been approved for commercial sale, we
    will not be successful if the product is 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.   23




---



##### 



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.
    We
    rely upon a limited number of pharmaceutical wholesalers and
    distributors, which could impact our ability to sell our Keflex
    products or MOXATAG.
    The
    potential success of our products and product candidates,
    including our Keflex 750 mg product and, our
    recently-approved MOXATAG product, will be dependent upon
    successfully pricing the products in the
    marketplace.
    Generic
    pricing plans, such as that implemented by Wal-Mart and other
    retailers, may affect the market for our products.
  and/or
  Our
    products are subject to therapeutic equivalent substitution,
    Medicaid reimbursement and price reporting.
   24




---



##### 



We are
    dependent on our contract manufacturers and suppliers to provide
    us with active pharmaceutical ingredients and finished
    products.
    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.
   25




---



##### 



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.  Collaboration Agreements
  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.
   26




---



##### 



Our
    executive officers and other key personnel are critical to our
    business and our future success depends on our ability to retain
    them.
    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.
   27




---



##### 




    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.    
    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.   28




---



##### 




    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.      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 significant influence over
    our business, and the interests of the HealthCare Ventures
    partnerships may not be consistent with the interests of our
    other stockholders.
   30




---



##### 



Deerfield
    Management may have significant influence over our ability to
    raise capital or to enter into certain major transactions, and
    Deerfields interests may not be consistent with the
    interests of our other shareholders.
      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.
     31




---



##### 



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    Item 2.
    Properties          Item 3.
    Legal
    Proceedings   32




---



##### 



Item 4.
    Submission
    of Matters to a Vote of Security Holders   PART II  Item 5.
    Market
    for Registrants Common Equity and Related Stockholder
    Matters and Issuer Purchases of Equity Securities  Market
    Information
    High


LowDecember 31, 2007:Fourth quarter

$
2.47


$
1.00Third quarter


2.62



1.71Second quarter


4.50



2.20First quarter


3.99



2.00December 31, 2006:Fourth quarter

$
5.90


$
3.23Third quarter


6.70



2.79Second quarter


3.98



2.50First quarter


3.72



1.23   Holders
   33




---



##### 



Dividends
    Recent
    Sales of Unregistered Securities
  Form S-3
 34




---



##### 



Corporate
    Performance Graph
      
  10/16/03


12/31/03


12/31/04


12/31/05


12/31/06


12/31/07MiddleBrook Pharmaceuticals


$
100.00



$
75.00



$
38.20



$
13.80



$
39.10



$
12.00Nasdaq Stock Market (U.S.)


$
100.00



$
102.66



$
111.72



$
114.10



$
125.36



$
135.93Nasdaq Pharmaceutical Index


$
100.00



$
99.75



$
106.24



$
116.99



$
114.52



$
120.43  35




---



##### 



Item 6.
    Selected
    Financial Data  Form 10-K Form 10-K
  For the Years Ended December 31,2007


2006


2005


2004


2003Statements of Operations DataTotal revenue

$
10,456,700


$
4,810,410


$
16,847,690


$
11,358,032


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


2,576,954



899,601



562,009



169,854



Research and development


21,957,708



25,973,844



39,729,441



33,642,930



16,594,629Selling, general and administrative


26,043,711



21,288,968



10,515,302



12,219,409



6,427,453Total expenses


50,578,373



48,162,413



50,806,752



46,032,193



23,022,082Loss from operations


(40,121,673
)


(43,352,003
)


(33,959,062
)


(34,674,161
)


(19,397,082
)Interest income (expense), net


(40,834
)


385,034



954,193



669,448



88,565Beneficial conversion feature  deemed interest


















(1,666,667
)Other income or (expense)


(2,249,048
)


976,815



16,292







Net loss including noncontrolling interest


(42,411,555
)


(41,990,154
)


(32,988,577
)


(34,004,713
)


(20,975,184
)Loss attributable to noncontrolling interest


162,189















Net loss applicable to common shareholders


(42,249,366
)


(41,990,154
)


(32,988,577
)


(34,004,713
)


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


















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


















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

$
(42,249,366
)

$
(41,990,154
)

$
(32,988,577
)

$
(34,004,713
)

$
(42,091,977
)Basic and diluted net loss per share

$
(0.96
)

$
(1.38
)

$
(1.20
)

$
(1.50
)

$
(7.58
)Shares used in computing net loss per share, basic and diluted


43,816,145



30,535,965



27,421,516



22,684,410



5,554,773Balance Sheet Data at Year-End:Unrestricted cash, cash equivalents and marketable securities

$
1,951,715


$
15,379,461


$
29,431,058


$
30,051,937


$
65,087,122Total assets


23,665,795



42,005,769



57,796,892



61,142,140



84,174,843Long-term debt, including current portion






6,963,889



1,567,412



2,577,387



2,440,588Noncontrolling interest


7,337,811















Accumulated deficit


(195,334,828
)


(153,085,462
)


(111,095,308
)


(78,106,731
)


(44,102,018
)Total stockholders equity (deficit)


(5,848,152
)


11,872,020



33,342,011



39,738,379



70,149,920  36




---



##### 



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 tm
  General
  Form 10-K.
  Management
    Overview of the Key Developments in 2007
    Amoxicillin
    PULSYS product development 
    MOXATAG tm approval
  
    In August 2006, we announced that our Amoxicillin PULSYS
    Phase III clinical trial for the treatment of adolescents
    and adults with acute pharyngitis
    and/or
    tonsillitis achieved its desired clinical and 37




---



##### 



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 New Drug Application (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. The FDA did not
    raise any clinical or other issues in its communication.
    We conducted a meeting with the FDA regarding our Amoxicillin
    PULSYS NDA on February 26, 2007, and obtained clarification
    on the additional information that would be required for the FDA
    to accept our NDA for filing. We resubmitted our Amoxicillin
    PULSYS NDA on March 23, 2007, and were notified that the
    NDA was accepted for filing on May 22, 2007. In the
    notification letter, we received a Prescription Drug User Fee
    Act (PDUFA) target action date of January 23, 2008.
    We received FDA approval of our NDA on January 23, 2008,
    for our once-daily Amoxicillin PULSYS product under the trade
    name
    MOXATAGtm
    (amoxicillin extended-release) Tablets for the treatment of
    adults and pediatric patients 12 years and older with
    pharyngitis
    and/or
    tonsillitis secondary to Streptococcus pyogenes (commonly
    referred to as strep throat). With the FDA approval of MOXATAG,
    physicians now have available the first once-daily product in
    the aminopenicillin class for the treatment of pharyngitis.  Marketed
    Products  Keflex Capsules (Cephalexin
    USP)
  
    In 2007, net sales of our branded Keflex product line were
    approximately $10.5 million, an increase from
    $4.8 million in 2006.
    During 2007, we continued our commercialization efforts for our
    750 mg strength of Keflex capsules through a targeted and
    dedicated national contract sales force, which currently
    consists of approximately 30 sales representatives and three
    MiddleBrook district sales managers. 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.  Investment
    Bank Retained to Explore Strategic
    Alternatives
  
    In March 2007, we announced that we had initiated a process to
    explore various strategic alternatives to further enhance
    shareholder value. Subsequent to receiving FDA approval for our
    MOXATAG product in January 2008, we announced that the strategic
    review process was ongoing and that we had retained Morgan
    Stanley as our strategic advisor to assist us in this regard.
    Strategic alternatives we may pursue could include, but are not
    limited to, continued execution of our operating plan, licensing
    or development arrangements, the sale of some or all of our
    companys assets, partnering or other collaboration
    agreements, or a merger or other strategic transaction. There
    can be no assurance that the exploration of strategic
    alternatives will result in any agreements or transactions, or
    that, if completed, any agreements or transactions will be
    successful or on attractive terms. We do not intend to disclose
    developments with respect to this process unless and until the
    evaluation of strategic alternatives has been completed.  Cost
    Reduction Initiatives for 2007
  
    During 2007, we implemented a cost reduction program including
    personnel reductions, postponement of PULSYS clinical
    development programs other than Amoxicillin PULSYS for adults
    and adolescents, and elimination of other discretionary spending
    during the year. Additionally, future development efforts for
    our PULSYS product candidates other than Amoxicillin PULSYS will
    be dependent upon our ability to secure additional capital or to
    find a partner to help fund their continued development. 38




---



##### 



Private
    Placement Transactions
  
    In April 2007, we closed a private placement transaction of
    common stock and warrants, which provided $22.4 million in
    net cash proceeds.
    Subsequent to our December 31, 2007 fiscal yearend, we
    closed a private placement transaction of common stock and
    warrants on January 28, 2008, which provided
    $19.9 million in net cash proceeds.  Agreement
    For the Sale and Repurchase Rights to Our Cephalexin
    Assets
  
    On November 8, 2007, we announced an agreement with
    Deerfield Management, a healthcare investment fund and one of
    the Companys largest equity shareholders, for the sale and
    license of certain of our cephalexin assets and intellectual
    property. Under the terms of the agreement, we raised
    $7.5 million upon closing of the transaction, and an
    additional $2.5 million was available, at our option, upon
    the approval of our MOXATAG NDA. Proceeds from the transaction
    were used to retire our outstanding debt of approximately
    $4.6 million and were also used for general corporate
    purposes. We also retained the right to repurchase all such
    assets and intellectual property at a future date. See
    Keflex Agreements  Deerfield
    Transaction, in Part I above.  Focus
    for 2008
    Critical
    Accounting Policies and Estimates
      Revenue
    Recognition
    Product Sales.
 39




---



##### 



Chargebacks and Rebates.
  Product Returns.
  Contract Revenue.
  Reimbursement of Development Costs.
  Inventories
  first-in, work-in-process
 40




---



##### 



Intangible
    Assets
  Acquired Intangible Assets.
  Impairment.
  Accrued
    Expenses
    Stock-Based
    Compensation
  Share-Based Payment
 41




---



##### 




    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 based our estimate of
    expected future volatility upon 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
    Accounting for Uncertainty in Income Taxes 
    an Interpretation of FASB Statement No. 109
 42




---



##### 



Warrants
  Accounting
    for Certain Financial Instruments with Characteristics of both
    Liabilities and Equity. Accounting for Derivative Instruments and Hedging
    Activities. EITF 00-19, Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own
    Stock.
  EITF 00-19, EITF 00-19
    Registration
    Payment Arrangements
  No. EITF 00-19-2, Accounting for Registration Payment Arrangements. No. EITF 00-19-2, Accounting for
    Contingencies.
  Consolidation
    of Variable Interest Entities
  Consolidation of Variable Interest Entities Consolidated
    Financial Statements,
 43




---



##### 



Recent
    Accounting Pronouncements
  The Fair Value
    Option for Financial Assets and Financial Liabilities
  No. 07-03, Accounting for Nonrefundable Advance Payments for Goods
    or Services to Be Used in Future Research and Development
    Activities, (EITF 07-03). EITF 07-03 EITF 07-03
  No. 07-01, Accounting for Collaborative Arrangements, (EITF 07-01). EITF 07-01
 44




---



##### 



EITF 07-01 EITF 07-01
  Business Combinations
  Noncontrolling Interests in Consolidated Financial
    Statements, an amendment of ARB No. 51,
  Fair Value Measurements,
  Research
    and Development Expenses
   45




---



##### 



Summary of Product Development
    Initiatives.
  Our Product Pipeline
  Total ExpenseIncurred FromInception(January 1, 2000)


ClinicalYear Ended December 31,


to December 31,


Development2007


2006


2005


2007


PhaseDirect Project Costs(1)Amoxicillin PULSYS(2)

$
10,615,000


$
12,354,000


$
24,294,000


$
71,099,000


NDA approvedKeflex Product Development(3)


3,324,000



5,424,000



5,360,000



14,330,000


Phase III-ready
    (on hold)Generic Clarithromycin(4)










79,000



15,579,000


DiscontinuedOther Product Candidates


147,000



863,000



1,289,000



16,255,000


PreclinicalTotal Direct Project Costs


14,086,000



18,641,000



31,022,000



117,263,000Indirect Project Costs(1)Facility


3,468,000



3,136,000



3,603,000



15,569,000Depreciation


2,854,000



2,441,000



2,610,000



11,173,000Other Indirect Overhead


1,550,000



1,756,000



2,494,000



11,177,000Total Indirect Expense


7,872,000



7,333,000



8,707,000



37,919,000Total Research & Development Expense

$
21,958,000


$
25,974,000


$
39,729,000


$
155,182,000     (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 January 23, 2008, we received approval for marketing
    from the FDA of our Amoxicillin PULSYS adult product, with the
    trade name MOXATAG. See Our Lead Product: MOXATAG
    (amoxicillin extended-release) Tabletsabove for
    clinical development background. 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.
    Our amoxicillin pediatric sprinkle product is ready for
    Phase II clinical trials. See Amoxicillin
    Pediatric Pharyngitis Program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
   46




---



##### 



Results
    of Operations
  Fiscal
    Year Ended December 31, 2007 Compared to Fiscal Year Ended
    December 31, 2006
  Revenues.
  Product Sale Revenues:

2007


2006Keflex 750mg capsules

$
7,717,000


$
2,680,000Keflex 250mg and 500mg capsules


2,740,000



2,130,000Total

$
10,457,000


$
4,810,000     Cost of Product Sales.
  Cost of Product Sales:

2007


2006Product manufacturing costs

$
903,000


$
459,000Obsolescence provisions


864,000



140,000Royalty to Lilly


810,000



301,000$
2,577,000


$
900,000     Research and Development Expenses.
 47




---



##### 



Year Ended December 31,Research and Development Expenses

2007


2006Direct project costs:Personnel, benefits and related costs

$
6,766,000


$
6,252,000Stock-based compensation


718,000



1,435,000Consultants, supplies, materials and other direct costs


6,530,000



4,916,000Clinical studies


72,000



6,038,000Total direct costs


14,086,000



18,641,000Indirect project costs


7,872,000



7,333,000Total

$
21,958,000


$
25,974,000         Selling, General and Administrative
    Expenses.
  Year Ended December 31,2007


2006Salaries, benefits and related costs

$
3,284,000


$
2,710,000Severance costs


534,000



(359,000
)Stock-based compensation


1,213,000



1,970,000Legal and consulting expenses


2,212,000



2,142,000Other expenses


6,526,000



6,175,000Marketing costs


4,746,000



3,786,000Contract sales expenses


7,529,000



4,865,000Total

$
26,044,000


$
21,289,000        48




---



##### 



Net Interest Income (Expense).
    Year Ended December 31,2007


2006Interest income

$
543,000


$
896,000Interest expense


(584,000
)


(511,000
)Total, net

$
(41,000
)

$
385,000   Warrant expense.
  Other Income.
    Noncontrolling Interest.
  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    49




---



##### 



Cost of Product Sales.
  Research and Development Expenses.
    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      50




---



##### 



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               Net Interest Income (Expense).
  51




---



##### 



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.
  Liquidity
    and Capital Resources
      Cash
    and Marketable Securities
    As of December 31,2007


2006Cash and cash equivalents

$
1,952,000


$
14,857,000Marketable securities






522,000Total

$
1,952,000


$
15,379,000    52




---



##### 



Cash
    Flow
    Year Ended December 31,2007


2006


2005Net cash used in operating activities

$
(35,261,000
)

$
(36,331,000
)

$
(24,890,000
)Net cash provided by (used in) investing activities


(834,000
)


10,793,000



7,676,000Net cash provided by financing activities


23,190,000



22,278,000



24,935,000Net increase (decrease) in cash and cash equivalents

$
(12,905,000
)

$
(3,260,000
)

$
7,721,000   Operating
    Activities
    Year Ended December 31,Operating Activities

2007


2006


2005Cash receipts:Cash received from product sales

$
10,707,000


$
6,120,000


$
5,159,000Cash received from collaboration partners










14,250,000Interest income received and other


785,000



1,568,000



1,622,000Total cash receipts


11,492,000



7,688,000



21,031,000Cash disbursements:Cash paid for employee compensation and benefits


11,260,000



9,969,000



11,432,000Cash paid to vendors, suppliers, and other


35,493,000



34,050,000



34,489,000Total cash disbursements


46,753,000



44,019,000



45,921,000Net cash used in operating activities

$
(35,261,000
)

$
(36,331,000
)

$
(24,890,000
)    53




---



##### 



Investing
    Activities
    Year Ended December 31,Investing Activities

2007


2006


2005Cash receipts:Sale of marketable securities, net of purchases

$
563,000


$
10,590,000


$
8,176,000Advance payment received for potential sale of Keflex










1,000,000Sale of fixed assets, restricted cash and other






754,000



423,000Total cash receipts


563,000



11,344,000



9,599,000Cash disbursements:Property and equipment purchases and deposits


1,397,000



551,000



1,923,000Net cash provided by (used in) investing activities

$
(834,000
)

$
10,793,000


$
7,676,000       agreement-in-principle
  Financing
    Activities
    Year Ended December 31,Financing Activities

2007


2006


2005Cash receipts:Cash received from private placement

$
22,412,000


$
16,736,000


$
25,844,000Cash received from term debt






7,793,000



Cash received from Deerfield


7,500,000







Cash received from exercise of stock options


167,000



353,000



101,000Total cash receipts


30,079,000



24,882,000



25,945,000Cash disbursements:Cash paid for debt


6,889,000



2,604,000



1,010,000Total cash disbursements


6,889,000



2,604,000



1,010,000Net cash provided by financing activities

$
23,190,000


$
22,278,000


$
24,935,000    54




---



##### 



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

Total


2008


2009


2010


2011


2012


2012(In thousands)Minimum purchase commitments(3)

$
1,244


$
1,244


$



$



$



$



$
Minimum royalty commitment(4)


800



800



















Operating lease obligations


11,828



2,139



2,156



2,214



2,155



2,220



944Total contractual cash obligations

$
13,872


$
4,183


$
2,156


$
2,214


$
2,155


$
2,220


$
944Other commercial commitments(5)

$
10,486


$
8,239


$
2,247


$



$



$



$
     (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 55




---



##### 



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)
    
    In the event we were to terminate our Innovex sales contract, we
    would incur minimum costs to exit of approximately
    $1.2 million. The remaining purchase commitments include
    costs of our product manufacturing capability under development
    in Ireland and Puerto Rico.(4)
    
    Effective November 7, 2007, we pay consignment payments and
    royalties to Deerfield at 20% of net Keflex revenues, with
    a minimum combined quarterly payment of $400,000. The combined
    20% rate declines to 15% if we elect to make an extension
    payment, as defined in the agreements with Deerfield, of
    $1.35 million ($1.8 million if a second closing has
    occurred) to Deerfield by June 30, 2008. The related
    agreements expire June 30, 2008, unless extension payments
    are made, at the Companys option, to extend the expiration
    dates of the repurchase rights.(5)
    
    In addition to the minimum purchase commitments required under
    our contracts, we expect to incur additional amounts under the
    contractual arrangement. These amounts represent the remaining
    contractual amount due over the remaining Innovex contract term,
    for on on-going commercialization efforts related to MOXATAG,
    and for manufacturing and research related to our Keflex
    products,    Off-Balance
    Sheet Arrangements
      Prospective
    Information  Risks and Uncertainties related to Our
    Future Capital Requirements
     56




---



##### 



scale-up
     57




---



##### 



Safe
    Harbor Statement under the Private Securities Litigation Reform
    Act of 1995
    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk  Market
    Risk
   58




---



##### 



Fair
    Value of Warrants (Derivative Liabilities)
    Increase (Decrease) inFair Value of Derivative10% increase in stock price

$
270,00020% increase in stock price

$
570,00020% increase in risk-free interest rate

$
30,00010% decrease in stock price

$
(300,000
)20% decrease in stock price

$
(570,000
)20% decrease in risk-free interest rate

$
(30,000
)     Inflation
    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
  Form 10-K
 59




---



##### 



Changes
    in Internal Control over Financial Reporting during the
    Quarter
    Managements
    Report on Internal Controls over Financial Reporting
  Rule 13a-15(f)
    Internal
    Control  Integrated Framework
  Item 9B.
    Other
    Information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters   60




---



##### 



Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   PART IV  Item 15.
    Exhibits,
    Financial Statements Schedule, and Reports on
    Form 8-K    Index to Financial Statements
  PageNumberReport of Independent Registered Public Accounting Firm


F-2Consolidated Balance Sheets at December 31, 2007 and 2006


F-3Consolidated Statements of Operations for the Years Ended
    December 31, 2007, 2006 and 2005


F-4Consolidated Statement of Changes in Stockholders Equity
    (Deficit) for the Years Ended December 31, 2007, 2006 and
    2005


F-5Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2007, 2006 and 2005


F-6Notes to Consolidated Financial Statements


F-7   Financial Statement Schedule
  Form 10-K:
    Exhibits
  Exhibit No.2
.1(3)+

Asset Purchase Agreement dated as of June 30, 2004, by and
    between the Registrant and Eli Lilly and Company2
.2(15)

Asset Purchase Agreement, dated November 7, 2007, by and
    between the Registrant and Kef Pharmaceuticals, Inc.2
.3(15)

Asset Purchase Agreement, dated November 7, 2007, by and
    between the Registrant and Lex Pharmaceuticals, Inc.3
.1(1)

Certificate of Incorporation3
.2(1)

Bylaws3
.3(13)

Certificate of Ownership and Merger Merging MiddleBrook
    Pharmaceuticals, Inc. Into Advancis Pharmaceutical Corporation4
.1(1)

Specimen Stock Certificate4
.2(10)

Form of Registration Rights Agreement dated April 9, 20074
.3(15)

Form of Warrant of the Registrant4
.4(15)

Registration Rights Agreement, dated November 7, 2007, by
    and among the Registrant, Deerfield Private Design International
    Fund, L.P., Deerfield Special Situations Fund, L.P., Deerfield
    Special Situation International Limited and Deerfield Private
    Design Fund, L.P.4
.5(17)

Form of Registration Rights Agreement dated January 24, 20084
.6(17)

Form of Warrant Agreement dated January 28, 2008 61




---



##### 



Exhibit No.10
.1(1)

Executive Employment Agreement between the Registrant and Edward
    M. Rudnic dated January 7, 200010
.2(1)

Executive Employment Agreement between the Registrant and Sandra
    E. Wassink dated August 13, 200310
.3(1)

Executive Employment Agreement between the Registrant and Beth
    A. Burnside dated August 13, 200310
.4(1)

Executive Employment Agreement between the Registrant and Darren
    Buchwald dated September 1, 200310
.5(4)

Executive Employment Agreement between the Registrant and Donald
    Treacy dated March 19, 200410
.6(8)

Executive Employment Agreement between the Registrant and Robert
    C. Low dated December 12, 200510
.7(1)

Form of Indemnification Agreement10
.8(1)

Stock Incentive Plan10
.9(1)

Form of Incentive Stock Option Agreement10
.10(1)

Form of Non-qualified Stock Option Agreement10
.11(1)

Form of Stock Restriction Agreement10
.12(2)

Employee Stock Purchase Plan10
.13(1)

Form of Employment Agreement on Ideas, Inventions and
    Confidential Information10
.14(1)

Construction Services Agreement between the Registrant and
    Barclay White Skanska, Inc. dated July 12, 200210
.15(1)

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(1)

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(1)

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

Fourth Amended and Restated Stockholders Agreement10
.19(1)

Omnibus Addendum and Amendment to Series E Convertible
    Preferred Stock Purchase Agreement and Fourth Amended and
    Restated Stockholders Agreement10
.20(1)+

Supply, Distribution and Marketing Agreement between the
    Registrant and Par Pharmaceutical, Inc. dated
    September 4, 200310
.21(3)+

Manufacturing Agreement dated as of June 30, 2004, by and
    between the Registrant and Eli Lilly and Company10
.22(3)+

Transition Services Agreement dated as of June 30, 2004, by
    and between the Registrant and Eli Lilly and Company10
.23(4)+

Development and Commercialization Agreement between the
    Registrant and Par Pharmaceutical, Inc. dated May 28,
    200410
.24(5)+

Commercial Supply Agreement between the Registrant and Ceph
    International Corporation dated December 3, 200410
.25(5)+

First Amendment to Development and Commercialization Agreement
    between the Registrant and Par Pharmaceutical Corporation
    dated December 14, 200410
.26(7)+

Manufacturing and Supply Agreement between the Registrant and
    Clonmel Healthcare Limited, dated as of April 19, 200510
.27(7)+

Development and Clinical Manufacturing Agreement between the
    Registrant and Clonmel Healthcare Limited, dated as of
    April 19, 2005 62




---



##### 



Exhibit No.10
.28(7)+

Facility Build-Out Agreement between the Registrant and Clonmel
    Healthcare Limited, dated as of April 19, 200510
.29(6)+

Form of Purchase Agreement dated April 26, 2005, including
    the form of Warrant attached thereto10
.30(9)

Credit and Security Agreement, dated June 30, 2006 between
    the Registrant and Merrill Lynch Capital10
.31(10)

Securities Purchase Agreement dated April 9, 2007,
    including the form of Warrant attached thereto10
.32(11)

Letter Agreement, dated May 9, 2007, between the Registrant
    and Merrill Lynch Capital, a division of Merrill Lynch Business
    Financial Services, Inc.10
.33(12)

Form of Amendment to the Form of Incentive Stock Option Agreement10
.34(12)

Form of Amendment to the Form of Non-Qualified Stock Option
    Agreement10
.35(14)

Letter Agreement, dated August 14, 2007, between the
    Registrant and Merrill Lynch Capital, a division of Merrill
    Lynch Business Financial Services, Inc.10
.36(15)

Stock Purchase Agreement, dated November 7, 2007, by and
    among Deerfield Private Design International Fund, L.P.,
    Deerfield Special Situations Fund, L.P., Deerfield Special
    Situation International Limited, Deerfield Private Design Fund,
    L.P., Deerfield Management, L.P., Kef Pharmaceuticals, Inc. and
    the Registrant10
.37(15)

Stock Purchase Agreement, dated November 7, 2007, by and
    among Deerfield Private Design International Fund, L.P.,
    Deerfield Special Situations Fund, L.P., Deerfield Special
    Situation International Limited, Deerfield Private Design Fund,
    L.P., Deerfield Management, L.P., Lex Pharmaceuticals, Inc. and
    the Registrant10
.38(15)

Inventory Consignment Agreement, dated November 7, 2007, by
    and between the Registrant and Kef Pharmaceuticals, Inc.10
.39(15)

Registration and Trademark License Agreement, dated
    November 7, 2007, by and between the Registrant and Lex
    Pharmaceuticals, Inc.10
.40(15)

Form of Patent License Agreement, by and between the Registrant
    and Kef Pharmaceuticals, Inc.10
.41(15)

Form of Patent Sublicense Agreement, by and between the
    Registrant and Kef Pharmaceuticals, Inc.10
.42(15)

Regulatory Responsibility Agreement, dated November 7,
    2007, by and between the Registrant and Lex Pharmaceuticals, Inc.10
.43(15)

Keflex Products Transition Agreement, dated November 7,
    2007, by and between the Registrant and Kef Pharmaceuticals, Inc.10
.44(15)

Contingent Manufacturing Assignment, dated November 7,
    2007, by and between the Registrant and Lex Pharmaceuticals, Inc.10
.45(16)

First Amendment to Executive Employment Agreement Amendment
    between the Registrant and Edward M. Rudnic, dated
    November 19, 200710
.46(16)

Second Amendment to Executive Employment Agreement Amendment
    between the Registrant and Robert C. Low, dated
    November 19, 200710
.47(16)

Second Amendment to Executive Employment Agreement Amendment
    between the Registrant and Darren Buchwald, dated
    November 19, 200710
.48(16)

Second Amendment to Executive Employment Agreement Amendment
    between the Registrant and Beth A. Burnside, dated
    November 19, 200710
.49(16)

Second Amendment to Executive Employment Agreement Amendment
    between the Registrant and Donald Treacy, dated
    November 19, 200710
.50(16)

Second Amendment to Executive Employment Agreement Amendment
    between the Registrant and Sandra E. Wassink, dated
    November 19, 200710
.51(17)

Form of Purchase Agreement dated January 24, 200823
.1

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

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

Rule 13a-14(a)
    Certification of Principal Financial Officer 63




---



##### 



Exhibit No.32
.1

Section 1350 Certification of Chief Executive Officer32
.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 Current Report on
    Form 8-K
    filed July 15, 2004.(4)
    
    Incorporated by reference to our Quarterly Report on
    Form 10-Q
    filed August 6, 2004.(5)
    
    Incorporated by reference to our Annual Report on
    Form 10-K
    filed March 10, 2005.(6)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    dated April 27, 2005.(7)
    
    Incorporated by reference to our Quarterly Report on
    Form 10-Q
    filed August 15, 2005.(8)
    
    Incorporated by reference to our Annual Report on
    Form 10-K
    filed March 29, 2006.(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 April 13, 2007.(11)
    
    Incorporated by reference to our Quarterly Report on
    Form 10-Q
    filed May 11, 2007.(12)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed May 22, 2007.(13)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed June 28, 2007.(14)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed August 20, 2007.(15)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed November 13, 2007.(16)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed November 26, 2007.(17)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed January 30, 2008.
    
    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. 64




---



##### 



SIGNATURES    MIDDLEBROOK PHARMACEUTICALS, INC.
  By:
    /s/  Edward
    M. Rudnic         Signature

Title

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

Chairman of the Board of Directors

March 25, 2008/s/  Edward
    M. RudnicEdward
    M. Rudnic, Ph.D.

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

March 25, 2008/s/  Robert
    C. LowRobert
    C. Low

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

March 25, 2008/s/  James
    H. CavanaughJames
    H. Cavanaugh, Ph.D.

Director

March 25, 2008/s/  Richard
    W. DuganRichard
    W. Dugan

Director

March 25, 2008/s/  Wayne
    T. HockmeyerWayne
    T. Hockmeyer, Ph.D.

Director

March 25, 2008/s/  Martin
    A. VogelbaumMartin
    A. Vogelbaum

Director

March 25, 2008/s/  Harold
    R. WernerHarold
    R. Werner

Director

March 25, 2008  65




---



##### 



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


F-2Consolidated Balance Sheets at December 31, 2007 and 2006


F-3Consolidated Statements of Operations for the Years ended
    December 31, 2007, 2006 and 2005


F-4Consolidated Statement of Changes in Stockholders Equity
    (Deficit) for the Years ended December 31, 2007, 2006 and
    2005


F-5Consolidated Statements of Cash Flows for the Years ended
    December 31, 2007, 2006 and 2005


F-6Notes to Consolidated Financial Statements


F-7  F-1




---



##### 



Report of
    Independent Registered Public Accounting Firm     Internal Control  Integrated
    Framework
            F-2




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2007


2006ASSETSCurrent assets:Cash and cash equivalents

$
1,951,715


$
14,856,738Marketable securities






522,723Accounts receivable, net


687,787



303,514Inventories, net


687,933



2,077,390Prepaid expenses and other current assets


1,142,905



1,682,685Total current assets


4,470,340



19,443,050Property and equipment, net


10,928,659



11,764,627Restricted cash


872,180



872,180Deposits and other assets


174,965



1,548,585Intangible assets, net


7,219,651



8,377,327Total assets

$
23,665,795


$
42,005,769LIABILITIES, NONCONTROLLING INTEREST AND STOCKHOLDERS
    EQUITY (DEFICIT)Current liabilities:Accounts payable

$
1,659,752


$
2,285,736Accrued expenses and advances


5,613,544



7,817,224Lines of credit and short term debt






6,888,889Note payable






75,000Deferred product revenue






189,000Total current liabilities


7,273,296



17,255,849Warrant liability


2,100,000



Deferred contract revenue


11,625,000



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


1,177,840



1,252,900Total liabilities


22,176,136



30,133,749Noncontrolling interest


7,337,811



Commitments and contingenciesStockholders equity (deficit):Preferred stock, $0.01 par value; 25,000,000 shares
    authorized, no shares issued or outstanding at December 31,
    2007 and 2006






Common stock, $0.01 par value; 225,000,000 shares
    authorized, and 46,748,748 and 36,362,447 shares issued and
    outstanding at December 31, 2007 and 2006, respectively


467,488



363,625Capital in excess of par value


189,019,188



164,593,930Accumulated deficit


(195,334,828
)


(153,085,462
)Accumulated other comprehensive loss






(73
)Total stockholders equity (deficit)


(5,848,152
)


11,872,020Total liabilities, noncontrolling interest and
    stockholders equity (deficit)

$
23,665,795


$
42,005,769    F-3




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
  Year Ended December 31,2007


2006


2005Revenues:Product sales

$
10,456,700


$
4,810,410


$
4,809,222Contract revenue










4,027,778Reimbursement of development costs










8,010,690Total revenue


10,456,700



4,810,410



16,847,690Cost and expenses:Cost of product sales


2,576,954



899,601



562,009Research and development


21,957,708



25,973,844



39,729,441Selling, general and administrative


26,043,711



21,288,968



10,515,302Total expenses


50,578,373



48,162,413



50,806,752Loss from operations


(40,121,673
)


(43,352,003
)


(33,959,062
)Interest income


543,442



895,685



1,075,084Interest expense


(584,276
)


(510,651
)


(120,891
)Early extinguishment of debt


(224,048
)






Warrant expense


(2,100,000
)






Other income


75,000



976,815



16,292Loss including noncontrolling interest

$
(42,411,555
)

$
(41,990,154
)

$
(32,988,577
)Loss attributable to noncontrolling interest


162,189







Net loss

$
(42,249,366
)

$
(41,990,154
)

$
(32,988,577
)Basic and diluted net loss per share applicable to common
    stockholders

$
(0.96
)

$
(1.38
)

$
(1.20
)Shares used in calculation of basic and diluted net loss per
    share


43,816,145



30,535,965



27,421,516    F-4




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  CONSOLIDATED
    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, 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
)


11,872,020Exercise of stock options


201,249



2,013



164,777















166,790Vesting of unvested restricted stock


30,052



300



18,332















18,632Issuance and remeasurement of stock options for services










16,594















16,594Stock-based employee compensation expense










1,914,845















1,914,845Proceeds from private placement of common stock and warrants,
    net of issuance expenses


10,155,000



101,550



22,310,710















22,412,260Comprehensive income (loss):Net loss


















(42,249,366
)






(42,249,366
)Unrealized gain on marketable securities, net






















73



73Total comprehensive loss


























(42,249,293
)Balance at December 31, 2007


46,748,748


$
467,488


$
189,019,188


$
0


$
(195,334,828
)

$
0


$
(5,848,152
)    F-5




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Year Ended December 31,2007


2006


2005Cash flows from operating activities:Net loss

$
(42,249,366
)

$
(41,990,154
)

$
(32,988,577
)Adjustments to reconcile net income to net cash used in
    operating activities:Loss attributed to non-controlling interest


(162,189
)






Depreciation and amortization


4,460,069



3,919,267



4,044,419Warrant liability


2,100,000







Stock-based compensation


1,931,439



3,404,063



535,786Deferred rent and credit on lease concession


(75,060
)


(15,957
)


47,629Amortization of premium on marketable securities


(39,687
)


204,525



253,483(Gain) or loss on disposal of fixed assets






23,185



(16,292
)Advance payment for sale of Keflex






(1,000,000
)


Changes in:Accounts receivable


(384,273
)


574,751



(406,648
)Inventories


1,389,457



(1,857,939
)


(39,713
)Prepaid expenses and other current assets


539,780



(885,432
)


247,136Deposits other than on property and equipment, and other assets


304,151



(30,096
)


(62,394
)Accounts payable


(625,984
)


599,249



(2,200,076
)Accrued expenses and advances


(2,260,048
)


534,236



3,483,910Deferred product and contract revenue


(189,000
)


189,000



2,211,532Net cash used in operating activities


(35,260,711
)


(36,331,302
)


(24,889,805
)Cash flows from investing activities:Advance payment for potential sale of Keflex intangible assets










1,000,000Purchase of marketable securities


(5,867,519
)


(13,764,736
)


(15,029,229
)Sale and maturities of marketable securities


6,430,000



24,355,000



23,205,000Purchases of property and equipment


(1,396,954
)


(550,929
)


(1,922,881
)Proceeds from sale of fixed assets






25,000



111,163Change in restricted cash






728,744



312,390Net cash provided by (used in) investing activities


(834,473
)


10,793,079



7,676,443Cash flows from financing activities:Proceeds from private placement of common stock and warrants,
    net of issuance costs


22,412,260



16,735,804



25,844,053Proceeds from purchase of noncontrolling interest


7,500,000







Proceeds from issuance of debt, net of issue costs






7,792,976



Payments on lines of credit


(6,888,889
)


(2,603,524
)


(1,009,975
)Proceeds from exercise of common stock options


166,790



352,737



100,495Net cash provided by financing activities


23,190,161



22,277,993



24,934,573Net increase (decrease) in cash and cash equivalents


(12,905,023
)


(3,260,230
)


7,721,211Cash and cash equivalents, beginning of period


14,856,738



18,116,968



10,395,757Cash and cash equivalents, end of period

$
1,951,715


$
14,856,738


$
18,116,968Supplemental disclosure of cash flow information:Cash paid for interest

$
566,726


$
386,454


$
120,891Supplemental disclosure of non-cash transactions:Reclassification of liability related to early exercises of
    restricted stock to equity upon vesting of the restricted stock

$
18,632


$
24,137


$
24,711Warrants issued

$
2,580,000


$



$
    F-6




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  1.
    Nature of
    the Business  once-a-day ® tm
   F-7




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  2.
    Summary
    of Significant Accounting Policies  Basis
    of Presentation
  Consolidation of Variable
    Interest Entities Noncontrolling Interest 
    Deerfield Transaction
  Use of
    Estimates
    Revenue
    Recognition
  Product sales revenue
  Deferred product revenue
  Contract revenues
  Deferred contract revenue Note 3 
    Revenue
 F-8




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Research
    and Development
    Cash
    and Cash Equivalents
    Restricted
    Cash
    Marketable
    Securities
    Fair
    Value of Financial Instruments
    Accounts
    Receivable
    Inventories
  first-in,
 F-9




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Basis of Presentation,
  Property
    and Equipment
    Intangible
    Assets
  Basis of Presentation,
    Impairment
    of Long-Lived Assets
  Accounting for the Impairment
    or Disposal of Long-Lived Assets,
  Leases
   F-10




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Income
    Taxes
    Warrant
    Liabilities
  Accounting for Certain
    Financial Instruments with Characteristics of both Liabilities
    and Equity. Accounting for Derivative Instruments and Hedging
    Activities EITF 00-19, Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own
    Stock.
  Registration
    Payment Arrangements
  No. EITF 00-19-2, Accounting for Registration Payment Arrangements. No. EITF 00-19-2, Accounting for
    Contingencies.
  Comprehensive
    Income
  Reporting Comprehensive
    Income,
 F-11




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Earnings
    Per Share
      December 31,(Number of Underlying Common Shares)

2007


2006


2005Stock options


4,774,206



4,378,578



4,095,417Nonvested restricted stock






30,052



71,032Warrants


13,012,607



2,396,357



2,396,357Total


17,786,813



6,804,987



6,562,806   Segment
    and Geographic Information
  Disclosure
    about Segments of an Enterprise and Related Information,
    Long-LivedGeographic Information

Product Sales


AssetsUnited States

$
10,456,700


$
8,415,184Ireland






2,513,475Total

$
10,456,700


$
10,928,659   Recent
    Accounting Pronouncements
  The Fair Value
    Option for Financial Assets and Financial Liabilities
 F-12




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    No. 07-03, Accounting for Nonrefundable Advance Payments for Goods
    or Services to Be Used in Future Research and Development
    Activities, (EITF 07-03). EITF 07-03 EITF 07-03
  No. 07-01, Accounting for Collaborative Arrangements, (EITF 07-01). EITF 07-01 EITF 07-01 EITF 07-01
  Business Combinations
  Noncontrolling Interests in Consolidated Financial
    Statements, an amendment of ARB No. 51,
  ,
    Fair Value Measurements,
 F-13




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    3.
    Revenue    Product Sales.
  Contract Revenue.
  December 31,Contract Revenue

2007


2006


2005Upfront payment  Par  amortization

$



$



$
796,783Upfront payment  Par  acceleration upon
    termination










3,230,995Total

$



$



$
4,027,778     Reimbursement of Development Costs.
  December 31,Reimbursement of Development Costs

2006


2006


2005Reimbursement by Par of period costs incurred

$



$



$
5,635,690Acceleration upon termination of Par collaboration










2,375,000Total

$



$



$
8,010,690   Collaboration with Par Pharmaceutical for Amoxicillin
    PULSYS.
   F-14




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
        4.
    Marketable
    Securities      December 31, 2006Gross


GrossAmortized


Unrealized


Unrealized


FairAvailable-for-Sale

Cost


Gains


Losses


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

$
522,796


$



$
(73
)

$
522,723     5.
    Accounts
    Receivable    December 31,2007


2006Accounts receivable for product sales, gross

$
1,290,630


$
520,444Allowances for discounts, chargebacks and rebates


(602,843
)


(216,930
)Accounts receivable for product sales, net

$
687,787


$
303,514  F-15




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    6.
    Inventories    December 31,2007


2006Finished goods

$
1,692,334


$
2,371,346Reserve for obsolete and slow-moving inventory


(1,004,401
)


(293,956
)Inventories, net

$
687,933


$
2,077,390     Basis of
    Presentation,
  7.
    Prepaids
    and Other Current Assets    December 31,2007


2006Prepaid insurance

$
836,334


$
804,790New Drug Application filing fee  refundable






672,150Other prepaid costs


306,571



205,745Prepaid expenses and other current assets

$
1,142,905


$
1,682,685    F-16




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  8.
    Property
    and Equipment    Estimated Useful Life

December 31,(Years)

2007


2006Construction in progress

n/a

$
46,752


$
554,673Computer equipment

3


1,038,543



1,024,149Furniture and fixtures

3-10


1,405,918



1,405,918Equipment

3-10


11,401,691



9,140,957Shorter of economic lifeLeasehold improvements

or lease term


9,292,903



8,738,230Subtotal




23,185,807



20,863,927Less  accumulated depreciation




(12,257,148
)


(9,099,300
)Property and equipment, net



$
10,928,659


$
11,764,627       9.
    Intangible
    Assets    December 31, 2007Gross Carrying


Accumulated


Net CarryingAmount


Amortization


AmountKeflex brand rights

$
10,954,272


$
(3,834,012
)

$
7,120,260Keflex non-compete agreement


251,245



(175,854
)

$
75,391Patents acquired


120,000



(96,000
)

$
24,000Intangible assets

$
11,325,517


$
(4,105,866
)

$
7,219,651   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    F-17




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
          Basis of
    Presentation,
  10.
    Borrowings    December 31,2007


2006Merrill Lynch Capital term loan

$



$
6,888,889Montgomery County note payable






75,000Total

$



$
6,963,889   Merrill
    Lynch Capital Term Loan
  Noncontrolling Interest  Deerfield
    Transaction.
   F-18




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Montgomery
    County Note Payable
    11.
    Accrued
    Expenses and Advances    December 31,2007


2006Product returns

$
1,414,507


$
937,044Bonus


1,255,357



1,081,503Research and development expenses


731,273



1,695,628Accrued loss on leased facility


589,587



Professional fees


475,392



734,250Insurance and benefits


240,577



228,009Product royalties


231,211



102,414Severance  current portion


190,317



1,094,375Sales and marketing expense


127,890



1,598,437Liability for exercised unvested stock options






18,632Other expenses


357,433



326,932Total accrued expenses

$
5,613,544


$
7,817,224   Accrued
    Severance
   F-19




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Expense forYear Ended December 31, 2007Research &


Selling, General &Development


AdministrativeExpense


Expense


TotalSeverance  salaries and benefits

$



$
533,696


$
533,696Stock-based compensation  forfeitures






(19,229
)


(19,229
)Total

$



$
514,467


$
514,467   Expense forYear Ended 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   reductions-in-force:
  December 31, 2007Beginning








EndingAccrued Severance  2007 Activity

Balance


Charge


Cash Paid


Balance2007 Workforce reduction

$



$
533,696


$
(343,379
)

$
190,3172005 Workforce reduction

$
1,094,375







(1,094,375
)

$
$
1,094,375


$
533,696


$
(1,437,754
)

$
190,317Current portion

$
1,094,375










$
190,317   December 31, 2006Beginning








EndingAccrued Severance  2006 Activity

Balance


Reversal


Cash Paid


Balance2005 Workforce reduction

$
3,105,873


$
(358,530
)

$
(1,652,968
)

$
1,094,375Current portion

$
1,870,479










$
1,094,375Noncurrent portion


1,235,394











$
3,105,873










$
1,094,375    F-20




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Advance
    Payment for Potential Sale of Keflex Assets
    12.
    Warrant
    Liability  EITF 00-19, Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own
    Stock,
    13.
    Noncontrolling
    Interest  Deerfield Transaction    First
    Closing
   F-21




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  ,
  Second
    Closing
    Repurchase
    Right
      Variable
    Interest Entities and FIN 46R Consolidation
   F-22




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    14.
    Preferred
    Stock  Undesignated    15.
    Common
    Stock and Warrants      Private
    Placements of Common Stock
  Form S-3
  Form S-3
 F-23




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Form S-3
  Form S-3 Form S-3
  Subsequent Event
  No. EITF 00-19-2, Accounting for Registration Payment Arrangements. EITF 00-19, Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own
    Stock, No. EITF 00-19-2, Accounting for
    Contingencies.
  No. EITF 00-19-2 EITF 00-19-2
 F-24




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Warrants
    Exercise


Expiration

Number ofDate Issued

Price


Date

SharesApril 29, 2005

$
4.78


April 29, 2010


2,396,357April 12, 2007

$
2.27


April 12, 2012


7,616,250November 7, 2007

$
1.38


November 7, 2013


3,000,00013,012,607     Shares Reserved
    for Future Issuance
    Number of SharesOutstanding common stock options


4,774,206Common stock available for future grant under our stock option
    plans


2,659,604Common stock available for future grant under our Employee Stock
    Purchase Plan


100,000Warrants


13,012,60720,546,417   16.
    Stock
    Option Plan    4-year
 F-25




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Weighted-AverageRemaining


AggregateNumber of


Weighted-Average


Contractual


IntrinsicOptions


Exercise Price


Term (Yrs)


ValueOutstanding, 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


$
4.30Granted


1,075,150



2.56Exercised


(201,249
)


0.83Cancelled


(478,273
)


3.12Outstanding, December 31, 2007


4,774,206


$
4.18



7.3


$
205,434Exercisable, December 31, 2007


3,472,204


$
4.74



6.9


$
204,127       Number of


WeightedNonvested Stock


Average Grant DateOptions


Fair ValueOutstanding, December 31, 2006


1,919,440


$
3.48Granted


1,075,150



1.79Vested


(1,169,931
)


3.70Forefeited


(451,983
)


2.13Outstanding, December 31, 2007


1,372,676


$
1.85    F-26




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Weighted-


Weighted-





Weighted-Range of

Number


Average Remaining


Average


Number


AverageExercise Prices

Outstanding


Contractual Life


Exercise Price


Exercisable


Exercise PriceDecember 31, 2007$0.35 to $0.93


499,462



6.5


$
0.79



494,623


$
0.79$1.28 to $1.79


1,125,055



7.5



1.52



684,692



1.49$2.03 to $3.59


1,144,381



8.9



2.66



530,348



2.71$4.05 to $5.57


767,365



7.3



4.36



554,822



4.36$8.40 to $10.00


1,237,943



6.0



9.24



1,207,719



9.264,774,206



7.3


$
4.18



3,472,204


$
4.74   17.
    Stock-Based
    Compensation    December 31,Stock-Based Compensation Expense:

2007


2006


2005Employees:SFAS 123R fair-value method

$
1,914,845


$
3,080,790


$
APB 25 intrinsic value method










658,935Subtotal  Employees


1,914,845



3,080,790



658,935Nonemployees:Fair value method


16,594



323,273



(123,149
)Total

$
1,931,439


$
3,404,063


$
535,786   December 31,Included in Income Statement Captions as Follows:

2007


2006


2005Research and development expense

$
718,257


$
1,434,664


$
159,699Selling, general and administrative expense


1,213,182



1,969,399



376,087Total

$
1,931,439


$
3,404,063


$
535,786   Employees. Accounting for Stock Issued
    to Employees, Share-Based Payment
 F-27




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
             F-28




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Year EndedDecember 31,2005Net loss, as reported

$
(32,988,577
)Add  Stock-based employee compensationexpense determined under the intrinsicvalue method


658,935Less  Stock-based employee compensationexpense determined under the fair valuebased method


(3,298,472
)Pro forma net loss applicable to commonstockholders

$
(35,628,114
)Net loss per share:Basic and diluted, as reported

$
(1.20
)Basic and diluted, pro forma

$
(1.30
)     December 31,2007


2006


2005Expected term (in years)


6.25



6.25



5Risk-free interest rate


4.79
%


4.57
%


3.81
%Volatility


75.0
%


75.0
%


79.6
%Dividend yield


0
%


0
%


0
%      F-29




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  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
      18.
    Income
    Taxes   F-30




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    December 31,2007


2006Net operating loss carryforwards

$
62,627,851


$
47,842,353Start-up
    costs


324,279



999,992Deferred revenue


4,503,358



4,704,335Depreciation and amortization


1,348,447



80,837Stock-based compensation


642,494



653,822Loss on sale of intangible assets


(667,921
)


Accrued research and development, accrued returns and other items


1,325,741



1,632,071Patent costs


613,806



531,175Research and experimentation tax credit


4,262,057



6,126,272Deferred tax assets


74,980,112



62,570,857Valuation allowance


(74,980,112
)


(62,570,857
)Net deferred tax assets

$



$
       Year Ended December 31,2007


2006


2005U.S. federal statutory income tax rate


(34.0
)%


(34.0
)%


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


(0.9
)%


(5.8
)%


(5.8
)%Permanent items, primarily stock-based compensation


1.4
%


2.9
%


0.2
%Research and experimentation tax credit


(1.4
)%


(2.8
)%


(6.3
)%Change in valuation allowance


34.9
%


39.7
%


45.9
%Effective tax rate


(0.0
)%


(0.0
)%


(0.0
)%       Accounting for Uncertainty in Income Taxes 
    an Interpretation of FASB Statement No. 109
 F-31




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
          19.
    401(k)
    Savings Plan and Employee Stock Purchase Plan      20.
    Commitments
    and Contingencies  Leases
  10-year
   F-32




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Summary of Significant Accounting Policies
        OperatingYear Ending December 31,

Leases2008

$
2,139,2502009


2,156,2102010


2,214,3992011


2,155,0212012


2,219,670Thereafter


943,669Total

$
11,828,219   Royalties
     F-33




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Legal
    Proceedings
        21.
    Related
    Party Transactions  Deerfield
    Transaction
  Noncontrolling Interest  Deerfield
    Transaction.
  Loans
    to Executive Officer
    Consulting
    Arrangements
   F-34




---



##### 



MIDDLEBROOK
    PHARMACEUTICALS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  22.
    Quarterly
    Financial Data (Unaudited)    Net LossNet Loss


Per ShareApplicable to


Applicable toOperating





Common


CommonRevenue


Loss


Net Loss


Stockholders


StockholdersYear endedDecember 31, 2007:First quarter

$
1,773,037


$
(13,678,122
)

$
(13,662,990
)

$
(13,662,990
)

$
(0.38
)Second quarter


2,680,558



(9,523,430
)


(9,477,927
)

$
(9,477,927
)


(0.21
)Third quarter


3,144,532



(10,024,075
)


(10,056,779
)

$
(10,056,779
)


(0.22
)Fourth quarter


2,858,573



(6,896,046
)


(9,051,670
)


(9,051,670
)


(0.19
)Year endedDecember 31, 2006:First 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
)   23.
    Subsequent
    Event  five-year Form S-3
 F-35




---



##### 



SCHEDULE II
  MIDDLEBROOK
    PHARMACEUTICALS, INC.
    VALUATION AND QUALIFYING ACCOUNTS
    Years Ended December 31, 2007, 2006, and 2005
  Balance atBeginning of








Balance at End ofPeriod


Additions


Deductions(1)


PeriodAccounts receivable allowances:Year Ended December 31, 2007

$
216,930


$
1,104,515


$
(718,602
)

$
602,843Year Ended December 31, 2006

$
352,920


$
821,165


$
(957,155
)

$
216,930Year Ended December 31, 2005

$
128,569


$
690,463


$
(466,112
)

$
352,920Inventory reserves:Year Ended December 31, 2007

$
293,956


$
864,404


$
(153,959
)

$
1,004,401Year Ended December 31, 2006

$
154,367


$
140,000


$
(411
)

$
293,956Year Ended December 31, 2005

$



$
154,367


$



$
154,367Deferred tax asset valuation reserves:Year Ended December 31, 2007

$
62,570,857


$
12,409,255


$



$
74,980,112Year Ended December 31, 2006

$
48,030,603


$
14,540,254


$



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

$
31,870,513


$
16,160,090


$



$
48,030,603     (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, wholesaler rebates and writeoffs of
    bad debts, if any. S-1