Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES xNO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a ~~non-accelerated filer.~~smaller reporting company. See ~~definition~~definitions of ~~“accelerated~~"large accelerated filer," "accelerated filer" and ~~large accelerated filer”~~"smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filero	o		Accelerated filerx	x
Non-accelerated filer	o	(Do no check if a smaller reporting company)	Smaller Reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO x

As of ~~November 6, 2007, 86,590,393~~May 2, 2008, 96,688,377 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.

Table of Contents

PART I - FINANCIAL INFORMATION

		Page
~~PART I - FINANCIAL INFORMATION~~

Item 1.		Financial Statements		1

	CONSOLIDATED BALANCE SHEETS
		~~CONSOLIDATED BALANCE SHEETS~~

		As of ~~September 30, 2007~~March 31, 2008 (unaudited) and December 31, ~~2006~~	2007	1

		CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

		For the Three Months Ended ~~September 30,~~March 31, 2008 and 2007 ~~and 2006~~
		~~For the Nine Months Ended September 30, 2007 and 2006~~		2

		CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

		For the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2008 and 2007 ~~and 2006~~		3

		Notes to Consolidated Financial Statements		4

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
	9
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		25
~~Item 4.~~		~~Controls and Procedures~~		2624

Item 4. Controls and Procedures	24

PART II - OTHER INFORMATION
Item 1.		Legal Proceedings	25
	26
Item 1A.		Risk Factors	25
	27
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	26
	27
Item 3.		Defaults Upon Senior Securities	26
	27
Item 4.		Submission of Matters to a Vote of Security Holders	27

Item 5. Other Information	27
~~Item 5.~~
~~Other Information~~	Item 6. Exhibits	27
~~Item 6.~~		~~Exhibits~~		27
Signatures		28

Unless the context otherwise requires, all references to “we,” “us,” “our,” and the “Company” include Discovery

Laboratories, Inc., and its wholly-owned, presently inactive subsidiary, Acute Therapeutics, Inc.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act). The forward-looking statements are only predictions and provide our current expectations or forecasts of future events and financial performance and may be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “will” or “should” or, in each case, their negative, or other variations or comparable terminology, though the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements include all matters that are not historical facts and include, without limitation statements concerning: our business strategy, outlook, objectives, future milestones, plans, intentions, goals, and future financial ~~conditions,~~condition; plans regarding the May 2008 Approvable Letter that we received from the FDA for Surfaxin^® (lucinactant) for the prevention of Respiratory Distress Syndrome in premature infants; our research and development programs and planning for and timing of any clinical trials; the possibility, timing and outcome of submitting regulatory filings for our products under development; remediation of manufacturing issues related to the April 2006 process validation stability failures and plans with respect to the release and stability testing of recently manufactured new process validation batches of Surfaxin^®; plans regarding strategic alliances and collaboration arrangements with pharmaceutical companies and others to develop, manufacture and market our drug products; research and development of particular drug products, technologies and aerosolization drug devices; the development of financial, clinical, manufacturing and marketing plans related to the potential approval and commercialization of our drug products, and the period of time for which our existing resources will enable us to fund our operations.

We intend that all forward-looking statements be subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to many risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Examples of the risks and uncertainties include, but are not limited to:

the risk that we may not ~~successfully~~be able to timely respond to the Approvable Letter that we recently received for Surfaxin and ~~profitably develop and market our products;~~

that any response that we do file will not satisfy the FDA;

~~risks relating to our research and development activities, which are time-consuming, costly and involve pre-clinical studies, clinical trials and other studies, and~~ the risk that ~~such trials~~the Food and ~~studies~~Drug Administration (FDA) or other regulatory authorities may ~~be delayed, halted~~not accept, or ~~fail;~~

may withhold or delay consideration of, any applications that we may file, including our New Drug Application (NDA) for Surfaxin, or may not approve our applications or may limit approval of our products to particular indications or impose unanticipated label limitations;

risks relating to the rigorous regulatory approval ~~process~~processes, including pre-NDA activities, required for approval of any drug or medical device products that we may develop, independently, with ~~our~~ development partners or pursuant to collaboration arrangements;

the risk that changes in the national or international political and regulatory environment may make it more difficult to gain FDA or other regulatory approval of our drug product candidates;

risks relating to our research and development activities, which involve time-consuming and expensive pre-clinical studies, multi-phase clinical trials and other studies and other efforts, and which may be subject to potentially significant delays or regulatory holds, or fail;

the risk that ~~the FDA~~we, our contract manufacturers or ~~other regulatory authorities may not accept, or may withhold or delay consideration of,~~ any ~~applications that we may file or limit approval to particular indications or other label limitations;~~

~~the risk that, after acceptance and review of applications that we file, the FDA or other regulatory authorities will not approve the marketing and sale~~ of our materials suppliers encounter problems manufacturing our products or drug ~~product candidates;~~

~~risks that we may not have successfully resolved the Chemistry, Manufacturing and Controls (CMC) and other cGMP-related matters at our manufacturing operations~~substances on a timely basis or in ~~Totowa, New Jersey, with respect~~an amount sufficient to Surfaxin and our other Surfactant Replacement Therapies (SRT) presently under development, including those identified in connection with our April 2006 process validation stability failures and matters noted by the FDA in its inspectional reports on Form FDA 483;

~~risks that our recently submitted formal response to the April 2006 Approvable Letter will not satisfy the FDA;~~

meet demand;

risks relating to ~~our own drug manufacturing operations and~~ the ~~manufacturing operations~~transfer of our manufacturing technology to third-party ~~suppliers and~~ contract manufacturers;

risks relating to the ability of our development partners and third-party suppliers of materials, drug ~~substance~~substances and aerosolization systems and related components to timely provide us with adequate supplies and expertise to support development and manufacture of drug product and aerosolization systems for initiation and completion of our clinical ~~studies;~~studies, and, if approved, commercialization of our drug and combination drug-device products;

the risk that we may not successfully and profitably market our products;

the risk that , even if approved, we may be unable, for reasons related to market conditions, the competitive landscape or otherwise, to successfully launch and market our products;

risks relating to our ability to develop a successful sales and ~~the ability~~marketing organization to market Surfaxin., if approved, and our other product candidates, in a timely manner, if at all, and that we or our marketing and advertising consultants will not succeed in developing market awareness of our ~~collaborators and development partners to develop and successfully manufacture and commercialize products that combine our drug products with innovative aerosolization technologies;~~

products;

~~risks relating to the transfer of our manufacturing technology to third-party contract manufacturers;~~

risks that financial market conditions may change, additional financings could result in equity dilution, or we will be unable to maintain the Nasdaq Global Market listing requirements, causing the price of our shares of common stock to decline;

iii

ITEM 1. FINANCIAL STATEMENTS

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(in thousands, except per share data)

See notes to consolidated financial statements

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY

Consolidated Statements of Operations

(in thousands, except per share data)

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Three Months Ended

Notes to Consolidated Financial Statements (unaudited)

Note 1 -– The Company and Basis of Presentation

Our SRT pipeline is focused initially on the most significant respiratory conditions prevalent in the NICU and PICU. ~~We have filed a New Drug Application (NDA) with~~On May 1, 2008, we received from the U.S. Food and Drug Administration ~~(FDA)~~(“FDA”) a third Approvable Letter for our ~~lead~~initial SRT product, Surfaxin® (lucinactant) for the prevention of Respiratory Distress Syndrome (RDS) in premature infants. ~~In connection with this NDA, we recently submitted our formal response to a second Approvable Letter that we received from~~See“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Plan of Operations.” We are also developing Surfaxin for the ~~FDA in April 2006. If the FDA deems our submission to be a complete response, we anticipate a six-month review period, with a target potential approval date in the second quarter~~treatment of ~~2008. For older children being treated in the PICU, we recently initiated a Phase 2 clinical trial evaluating the use of Surfaxin~~Acute Respiratory Failure (ARF) in children up to two years of age ~~suffering from Acute Respiratory Failure (ARF). We are also developing Surfaxin~~and for the prevention and treatment of Bronchopulmonary Dysplasia (BPD) ~~in premature infants,~~, a debilitating and chronic lung disease typically affecting premature infants who have suffered RDS. Aerosurf™ is our proprietary SRT in aerosolized form ~~administered through nasal continuous positive airway pressure (nCPAP)~~ and is being developed for the ~~prevention and~~ treatment of ~~infants at risk for respiratory failure.~~RDS in premature infants. Aerosurf has the potential to obviate the need for endotracheal intubation and conventional mechanical ~~ventilation.~~ventilation and holds the promise to significantly expand the use of SRT in respiratory medicine.

We have implemented a business strategy that includes: (i) ~~ongoing efforts intended~~focusing primarily on our formal response to the Approvable Letter to potentially gain regulatory approval ~~to market and sell~~in 2008 for Surfaxin for the prevention of RDS in premature infants in the United States; (ii) continued investment in the development of Aerosurf for neonatal and pediatric conditions; (iii) preparing for the potential ~~approval and~~ commercial launch of Surfaxin for RDS in the United States by (A) expanding our existing Medical Affairs organization to support increased educational and scientific activities, and (B) strategic planning for commercial capabilities to execute the launch of Surfaxin in the United ~~States, if approved; (iii)~~States; (iv) seeking collaboration agreements and strategic partnerships in the international and domestic markets for the development and potential commercialization of our SRT pipeline, including Surfaxin and Aerosurf; (v) continued investment in development of SRT pipeline programs, including Surfaxin for neonatal and pediatric conditions and Aerosurf, which uses the aerosol-generating technology rights that we have licensed through a strategic alliance with Chrysalis Technologies (Chrysalis), a division of Philip Morris USA Inc.; (iv) continued investment in enhancements to our quality systems and manufacturing capabilities ~~including our operations in Totowa, New Jersey (which we acquired in December 2005), to produce surfactant drug products~~ to meet the anticipated pre-clinical, clinical and potential future commercial requirements of Surfaxin, Aerosurf and our other SRT product candidates, and potentially to develop new and enhanced formulations of Surfaxin and our other SRT product candidates. Our long-term manufacturing strategy includes potentially building or acquiring additional manufacturing capabilities for the production of our precision-engineered SRT drug products; and ~~(v)~~(vi) seeking investments of additional capital, including potentially ~~entering~~from business alliances, commercial and development partnerships, equity financings and other similar opportunities, although there can be no assurance that we will identify or enter into ~~collaboration agreements and strategic partnerships for the development and commercialization of our SRT product candidates.~~any specific actions or transactions.

Basis of Presentation

Note 2 –- Accounting Policies and Recent Accounting Pronouncements

Accounting Policies

Recent Accounting Pronouncements

In ~~July 2006,~~December 2007, the ~~Financial Accounting Standards Board (FASB) issued~~ FASB ~~Interpretation~~ratified EITF Issue No. ~~48,~~ 07-1, “Accounting for Collaborative Arrangements.~~Accounting for~~~~Uncertainty in Income Taxes~~” ,EITF 07-1 requires certain income statement presentation of transactions with third parties and of payments between parties to the collaborative arrangement, along with disclosure about the nature and purpose of the arrangement. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact of the pending adoption of EITF 07-1 on our consolidated financial statements.

Note 3 –- Net Loss Per Share

Note 4 –- Comprehensive Loss

Note 5 –- ~~Restricted Cash~~Receivable from Collaborative Arrangements

Note 6 – Working Capital

We have a Committed Equity Financing Facility (CEFF) that allows us to raise capital, subject to certain conditions, ~~upon expiration~~at the time and in amounts deemed suitable to us, during a three-year period ending on May 12, 2009. Use of the ~~lease~~CEFF is subject to certain conditions, including a share and dollar limitation (currently approximately 5.2 million not to exceed $35.5 million) and the volume weighted average price of our common stock on each trading day must be at least $2.00. We anticipate using the CEFF, when available, to support working capital needs in ~~February 2013, the letter~~2008. (See our most recent Annual Report on Form 10-K at “Management’s Discussion and Analysis of ~~credit will expire.~~Financial Condition and Results of Operations - Liquidity and Capital Resources - Committed Equity Financing Facility”)

Note 6 7 –- Stock-Based Employee Compensation

Note 7 -8 ~~Working Capital~~–

Note ~~11 -~~9 – Subsequent Event

~~In October 2007,~~On May 1, 2008, we ~~completed a financing pursuant to the CEFF resulting in proceeds of $5 million~~received from the ~~issuance~~FDA a third Approvable Letter for Surfaxin^® (lucinactant) for the prevention of ~~1,909,172 shares of our common stock at an average price per share, after~~Respiratory Distress Syndrome (RDS) in premature infants. This official notification sets forth the ~~applicable discount, of $2.62.~~remaining conditions that must be satisfied to gain U.S. marketing approval for Surfaxin.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our SRT pipeline is focused initially on the most significant respiratory conditions prevalent in the NICU and PICU. ~~We have filed a New Drug Application (NDA) with~~On May 1, 2008, we received from the U.S. Food and Drug Administration ~~(FDA)~~(“FDA”) a third Approvable Letter for our ~~lead~~initial SRT product, Surfaxin® (lucinactant) for the prevention of Respiratory Distress Syndrome (RDS) in premature ~~infants. In connection with this NDA, we recently submitted our formal response to a second Approvable Letter that we received from~~infants (see“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Plan of Operations - Research and Development - SRT for Neonatal and Pediatric Indications - Surfaxin for the ~~FDA~~Prevention of RDS in ~~April 2006. If~~Premature Infants”). We are also developing Surfaxin for the ~~FDA deems our submission to be a complete response, we anticipate a six-month review period, with a target potential approval date in the second quarter~~treatment of ~~2008. For older children being treated in the PICU, we recently initiated a Phase 2 clinical trial evaluating the use of Surfaxin~~Acute Respiratory Failure (ARF) in children up to two years of age ~~suffering from Acute Respiratory Failure (ARF). We are also developing Surfaxin~~and for the prevention and treatment of Bronchopulmonary Dysplasia (BPD) ~~in premature infants,~~, a debilitating and chronic lung disease typically affecting premature infants who have suffered RDS. Aerosurf™ is our proprietary SRT in aerosolized form ~~administered through nasal continuous positive airway pressure (nCPAP)~~ and is being developed for the ~~prevention and~~ treatment of ~~infants at risk for respiratory failure.~~RDS in premature infants. Aerosurf has the potential to obviate the need for endotracheal intubation and conventional mechanical ~~ventilation.~~ventilation and holds the promise to significantly expand the use of SRT in respiratory medicine.

We have implemented a business strategy that includes:

Chrysalis Technologies, a Division of Philip Morris USA Inc.

In March 2008, we agreed to restructure our December 9, 2005 ~~we entered into~~ Strategic Alliance Agreement (the “Original Alliance Agreement”) with Philip Morris USA Inc., d/b/a ~~strategic alliance with~~ Chrysalis Technologies (“Chrysalis”), which was created to develop and commercialize aerosol SRT to address a broad range of serious respiratory conditions, such as neonatal respiratory failure, ALI, CF, COPD, asthma, and others. Through this alliance, we gained exclusive rights to Chrysalis’ aerosolization technology for use with pulmonary surfactants for all respiratory diseases. The alliance unitesunite two complementary respiratory technologies - our ~~precision-engineered~~peptide-containing synthetic surfactant technology with Chrysalis’ novel capillary aerosolization technology ~~that is being developed~~- to deliver therapeutics to the deep lung.

Under the Original Alliance Agreement, Chrysalis has developed a proprietary aerosol generation technology that is being designed with the potential to enable targeted upper respiratory or deep lung delivery of therapies for local or systematic applications. The Chrysalis technology is designed to produce high-quality, low velocity aerosols for possible deep lung aerosol delivery. Aerosols are created by pumping the drug formulation through a small, heated capillary wherein the excipient system is substantially converted to the vapor state. Upon exiting the capillary, the vapor stream quickly cools and slows in velocity yielding a dense aerosol with a defined particle size.

The alliance focuses on therapies for hospitalized patients, including those in the NICU, PICU and ICU, and can be expanded into other hospital applications and ambulatory settings. We and Chrysalis are utilizing our respective capabilities and resources to support and fund the design and development of combination drug-device systems that can be uniquely customized to address specific respiratory diseases and patient populations. Chrysalis iswas primarily responsible for ~~developing the design for the~~development activities related to its proprietary capillary aerosolization ~~device platform, disposable dose packets~~technology (the “Chrysalis Technology”) and ~~patient interface. We are~~we were responsible for aerosolized ~~SRT~~ drug formulations, clinical and regulatory activities, and the manufacturing and commercialization of the combination drug-device ~~products.~~ products using the Chrysalis Technology (“Licensed Products”). Under the restructuring, we entered into an Amended and Restated License Agreement dated March 28, 2008 (the “US License Agreement”) with Chrysalis to amend and restate the Original Alliance Agreement in the United States. As Chrysalis has assigned to Philip Morris Products S.A. (“PMPSA”) all rights in and to the Chrysalis Technology outside of the United States (the “International Rights”), effective March 28, 2008, we also entered into a License Agreement with PMPSA with respect to the International Rights (the “International License Agreement”, and together with the US License Agreement, the “License Agreements”) on substantially the same terms and conditions as the US License Agreement.

We ~~have~~hold an exclusive ~~rights~~license in the United States under the US License Agreement and an exclusive license to ~~Chrysalis’ aerosolization technology~~the International Rights under the PMPSA License Agreement in and to the Chrysalis Technology for use with pulmonary surfactants (alone or in combination with any other pharmaceutical compound(s)) for all respiratory diseases and conditions (the foregoing uses in ~~hospital and ambulatory settings. Generally, Chrysalis will receive a tiered royalty on product sales:~~each territory, the ~~base royalty generally applies to aggregate net sales of less than $500 million per contract year;~~“Exclusive Field”). In addition, under the royalty generally increases on aggregate net sales in excess of $500 million per contract year, and generally increases further on aggregate net sales of alliance products in excess of $1 billion per contract year.

Our lead neonatal program utilizing the Chrysalis technology is Aerosurf, an aerosolized formulation administered via nCPAP to treat premature infants in the NICU at risk for RDS. We are also planning an adult program utilizing the Chrysalis aerosolization technology to develop aerosolized SRT administered as a prophylactic for patients in the hospital at risk for ALI.

~~Laboratorios del Dr. Esteve, S.A.~~

~~In December 2004,~~US License Agreement, we further restructured our strategic alliance with Laboratorios del Dr. Esteve, S.A. (Esteve) for the development, marketing and sales of our products. We had first entered into the alliance in 1999 and had revised it in 2002 to broaden the territory to include all of Europe, Central and South America, and Mexico. Under the 2004 restructuring, we regained full commercialization rights to our SRT, including Surfaxin for the prevention of RDS in premature infants and the treatment of ARDS in adults, in key European markets, Central America, and South America. Esteve will focus on Andorra, Greece, Italy, Portugal, and Spain, and now has development and marketing rights to a broader portfolio of potential SRT products. Esteve will pay us a transfer price on sales of Surfaxin and other SRT. We will be responsible for the manufacture and supply of all of the covered products and Esteve will be responsible for all sales and marketing in the revised territory. We also agreed to pay to Esteve 10% of any cash up-front and milestone fees (not to exceed $20 million in the aggregate) that we may receive in connection with any future strategic collaborations for the development and commercialization of Surfaxin for RDS, ARDS or certain other SRTs in the territory for which we had previously grantedhold a license to ~~Esteve. Esteve~~use the Chrysalis Technology with other drugs to treat specified target indications in specified target populations. Our exclusive license under each License Agreement now includes, in addition to the rights we previously had, the right to develop and have developed Licensed Products in the Exclusive Field in the respective territory.

The US License Agreement provides that prior to June 30, 2008, Chrysalis will complete a technology transfer of the Chrysalis Technology to us in scope sufficient to permit us to practice the Chrysalis Technology. The License Agreements provide that we are solely responsible for future development of the Chrysalis Technology; however, Chrysalis has agreed to ~~make stipulated cash payments~~provide to us ~~upon our achievement of certain milestones, primarily upon receipt of marketing regulatory approvals for the covered products.~~continued development support through, but in no event after, June 30, 2008. In addition, ~~Esteve has agreed~~the US License Agreement provides that Chrysalis will provide to ~~contribute to Phase 3 clinical trials for the covered products by conducting and funding development performed~~us transition assistance in the ~~revised territory.~~form of payments totaling $4.5 million, with respect to which we expect to receive the last payment in the third quarter 2008.

1311

~~In October 2005, Esteve sublicensed the distribution rights to Surfaxin in Italy to Dompé farmaceutici s.p.a. (Dompé), a privately owned Italian company.~~ Under the ~~sublicense agreement, Dompé~~Original Alliance Agreement, we were obligated to pay Chrysalis royalties based on a multi-tiered royalty structure (that escalated upon attaining collaboration product revenues greater than $500 million and $1 billion). Under the License Agreements, we are now obligated to pay royalties at a rate equal to a low single-digit percent of sales of products sold in the Exclusive Field in the respective territory. In connection with the exclusive undertakings of Chrysalis and PMPSA not to exploit the Chrysalis Technology in the Exclusive Field, we are obligated to pay royalties on all product sales, including sales of any aerosol devices and related components sold by us in the Exclusive Field that are based on aerosolization technology other than the Chrysalis Technology. In addition, we have agreed in the future to pay minimum royalties, but are entitled to a future reduction of royalties in an amount equal to the excess of any minimum royalty paid over royalties actually earned under the License Agreements.

Under the License Agreements, we generally own the intellectual property that we create or reduce to practice in the performance of the License Agreements or exercise of the licenses granted thereunder, except such inventions that relate primarily, in each instance, to the Chrysalis Technology (the “Chrysalis Technology Improvements”). We are obligated to assign to Chrysalis and PMPSA all such Chrysalis Technology Improvements and all such inventions are then made subject to our rights under each License Agreement. The License Agreements also contain provisions related to the calculation and payment of royalties, record-keeping and audit rights, and prosecution of patents, and include customary representations, warranties and indemnities. Each License Agreement, unless terminated earlier will expire as follows as to each Licensed Product in each country in the respective territory, on a country-by-country basis, upon the latest of: (a) the tenth anniversary of the date of the first commercial sale of the Licensed Product; (b) the date on which the sale of such Licensed Product ceases to be ~~responsible for sales, marketing~~covered by a claim of an issued and ~~distribution~~unexpired patent in such country, or (c) the date a generic form of ~~Surfaxin~~the product is introduced in ~~Italy.~~such country. The License Agreements may be terminated, by Chrysalis or PMPSA, as appropriate, in the event that we fail to make the payment of the minimum royalties, as provided therein, or by us, in whole or in part, initially upon payment of a termination fee. In addition, either party to each License Agreement may terminate upon a material breach by the other party (subject to a specified cure period).

PLAN OF OPERATIONS

We have incurred substantial losses since inception and expect to continue to ~~expend substantial amounts~~make significant investments for ~~continued~~ product research, development, manufacturing, sales and marketing and general ~~business~~administrative activities. We will need to generate significant revenues from product sales, related royalties and transfer prices to achieve and maintain profitability.

Through ~~September 30, 2007,~~March 31, 2008, we had no revenues from any product sales, and had not achieved profitability on a quarterly or annual basis. Our ability to achieve profitability depends upon, among other things, our ability to develop products, obtain regulatory approval for products under development and enter into collaboration and other agreements for product development, manufacturing and commercialization. In addition, our results are dependent upon the performance of our strategic partners and suppliers. Moreover, we may never achieve significant revenues or profitable operations from the sale of any of our products or technologies.

Through ~~September 30, 2007,~~March 31, 2008, we had not generated taxable income. At December 31, ~~2006,~~2007, net operating losses available to offset future taxable income for Federal tax purposes were approximately ~~$229.8~~$258.7 million. The future utilization of such loss carryforward may be limited pursuant to regulations promulgated under Section 382 of the Internal Revenue Code. In addition, we had a research and development tax credit carryforward of ~~$5.2~~$6.1 million at December 31, ~~2006.~~2007. The Federal net operating loss and research and development tax credit carryforwards expire beginning in 2008 through 2026.

~~We anticipate that during~~Over the next 12 to 24 ~~months:~~months, we plan to undertake a variety of initiatives that are discussed below.

Research and Development

We will continue to focus our research, development and regulatory activities ~~in an effort~~ to ~~develop a~~advance our pipeline of potential SRT for respiratory diseases. The drug development, clinical trial and regulatory process is lengthy, expensive and uncertain and subject to numerous risks including, without limitation, the applicable risks discussed in herein and those contained in the “Risk Factors” section in our most recent Annual Report on Form 10-K. See “Management’s Discussion and Analysis -– Research and Development.”

Our major research and development projects include:

SRT for Neonatal and Pediatric Indications

In order to address the most prevalent respiratory disorders affecting infants in the NICU and PICU, we are conducting several ~~NICU and PICU~~ therapeutic programs ~~targeting~~that target respiratory conditions that have been cited as some of the most significant unmet medical needs ~~for~~in the neonatal and pediatric community.

Surfaxin for the Prevention of RDS in Premature Infants

In October 2007, we submitted to the FDA our Complete Response to the April 2006 Approvable Letter. The FDA thereafter established May 1, 2008, as its target date to complete its review of our NDA.

Since the filing of our Complete Response and prior to receiving the May 1, 2008 Approvable Letter, the following important events have occurred:

	·	As of March 2008, we have submitted to the FDA 12-month stability data on our Surfaxin process validation batches, which continue to demonstrate conformance to our established stability specifications.

	·	In March 2008, the FDA completed a pre-approval inspection (PAI) of our manufacturing operations at Totowa, New Jersey, and recently issued an Establishment Inspection Report (EIR) indicating an approval recommendation. We believe that our manufacturing operations are prepared to produce sufficient drug product to meet the commercial requirements of Surfaxin, if approved.

	·	On April 30, 2008, as part of our NDA review, we completed labeling discussions with the FDA and agreed to the content of the Surfaxin package insert. Although the package insert will not be considered final until the FDA approves our NDA, we are pleased with the competitive profile of the current form of package insert.

On May 1, 2008, we received ~~a second~~another Approvable Letter from the FDA. Importantly, this Approvable Letter contains no requirement for additional clinical trials to gain FDA approval for Surfaxin. The Approvable Letter includes, among other things, requests (i) to further tighten an acceptance criterion for our release and stability biological activity test, (ii) to further tighten acceptance criteria for lipid drug substance impurities, and (iii) to submit (for inclusion in the NDA) summary information from certain equipment-related qualification reports.

Based on our assessment of the Approvable Letter, conducted by our regulatory, manufacturing and quality management in consultation with our expert consultants, we believe that with our current dataset for Surfaxin ~~for the prevention of RDS in premature infants. Specifically,~~we and the FDA ~~requested information primarily focused~~can reach agreement on ~~the Chemistry, Manufacturing~~appropriate acceptance criteria and ~~Controls (CMC) section of our NDA, predominately involving~~ drug product specifications for Surfaxin. We also believe that the requested equipment qualification summary information will be acceptable to the FDA because the reports in question have been reviewed and stability, analytical methods and related controls. Also in April 2006, ongoing analysis of Surfaxin process validation batches that had been manufactured for us in 2005 by our contract manufacturer, Laureate Pharma, Inc. (Laureate), as a requirement for our NDA indicated that certain stability parameters no longer met acceptance criteria. We immediately conducted a comprehensive investigation, which focused on analysis of manufacturing processes, analytical methods and method validation and active pharmaceutical ingredient suppliers. As a resultfound acceptable during the pre-approval inspection of our ~~investigation,~~manufacturing operations at Totowa in March 2008. Based on our regulatory assessment and our experts’ advice, we ~~identified a most probable root cause,~~believe the meeting will qualify for priority scheduling and ~~executed a corrective action and preventative action (CAPA) plan.~~

~~In December 2006, we attended a meeting with~~that the FDA the purpose of which was to clarify certain of the key CMC matters identified by the FDA in the Approvable Letter, provide information concerning the status and interim findings of our comprehensive investigation into the process validation stability failure and efforts to remediate the related manufacturing issues, and obtain guidance from the FDA on the appropriate path to potentially gain approval of Surfaxin for the prevention of RDS in premature infants. Following that meeting and consistent with the guidance obtained from the FDA, in February 2007, we completed the manufacture of three new Surfaxin process validation batches. These process validation batches have been, and will continue to be, subjected to ongoing comprehensive stability testing on pre-specified testing dates, initially every three months, in accordance with an established protocol that complies with guidelines established by the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH). Under this comprehensive testing protocol, these process validation batches have demonstrated acceptable stability through six months and continue to be monitored.

~~In October 2007, we completed the projects and compiled the additional data that we thought necessary to address the outstanding CMC issued identified in the Approvable Letter and submitted~~may designate our formal response to ~~FDA. Those projects were developed based on~~this Approvable Letter as a Class 1 resubmission, which would result in a target review period of 60 days (whereas a Class 2 resubmission would result in a 6-month target review period).

We anticipate being in a position to submit our formal response to the ~~guidance that we received at our December 2006 meeting~~Approvable Letter in approximately 6 to 8 weeks, although this timeline may be shortened or extended following discussions with the FDA. ~~Our formal response also included~~If our understanding of the ~~six-month stability data from our new process validation batches. We expect that~~timeline is correct, we now anticipate the ~~FDA will advise us~~potential approval of Surfaxin in mid-November whether it has accepted our submission as a complete response and provide a review classification that determines the targeted review timeframe. Assuming that our submission is deemed complete, we anticipate that the FDA will designate our submission as a Class 2 submission, thereby allowing for a six-month review period with a target approval date under PDUFA in the second quarter of 2008.

~~We voluntarily withdrew in June 2006the~~

In October 2004, we filed a Marketing Authorization Application (MAA) ~~filed in October 2004~~ with the European Medicines Agency (EMEA) for clearance to market in Europe Surfaxin for the prevention and rescue treatment of RDS in premature ~~infants in Europe because~~infants. In June 2006, following the Surfaxin process validation stability failure, we determined that we could not resolve our manufacturing issues ~~would not be resolved~~ within the regulatory time frames mandated by the EMEA procedure. ~~Our withdrawal of~~Consequently, in June 2006, we voluntarily withdrew the MAA ~~precluded final resolution of~~without resolving with the EMEA certain outstanding clinical issues related to the Surfaxin Phase 3 clinical ~~trials, which had been the focus of a recent EMEA clinical expert meeting~~trials. We have recently consulted with regulatory experts in Europe and, ~~were expected to be reviewed at a planned Oral Explanation before the Committee~~if we receive approval for ~~Medicinal Products for Human Use (CHMP) in late June 2006. We plan~~Surfaxin in the ~~future~~United States, plan to have further discussions with the EMEA and potentially develop a strategy to ~~potentially~~ gain approval for Surfaxin in Europe.

Surfaxin for BPD in Premature Infants

In October 2006, we announced preliminary results of our Phase 2 clinical trial offor Surfaxin for the prevention and treatment of BPD, which was designed as an estimation study to evaluate the safety and potential efficacy of Surfaxin in infants at risk for BPD. We believe that these results suggest that Surfaxin may potentially represent a novel therapeutic option for infants at risk for ~~BPD~~BPD. We plan to seek scientific advice from the FDA and ~~anticipate determining~~other regulatory agencies with respect to potential clinical trial designs to support the ~~next~~further development ~~steps~~of Surfaxin for the prevention of BPD. At this ~~program by early 2008.~~time, we expect to pursue these discussions only after we have successfully gained FDA approval of Surfaxin for the prevention of RDS in premature infants.

In April 2006, ongoing analysis of our initial Surfaxin process validation batches that had been manufactured for us in 2005 by our then contract manufacturer, Laureate, as a requirement for our NDA indicated that certain stability parameters no longer met acceptance criteria. We immediately initiated a comprehensive investigation, which focused on analysis of manufacturing processes, analytical methods and method validation and active pharmaceutical ingredient suppliers, to determine the cause of the failure. As a result of this investigation, we developed a corrective action and preventative action (CAPA) plan to remediate the related manufacturing issues.

Long-Term Manufacturing Capabilities

We are planning to have manufacturing capabilities, primarily through our manufacturing ~~operation~~operations in Totowa, New Jersey, that should allow for sufficient ~~commercial~~ production of ~~Surfaxin, if approved,~~drug product to supply (i) the potential worldwide commercial demand for Surfaxin for our RDS program, if approved, (ii) the preclinical and clinical and, if approved, potential worldwide commercial demand for Surfaxin for our ARF and BPD programs, and ~~all of our~~(iii) the anticipated ~~production requirements~~preclinical and clinical and, if approved, potential worldwide commercial demand for Aerosurf.

~~We view~~

Owning our ~~acquisition of~~own manufacturing operations in Totowa asis an initial step ofin our manufacturing strategy ~~for~~to support the continued development of our SRT portfolio, including life cycle management of Surfaxin for new indications, potential new formulations and formulation enhancements, and expansion of our aerosol SRT products, beginning with Aerosurf. The lease for our Totowa facility ~~extends through~~expires in December 2014. In addition to customary ~~lease~~ terms and conditions, the lease ~~contains an early termination option, first beginning in December 2009. The early termination option can only be exercised by~~is subject to a right of the landlord, first after December 2007 and upon ~~a minimum of~~ two ~~years~~years’ prior notice, to terminate the lease early. This termination right is subject to certain conditions, including that the master tenant, a related party of the landlord, must have ceased all activities at the premises, and, in the earlier years, ~~payment~~if we satisfy certain financial conditions, the landlord must make payments to us of significant early termination amounts. ~~Taking into account this early termination option, which may cause us to move out of~~Currently, our ~~Totowa facility as early as December 2009, our long-term~~ manufacturing strategy includes (i) potentially renegotiating our current lease to amend the termination and other provisions, (ii) building or acquiring additional manufacturing capabilities ~~as well as~~for the production of our SRT drug products, and (iii) potentially using contract manufacturers, for the production of our ~~precision-engineered~~ SRT drug products.

Sales and Marketing

To prepare for the potential approval of Surfaxin for the prevention of RDS in premature infants, we plan to establish our own U.S. specialty pulmonary commercial organization that will initially specialize in neonatal and pediatric indications and, as products are developed, may potentially expand to adult critical care and other hospital settings. This strategy is intended to allow us to manage our own sales and marketing activities, establish a strong presence in the NICU, and optimize the economics of our business.

We expect to rely primarily on our commercial organization to market Surfaxin in the United States, if approved. Our pre-approval preparations have included the hiring of experienced management personnel. We have also begun to invest in our medical affairs capabilities to provide for increased scientific and medical educational activities. We plan to hire our sales representatives only after we have received approval to market Surfaxin. We expect to incur significant expenses to develop a complete U.S. commercial capability. We also intend to pursue potential collaboration arrangements with international partners to co-develop and/or co-commercialize our neonatal and pediatric pipeline for Surfaxin and Aerosurf.

General and Administrative

Potential Collaboration Agreements and Strategic Partnerships

Revenue from Collaborative Arrangements and Grants

Research and Development Expenses

(ii)

Research and development operations to manage the development and advancement of our SRT pipeline. Expenses related to these activities ~~excluding manufacturing development activities,~~for the three months ended March 31, 2008 and 2007 were $2.0 million and $1.5 million, respectively. These costs are primarily associated with ~~infrastructure development, including~~scientific and clinical ~~trial~~ management, clinical quality control and regulatory compliance activities, data management and biostatistics, and medical affairs activities. The increase in the first quarter of 2008 as compared to the same period in 2007 is primarily due to investment in our medical affairs capabilities, including medical science liaisons, to provide scientific and ~~scientific affairs~~medical educational support to the neonatal medical community regarding Surfaxin and our SRT pipeline.

(iii)

Direct pre-clinical and clinical program activities ~~as well as direct program expenses~~related to ~~advance~~the advancement of our SRT pipeline. Expenses ~~associated with research and development~~related to these activities ~~for the three and nine months ended September 30, 2007~~ were ~~$3.1~~$0.9 million and ~~$10.0 million, respectively, as compared to $2.9 million and $11.0~~$1.1 million for the ~~three and nine~~ months ended ~~September 30, 2006,~~March 31, 2008 and 2007, respectively. ~~Research~~These expenses in 2008 and ~~development expenses for~~ 2007 primarily include: (i) ~~costs associated with obtaining data and other information necessary for our formal response to the Surfaxin Approvable Letter; (ii)~~ activities associated with the ongoing Phase 2 clinical trial evaluating the use of Surfaxin for ARF in children up to two years of age; and ~~(iii) development~~(ii) pre-clinical and preparatory activities ~~related to Aerosurf. The decrease in expenses~~for anticipated Phase 2 clinical trials for Aerosurf for the ~~nine months ended September 30, 2007 compared to the same period last year primarily reflects personnel~~prevention and ~~related costs incurred in 2006, in anticipation of the potential approval and commercial launch of Surfaxin for the prevention~~treatment of RDS in premature ~~infants, that~~infants. Additionally, included in these expenses for the three months ended March 31, 2007 were ~~later reduced as a result of staff reductions~~activities associated with obtaining data and ~~a reorganization of corporate management that occurred immediately after~~other information included in our Complete Response to the April 2006 Surfaxin ~~process validation stability failure.~~Approvable Letter.

General and Administrative Expenses

(i)

pre-launch commercialization activities in 2008 in anticipation of the potential approval of Surfaxin related to building a United States commercial organization. Expenditures for these activities for the three months ended March 31, 2008 were $1.3 million. We did not incur any pre-launch commercialization expenses for the three months ended March 31, 2007; and

(ii)	charges associated with stock-based employee compensation in accordance with the provisions of Statement No. 123(R) which for the three months ended March 31, 2008 and 2007 were $0.7 million and $0.4 million, respectively.

We incurred a restructuring charge of $4.8 million in the second quarter of 2006 associated with the staff reductions and close-out of certain commercial programs, which was accounted for in accordance with Statement No. 146 ~~“Accounting for Costs Associated with Exit or Disposal Activities”~~ and is identified separately on our Statement of Operations as a Restructuring Charge. This charge included $2.5 million of severance and benefits related to staff reductions and $2.3 million for the termination of certain pre-launch commercial programs. As of September 30, 2007, the remaining balance of the unpaid restructuring charge totals $0.5 million, which is included in accounts payable and accrued expenses.

Other Income and (Expense)

Other income and (expense) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2008 and 2007 were ($~~16,000)~~27,000) and ($~~257,000) million, respectively. Other income and (expense) for the three and nine months ended September 30, 2006 were ($71,000) and $474,000 million,~~134,000), respectively.

Interest and other income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2008 and 2007 was ~~$0.5~~$0.4 million and ~~$1.3 million, respectively, as compared to~~ $0.3 million, ~~and $1.5 million for the three and nine months ended September 30, 2006,~~ respectively. The increase for the three months ended ~~September 30, 2007~~March 31, 2008 as compared to the same period last year is primarily due to an increase in our average ~~outstanding~~ cash ~~balance~~ and a general increase in earned market interest rates. The decrease for the nine months ended September 30, 2007 as compared to the same period last year is primarily due to proceeds of $0.3 million in the first quarter of 2006 from the sale of our Commonwealth of Pennsylvania research and development tax credits.marketable securities.

Interest, amortization and other expenses for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2008 and 2007 was $0.5 million and ~~$1.6 million, respectively, as compared to~~ $0.4 million, ~~and $1.0 million for~~respectively. These expenses consist of: (i) interest related to the ~~three and nine month ending September 30, 2006, respectively. The increase is primarily due to: (i)~~outstanding balance under the PharmaBio loan; (ii) interest expense related to the amortization of deferred financing costs associated with warrants issued to PharmaBio in October 2006 in consideration for renegotiating the terms on the existing $8.5 million ~~loan~~loan; and ~~(ii) a prepayment penalty of $0.2 million incurred in the second quarter of 2007~~(iii) interest associated with ~~the prepayment of~~ our ~~outstanding indebtedness~~equipment loan obligations with ~~GECC.~~General Electric Business Financial Services, Inc. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations -– Liquidity and Capital Resources.”

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

We have incurred substantial losses since inception and expect to continue to make significant investments for continued product research, development, manufacturing and commercialization activities. Historically, we have funded our operations primarily through the issuance of equity securities and the use of debt and ~~capital lease facilities.~~our equipment financing facility.

We are subject to risks customarily associated with the biotechnology industry, which requires significant investment for research and development. There can be no assurance that our research and development projects will be successful, that products developed, including Surfaxin for the prevention of RDS in premature infants, will obtain necessary regulatory approval, or that any approved product will be commercially viable.

We plan to fund our research, development, manufacturing and potential commercialization activities through:

the issuance of equity and debt financings;

payments from potential strategic collaborators, including license fees and sponsored research funding;

sales of Surfaxin and our other SRT, if approved;

~~sales of our other product candidates, if approved;~~

~~capital lease~~equipment financings; and

interest earned on invested capital.

Our capital requirements will depend on many factors, including the success of the product development and commercialization plan. Even if we succeed in developing and subsequently commercializing product candidates, we may never achieve sufficient sales revenue to achieve or maintain profitability. There is no assurance that we will be able to obtain additional capital when needed with acceptable terms, if at all.

To assist us in identifying and evaluating strategic alternatives intended to enhance the future growth potential of our SRT pipeline and maximize shareholder value, in 2006, we engaged Jefferies under an exclusive arrangement that we terminated in June 2007. In November 2006, we raised $10 million in a private placement transaction and, in April 2007, we raised $30.2 million ($28.1 million net) in a registered direct offering. We continue to evaluate a variety of strategic transactions, including, but not limited to, potential business alliances, commercial and development partnerships, financings and other similar opportunities, although we cannot assure you that we will enter into any specific actions or transactions.

We have a CEFF that allows us to raise capital, subject to certain conditions and limitations, at the time and in amounts deemed suitable to us, during a three-year period ending on May 12, 2009. Use of the CEFF is subject to certain conditions, ~~(discussed at “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Committed Equity Financing Facility”, below),~~ including a share limitation ~~on the total number of shares of common stock that we may issue under the CEFF~~ (currently ~~not more than~~ approximately 5.2 million shares). and the volume weighted average price of our common stock on each trading day must be at least $2.00. We anticipate using the CEFF, when available, to support working capital needs in ~~2007.~~2008. (See our most recent Annual Report on Form 10-K at “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Committed Equity Financing Facility”.)

We continue to evaluate a variety of strategic transactions, including, but not limited to, potential business alliances, commercial and development partnerships, financings and other similar opportunities, although there can be no assurance that we will enter into any specific actions or transactions.

Cash, Cash Equivalents and Marketable Securities

As of ~~September 30, 2007,~~March 31, 2008, we had cash, cash equivalents ~~restricted cash~~ and marketable securities of ~~$33.1~~$41.5 million, as compared to ~~$27.0~~$53.0 million as of December 31, ~~2006.~~2007. The ~~increase~~decrease is primarily due ~~to: (i) in April 2007, a registered direct offering of 14,050,000 shares of our common stock~~ to select institutional investors. The shares were priced at $2.15 per share resulting in gross proceeds of $30.2 million ($28.1 million net). This offering was made pursuant to our October 2005 universal shelf registration statement; (ii) proceeds of $2.0 million from a financing pursuant to the CEFF (discussed below); and (iii) $1.5 million from the use of the secured credit facility with Merrill Lynch; offset by (iv) $25.9$11.5 million used in operating activities, purchases of capital expenditures and principal payments, ~~on capital lease arrangements.~~offset by new financings under our equipment financing facility with GE Business Financial Services Inc.

In October 2007, we completed a financing pursuant to the CEFF resulting in proceeds of $5 million from the issuance of 1,909,172 shares of our common stock at an average price per share, after the applicable discount, of $2.62.

Committed Equity Financing Facility (CEFF)

In April 2006, we entered into a new ~~CEFF with Kingsbridge,~~Committed Equity Financing Facility (CEFF) in which Kingsbridge committed to purchase, subject to certain conditions, the lesser of up to $50 million or up to 11,677,047 shares of our common stock. ~~Our previous~~(See our most recent Annual Report on Form 10-K at “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Committed Equity Financing ~~Facility, which was entered with Kingsbridge in July 2004 (2004 CEFF) and under which up to $47.6~~Facility”.)

As of March 31, 2008, there were approximately 5.2 million ~~remained~~shares available ~~automatically terminated on May 12, 2006, the date on which the Securities and Exchange Commission (SEC) declared effective the registration statement filed in connection with the new CEFF.~~

The CEFF allows us to raise capital, subject to certain conditions that we must satisfy, at the time and in amounts deemed suitable to us, during a three-year period that began on May 12, 2006. We are not obligated to utilize the entire $50 million available under this CEFF.

~~The purchase price of shares sold to Kingsbridge~~for issuance under the CEFF ~~is at~~(up to a ~~discount ranging from 6 to 10 percent~~maximum of ~~the volume weighted average of the price of our common stock (VWAP)~~$35.5 million in gross proceeds) for ~~each of the eight trading days following our initiation of a “draw down” under the CEFF. The discount on each of these eight trading days is determined as follows:~~

VWAP*

% of VWAP (Applicable Discount)

Greater than $10.50 per share 94 % (6 )%
Less than or equal to $10.50 but greater than $7.00 per share 92 % (8 )%
Less than or equal to $7.00 but greater than or equal to $2.00 per share 90 % (10 )%

* As such term is set forth in the Common Stock Purchase Agreement.future financings.

If on any trading day during the eight trading day pricing period for a draw down, the VWAP is less than the greater of (i) $2.00 or (ii) 85 percent of the closing price of our common stock for the trading day immediately preceding the beginning of the draw down period, no shares will be issued with respect to that trading day and the total amount of the draw down for that pricing period will be reduced for each such trading day by one-eighth of the draw down amount that we had initially specified.

Our ability to require Kingsbridge to purchase our common stock is subject to various limitations. Each draw down is limited to the lesser of 2.5 percent of the closing price market value of our outstanding shares of our common stock at the time of the draw down or $10 million. Unless Kingsbridge agrees otherwise, a minimum of three trading days must elapse between the expiration of any draw down pricing period and the beginning of the next draw down pricing period. In addition, Kingsbridge may terminate the CEFF under certain circumstances, including if a material adverse effect relating to our business continues for 10 trading days after notice of the material adverse effect.

In 2006, in connection with the CEFF, we issued a Class C Investor Warrant to Kingsbridge to purchase up to 490,000 shares of our common stock at an exercise price of $5.6186 per share, which is fully exercisable beginning October 17, 2006 and for a period of five years thereafter. The warrant is exercisable for cash, except in limited circumstances, with expected total proceeds to us, if exercised, of approximately $2.8 million.

In February 2007, we completed a financing pursuant to the CEFF resulting in proceeds of $2 million from the issuance of 942,949 shares of our common stock at an average price per share, after the applicable discount, of $2.12.

As of ~~October 12, 2007, there were approximately 5.2 million shares available for issuance under~~March 31, 2008, the ~~CEFF (up to a maximum of $35.5 million in gross proceeds) for future financings.~~Class C Investor Warrant had not been exercised.

In 2004, in connection with ~~the~~a previous Committed Equity Financing Facility that we entered with Kingsbridge in July 2004 ~~CEFF,~~(2004 CEFF), which has been terminated, we issued a Class B Investor warrant to Kingsbridge to purchase up to 375,000 shares of our common stock at an exercise price equal to $12.0744 per share. The warrant, which expires in January 2010, is exercisable in whole or in part for cash, except in limited circumstances, with expected total proceeds, if exercised, of approximately $4.5 million. As of ~~December~~March 31, ~~2006,~~2008, the Class B Investor Warrant had not been exercised.

October 2005 Universal Shelf Registration Statement

In October 2005, we filed a universal shelf registration statement on Form S-3 with the SEC for the proposed offering, from time to time, of up to $100 million of our debt or equity securities. In December 2005, we completed a registered direct offering of 3,030,304 shares of our common stock to select institutional investors resulting in gross proceeds to us of ~~$20~~$20.0 million. In April 2007, we completed a registered direct offering of 14,050,000 shares of our common stock to select institutional investors resulting in gross proceeds of $30.2 million.

In December 2007, we completed a registered direct offering of 10,000,000 shares of our common stock to select institutional investors resulting in gross proceeds of $25.0 million.

The universal shelf registration statement may permit us, from time to time, to offer and sell up to an additional approximately ~~$49.8~~$24.8 million of equity or debt securities. There can be no assurance, however, that we will be able to complete any such offerings of securities. Factors influencing the availability of additional financing include the progress of our research and development activities, investor perception of our prospects and the general condition of the financial markets, among others.

~~Investments in Property and Equipment~~

In October, we completed the construction of a new research and analytical laboratory in our Warrington, Pennsylvania corporate headquarters. The new laboratory will consolidate the analytical and development activities that are presently located in Doylestown, Pennsylvania, and Mountain View, California, including analytical testing of raw materials and commercial and clinical drug product supply, as well as research and development of our aerosol SRT and other novel formulations. The consolidation of scientific and analytical resources into one facility will allow us to leverage professional and scientific expertise and improve both operational efficiency and financial economics.

The investment in the new laboratory will be $3.3M ($2.6M is reflected on the balance sheet as property and equipment at September 30, 2007 and the remainder is anticipated in the fourth quarter 2007). We anticipate that approximately 95% of the total project will be financed utilizing: (i) our existing secured credit facility with Merrill Lynch; (ii) $650,000 from the Commonwealth of Pennsylvania (including a $500,000 loan from the Machinery and Equipment Loan Fund and grants of up to $150,000 through the Opportunities Grant Program and Customized Job Training Funds); and (iii) a $400,000 landlord contribution under our existing lease agreement.

Debt

Loan with PharmaBio

PharmaBio, the strategic investment group of Quintiles Transnational Corp., extended to us a secured, revolving credit facility of $8.5 to ~~$10~~$10.0 million in 2001. ~~In 2004 and in October 2006, we amended and restated~~Currently, the ~~loan documents and restructured the loan. As a result of the restructuring, we now have a loan with PharmaBio in the~~outstanding principal amount, of $8.5 million, ~~that~~ matures on April 30, 2010. ~~Since October 1, 2006, interest~~Interest on the loan ~~has accrued~~accrues at the prime rate, compounded ~~annually. All unpaid interest, including interest~~annually, and after October 1, 2006, is payable together with ~~respect to~~ the ~~quarter ending September 30, 2006, will now be payable on April 30, 2010, the maturity date of the loan.~~outstanding principal at maturity. We may repay the loan, in whole or in part, at any time without prepayment penalty or premium. ~~In addition,~~ our obligations to PharmaBio under the loan documents are ~~now~~ secured by an interest in substantially all of our assets, subject to limited exceptions set forth in the related Security ~~Agreement (the PharmaBio Collateral).~~Agreement.

~~Also in~~

In October 2006, in consideration of PharmaBio’s agreement to restructure the loan, we entered into a Warrant Agreement with PharmaBio, pursuant to which PharmaBio has the right to purchase 1.5 million shares of our common stock at an exercise price equal to $3.5813 per share. The warrants have a seven-year term and are exercisable, in whole or in part, for cash, cancellation of a portion of our indebtedness under the PharmaBio loan agreement, or a combination of the foregoing, in an amount equal to the aggregate purchase price for the shares being purchased upon any exercise. Under the Warrant Agreement, we filed a registration statement with the SEC with respect to the resale of the shares issuable upon exercise of the warrants. As of March 31, 2008, the warrants had not been exercised.

As of ~~September 30, 2007,~~March 31, 2008, the outstanding balance under the loan was ~~$9.5~~$9.8 million ($8.5 million of pre-restructured principal and ~~$1.0~~$1.3 million of accrued interest) and was classified as a long-term loan payable on the Consolidated Balance Sheets.

~~Capital Lease~~Equipment Financing ~~Arrangements~~Facility with ~~Merrill Lynch Capital~~GE Business Financial Services, Inc.

On May 21, 2007, we entered into a Credit and Security Agreement (Loan Agreement) with Merrill Lynch Capital (“Merrill Lynch”), a division of Merrill Lynch Business Financial Services Inc. ~~(Merrill Lynch)~~, ~~entered into a Credit and Security Agreement (Loan Agreement),~~as Lender, pursuant to which Merrill Lynch ~~is providing~~agreed to provide us a $12.5 million credit facility (Facility) to fund our capital programs. ~~Under~~Previously, our capital financing arrangements had been primarily with the ~~Facility, $9 million was made available immediately (with up to an additional $3.5 million becoming available, at a rate~~Life Science and Technology Finance Division of $1 million for each $10 million raised by us through business development partnerships, stock offerings and other similar financings). Approximately $4.0 million of the Facility was drawn to fund the prepayment of all our outstanding indebtedness to General Electric Capital Corporation (GECC) under ~~the~~a Master Security Agreement ~~with GECC~~ dated December 20, 2002, as amended (GECC Agreement). ~~The right~~We simultaneously terminated our arrangement with GECC and drew down $4.0 million of the Facility to ~~draw funds~~prepay all of our then-outstanding indebtedness under the ~~Facility will expire on May 30,~~GECC Agreement. Effective in February 2008, ~~subject to~~as a ~~best efforts undertaking by~~consequence of the acquisition of Merrill Lynch Capital by GECC or an affiliate of GECC, GE Business Financial Services, Inc., as successor to ~~extend~~Merrill Lynch Capital, is now the ~~draw down period beyond~~Lender under the ~~expiration date for an additional six months.~~ Loan Agreement and the provider of the Facility.

The minimum advance under the Facility is $100,000. Interest on each advance ~~will accrue~~accrues at a fixed rate per annum equal to LIBOR plus 6.25%, determined on the funding date of such advance. Principal and interest on all advances will be payable in equal installments on the first business day of each month. We may prepay advances, in whole or in part, at any time, subject to a prepayment penalty, which, depending on the period of time elapsed from the closing of the Facility, will range from 4% to 1%.

We may use the Facility to finance (a) new property and equipment and (b) up to approximately $1.7 million “Other Equipment” and related costs, which may include leasehold improvements, intangible property such as software and software licenses, specialty equipment, a pre-payment penalty paid to GECC (with respect to the termination of our previous arrangement) and “soft costs” related to financed property and equipment (including, without limitation, taxes, shipping, installation and other similar costs). Advances to finance the acquisition of new property and equipment ~~will be~~are amortized over a period of 36 months. The ~~advance~~promissory note related to the GECC prepayment ~~will be~~is amortized over a period of 27 months and Other Equipment and related costs ~~will be~~is amortized over a period of 24 months.

~~Our~~The right to draw funds under the Facility will expire on May 30, 2008, subject to a best efforts undertaking by the Lender to extend the draw down period beyond the expiration date for an additional six months. We plan to approach GE Business Financial Services, Inc. to discuss the potential six-month extension of the Facility. In addition, our obligations ~~to Merrill Lynch~~under the Facility are secured by a security interest in (a) the financed property and equipment, including the property and equipment securing GECC under the GECC Agreement at the time of prepayment, and (b) as Supplemental Collateral, all of our intellectual property, subject to limited exceptions set forth in the Loan Agreement. Under the Loan Agreement, ~~(Supplemental Collateral). The~~the Supplemental Collateral will be released on the earlier to occur of (i) receipt by us of FDA approval of our NDA for Surfaxinfor the prevention of RDS in premature infants, or (ii) the date on which we shall have maintained over a continuous 12-month period ending on or after March 31, 2008, measured at the end of each calendar quarter, a minimum cash balance equal to our projected cash requirements for the following 12-month period. In addition, we, Merrill Lynch and PharmaBio entered into an Intercreditor Agreement under which Merrill Lynch agreed to subordinate its security interest in the Supplemental Collateral (which does not include financed property and equipment) to the security interest in the same collateral that we previously granted to PharmaBio (discussed above).

As of ~~September 30, 2007,~~March 31, 2008, approximately ~~$4.9~~$5.2 million was outstanding under the Facility ($~~2.1~~2.8 million classified as current liabilities and ~~$2.8~~$2.4 million as long-term liabilities) and ~~$3.5~~$4.9 million remained available for use, subject to the conditions of the Facility. ~~In the quarter ending September 30, 2007, we used $1.3 million under this Facility, primarily to finance the new laboratory.~~

Previously, our capital financing arrangements had been primarily with the Life Science and Technology Finance Division of GECC. Pursuant to a Master Security Agreement, we purchased capital equipment, including manufacturing, information technology systems, laboratory, office and other related capital assets and subsequently financed those purchases through GECC.

Lease Agreements

We maintain facility leases for our operations in Pennsylvania, New Jersey and California.

We maintain our headquarters in Warrington, Pennsylvania. The facility is 39,594 square feet and serves as the main operating facility for clinical development, regulatory, analytical technical services, research and development, sales and marketing, and administration. In April 2007, the lease, which originally expired in February 2010 with total aggregate payments of $4.6 million, was extended an additional three years through February 2013 with additional payments of $3.0 million over the extension period.

We lease a 21,000 square ~~foot pharmaceutical~~feet of space for our manufacturing ~~and development~~ facility in Totowa, New Jersey, ~~that~~at an annual rent of $150,000. This space is specifically designed for the production of sterile pharmaceuticals in compliance with cGMP ~~requirements.~~requirements and is our only manufacturing facility. The lease expires in December 2014, ~~with~~subject to a right of the landlord, first exercisable after December 2007 and upon two years’ prior notice, to terminate the lease early. This termination right is subject to certain conditions, including that the master tenant, a related party of the landlord, must have ceased all activities at the premises, and, in the earlier years, if we satisfy certain financial conditions, the landlord must make payments to us of significant early termination amounts. The total aggregate payments since inception of the lease are $1.4 million. For a discussion of ~~$1.4 million ($150,000 per year). The lease contains an early termination option, first beginning in December 2009. The early termination option can only be exercised by the landlord upon a minimum~~our manufacturing strategy, see “Plan of ~~two years prior notice~~Operations – Research and ~~payment of significant early termination amounts to us, subject to certain conditions.~~

Development – Manufacturing.”

~~In August 2006, we reduced our leased~~We lease approximately 5,600 square feet office and analytical laboratory space in Doylestown, Pennsylvania, ~~from~~with an annual rent of approximately ~~11,000 square feet to approximately 5,600 square feet and extended the lease that expired in~~$93,800, which since August 2007 has been leased on a monthly basis. We are currently consolidating the activities at this location into our new laboratory space in Warrington, Pennsylvania and ~~expect~~plan to terminate this lease in the ~~first half~~third quarter of 2008.

We lease 16,800 square feet of office and laboratory space at our facility in Mountain View, California. The facility is 16,800 square feet and houses aerosol and formulation development activities. We are currently consolidating these activities into our new laboratory space in Warrington, Pennsylvania.California, at an annual rent of approximately $275,000. The lease expires in June 2008, with total aggregate payments ~~since inception of~~over the lease term of $804,000. In March 2007, we subleased approximately 1,800 square feet of this facility for total aggregate receipts of $46,000. In December 2007, we consolidated these activities into our new laboratory space in Warrington, Pennsylvania and will not renew or extend this lease.

~~If we are successful in commercializing our SRT portfolio, we expect that our needs for additional leased space will increase.~~

Future Capital Requirements

Unless and until we can generate significant cash from our operations, we expect to continue to require substantial additional funding to conduct our business, including our manufacturing, research and product development activities and to repay our indebtedness. Our operations will not become profitable before we exhaust our current resources; therefore, we will need to raise substantial additional funds through additional debt or equity financings or through collaborative ~~ventures~~or joint development or commercialization arrangements with potential corporate partners. We may in some cases elect to develop products on our own instead of entering into collaboration arrangements and this would increase our cash requirements. Other than our CEFF with Kingsbridge and our ~~capital~~ equipment financing facility with ~~Merrill Lynch,~~GE Business Financial Services, Inc., the use of which are subject to certain conditions, we have no contractual arrangements under which we may obtain additional financing.

To assist us in identifying and evaluating strategic alternatives intended to enhance the future growth potential of our SRT pipeline and maximize shareholder value, in 2006, we engaged Jefferies under an exclusive arrangement that we terminated in June 2007. In November 2006, we raised $10 million in a private placement transaction and, in April 2007, we raised $30.2 million ($28.1 million net) in a registered direct offering. We continue to evaluate a variety of strategic transactions, including, but not limited to, potential business alliances, commercial and development partnerships, financings and other similar opportunities, although ~~we cannot assure you~~there can be no assurance that we will enter into any specific actions or transactions.

If a transaction involving the issuance of additional equity and debt securities is concluded, such a transaction may result in additional dilution to our shareholders. We cannot be certain that additional funding will be available when needed or on terms acceptable to us, if at all. If we fail to receive additional funding or enter into business alliances or other similar opportunities, we may have to reduce significantly the scope of or discontinue our planned research, development and manufacturing activities, which could significantly harm our financial condition and operating results.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is confined to our cash, cash equivalents and available for sale securities. We place our investments with high quality issuers and, by policy, limit the amount of credit exposure to any one issuer. We currently do not hedge interest rate or currency exchange exposure. We classify highly liquid investments purchased with a maturity of three months or less as “cash equivalents” and commercial paper and fixed income mutual funds as “available for sale securities.” Fixed income securities may have their fair market value adversely affected due to a rise in interest rates and we may suffer losses in principal if forced to sell securities that have declined in market value due to a change in interest rates.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective in their design to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

(b) Changes in internal controls

There were no changes in internal controls over financial reporting or other factors that could materially affect those controls subsequent to the date of our evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On March 15, 2007, the United States District Court for the Eastern District of Pennsylvania granted ~~defendant’s~~defendants’ motion to dismiss the Second Consolidated Amended Complaint filed by the Mizla Group, individually and on behalf of a class of investors who purchased our publicly traded securities between March 15, 2004 and June 6, 2006, alleging securities laws-related violations in connection with various ofpublic statements made by our ~~public statements.~~Company. The amended complaint had been filed on November 30, 2006 against us, our Chief Executive Officer, Robert J. Capetola, and our former Chief Operating Officer, Christopher J. Schaber, under the caption “In re: Discovery Laboratories Securities Litigation” and sought an order that the action proceed as a class action and an award of compensatory damages in favor of the plaintiffs and the other class members in an unspecified amount, together with interest and reimbursement of costs and expenses of the litigation and other equitable or injunctive relief. On April 10, 2007, plaintiffs filed a Notice of Appeal with the United States District Court for the Eastern District of ~~Pennsylvania and filed an opening brief on July 2, 2007. Defendants filed their opening brief on August 6, 2007, and~~Pennsylvania. On April 29, 2008, the Third Circuit Court of Appeals affirmed the District Court’s dismissal of the complaint for the reasons set forth in the District Court opinion. Plaintiffs ~~filed their reply brief on August 20, 2007.~~have 14 days, or until May 13, 2008, to decide whether to seek a rehearing of the Third Circuit's decision.

~~We intend to vigorously defend the appeal of the securities class action. The potential impact of~~Additional actions such as this ~~or any such actions, all of which generally seek unquantified damages, attorneys’ fees and expenses is uncertain. Additional actions~~one, based upon similar allegations, or otherwise, may be filed in the future. The potential impact of such actions, which generally seek unquantified damages, attorneys’ fees and expenses, is uncertain. There can be no assurance that an adverse result in any such proceedings would not have a potentially material adverse effect on our business, results of operations and financial condition.

We have from time to time been involved in disputes and proceedings arising in the ordinary course of business, including in connection with the termination in 2006 of certain pre-launch commercial programs following our process validation stability failure. Such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation. While it is impossible to predict with certainty the eventual outcome of such claims, we believe the pending matters are unlikely to have a material adverse effect on our financial condition or results of operations. However, there can be no assurance that we will be successful in any proceeding to which we are or may be a party.

ITEM 1A. RISK FACTORS

In addition to the risks, uncertainties and other factors set forth ~~herein,~~below and elsewhere in this Form 10-Q, see the “Risk Factors” section contained in our most recent Annual Report on Form 10-K.

Under our restructured collaboration arrangement with Chrysalis, we are responsible for future development, which will require us to build internal development capabilities or enter into future collaboration or other arrangements to gain the engineering expertise required to further develop the Chrysalis Technology.

In March 2008, we restructured our collaboration arrangement with Philip Morris USA Inc., d/b/a Chrysalis Technologies (“Chrysalis”). We now have responsibility for the development of the Chrysalis’ proprietary capillary aerosolization technology (the “Chrysalis Technology”) and will not have development support from Chrysalis after June 30, 2008. Our future development of the Chrysalis Technology is subject to certain risks and uncertainties, including, without limitation:

· We may not be able to complete the development of the initial prototype aerosolization device, if at all, on a timely basis and such inability may delay or prevent initiation of our planned Phase 2 clinical trials;

· We will require sophisticated engineering expertise to continue the development of the Chrysalis Technology. Although we are building our own internal medical device engineering expertise and have recently begun working with a leading engineering and design firm that has a successful track record of developing innovative devices for major companies in the medical and pharmaceutical industries, there is no assurance that our efforts will be successful or that we will be able to identify other potential collaborators to complete the development of the next-generation aerosolization system and enter into agreements with such collaborators on terms and conditions that are favorable to us, and, if we are unable to identify or retain design engineers and medical device experts to support our development program, this could impair our ability to commercialize or develop it’s aerosolized drug products;

· PMPSA and Chrysalis are no longer affiliated entities; as such, there is a risk that, if we were to require the consent of PMPSA and Chrysalis under the License Agreements, they may not agree on the appropriate course and we may be forced to develop the Chrysalis Technology in the two territories under different circumstances. Such inconsistencies could have an adverse effect on the our ability to develop the Chrysalis Technology or to successfully commercialize the Licensed Products in one or both of the territories; and

· We have additional rights under the US License Agreement that are not provided under the International License Agreement. Although the International License Agreement provides for the potential expansion of rights with the consent of PMPSA, there can be no assurance that PMPSA would agree to any such expansion and, as a result, we may be unable to develop and commercialize Licensed Products under its expanded rights outside the United States markets.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Plan of Operations – Research and Development – Corporate Partnership Agreements.”

Our pending NDA for Surfaxin for the prevention of RDS in premature infants may not be approved by the FDA in a timely manner or at all, which would adversely impact our ability to commercialize this product.

Receipt of the May 2008 Approvable Letter has delayed the FDA’s review of our NDA for Surfaxin for the prevention of RDS in premature infants. Based on our assessment of the Approvable Letter, conducted by our regulatory, manufacturing and quality management in consultation with our expert consultants, we believe that with our current dataset for Surfaxin we and the FDA can reach agreement on appropriate acceptance criteria and drug product specifications for Surfaxin. Based on our regulatory assessment and our experts’ advice, we believe the meeting will qualify for priority scheduling and that the FDA may designate our formal response to this Approvable Letter as a Class 1 resubmission, which would result in a target review period of 60 days (whereas a Class 2 resubmission would result in a 6-month target review period). We anticipate being in a position to submit our formal response to the Approvable Letter in approximately 6 to 8 weeks, although this timeline may be shortened or extended following discussions with the FDA. Although the FDA has not requested additional clinical data to date, it could at any time in its review process request additional data from additional clinical trials. Ultimately, the FDA may not approve Surfaxin for RDS in premature infants. Any failure to obtain FDA approval or further delay associated with the FDA’s review process would adversely impact our ability to commercialize our lead product and would have a material adverse effect on our business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three ~~and nine~~ months ended ~~September 30, 2007,~~March 31, 2008, we did not issue any unregistered shares of common stock pursuant to the exercise of outstanding warrants and options. There were no stock repurchases during the three ~~and nine~~ months ended ~~September 30, 2007.~~March 31, 2008.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibits are listed on the Index to Exhibits at the end of this Quarterly Report. The exhibits required by Item 601 of Regulation S-K, listed on such Index in response to this Item, are incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Discovery Laboratories, Inc.
	(Registrant)

	~~Discovery Laboratories, Inc.~~ ~~(Registrant)~~

Date: ~~November~~May 8 ~~2007~~2008	By:	/s/ Robert J. Capetola
		Robert J. Capetola, Ph.D.
		President and Chief Executive Officer


Date: ~~November~~May 8 ~~2007~~2008	By:	/s/ John G. Cooper
		John G. Cooper
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

INDEX TO EXHIBITS

The following exhibits are included with this Quarterly Report on Form 10-Q.

Exhibit No.	Description	Method of Filing

3.1	Restated Certificate of Incorporation of Discovery, dated September 18, 2002.	Incorporated by reference to Exhibit 3.1 to Discovery’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, as filed with the SEC on March 31, 2003.

3.2	Amended and Restated By-Laws of Discovery.	Incorporated by reference to Exhibit 3.2 to Discovery’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, as filed with the SEC on March 15, 2004.

3.3	Certificate of Designations, Preferences and Rights of Series A Junior Participating Cumulative Preferred Stock of Discovery, dated February 6, 2004.	Incorporated by reference to Exhibit 2.2 to Discovery’s Form 8-A, as filed with the SEC on February 6, 2004.

3.4	Certificate of Amendment to the Certificate of Incorporation of Discovery, dated as of May 28, 2004.	Incorporated by reference to Exhibit 3.1 to Discovery’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, as filed with the SEC on August 9, 2004.

3.5	Certificate of Amendment to the Restated Certificate of Incorporation of Discovery, dated as of July 8, 2005.	Incorporated by reference to Exhibit 3.1 to Discovery’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, as filed with the SEC on August 8, 2005.

4.1	Shareholder Rights Agreement, dated as of February 6, 2004, by and between Discovery and Continental Stock Transfer & Trust Company.	Incorporated by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on February 6, 2004.

4.2	Form of Class A Investor Warrant.	Incorporated by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on June 20, 2003.

4.3	Class B Investor Warrant dated July 7, 2004, issued to Kingsbridge Capital Limited.	Incorporated by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K as filed with the SEC on July 9, 2004.

4.4	Warrant Agreement, dated as of November 3, 2004, by and between Discovery and QFinance, Inc.	Incorporated by reference to Exhibit 4.1 of Discovery’s Quarterly Report on Form 10-Q, as filed with the SEC on November 9, 2004.

4.5	Class C Investor Warrant, dated April 17, 2006, issued to Kingsbridge Capital Limited	Incorporated by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on April 21, 2006.

4.6	Registration Rights Agreement, dated as of July 7, 2004, by and between Kingsbridge Capital Limited and Discovery.	Incorporated by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as filed with the SEC on July 9, 2004.

Exhibit No.		Description		Method of Filing

4.7	Registration Rights Agreement, dated as of April 17, 2006, by and between Kingsbridge Capital Limited and Discovery.	Incorporated by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as filed with the SEC on April 21, 2006.

4.8	Second Amended and Restated Promissory Note, dated as of October 25, 2006, issued to PharmaBio Development Inc. (PharmaBio)	Incorporated by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on October 26, 2006.

4.9	Warrant Agreement, dated as of October 25, 2006, by and between Discovery and PharmaBio	Incorporated by reference to Exhibit 4.2 to Discovery’s Current Report on Form 8-K, as filed with the SEC on October 26, 2006.

4.10	Warrant Agreement, dated November 22, 2006	Incorporated by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on November 22, 2006.

10.1	~~Stock Issuance~~ Amendment dated January 3, 2008 to the Amended and Restated Employment Agreement dated as of ~~October 30, 2007~~May 4, 2006 between Robert J. Capetola and Discovery Laboratories, Inc.	Incorporated by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on ~~October 30, 2007.~~January 3, 2008.

10.2	Amendment dated January 3, 2008 to the Amended and Restated Employment Agreement dated as of May 4, 2006 between John G. Cooper and Discovery Laboratories, Inc.	Incorporated by reference to Exhibit 10.3 to Discovery’s Current Report on Form 8-K, as filed with the SEC on January 3, 2008.

10.3	Amendment dated January 3, 2008 to the Amended and Restated Employment Agreement dated as of May 4, 2006 between David L. Lopez and Discovery Laboratories, Inc.	Incorporated by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as filed with the SEC on January 3, 2008.

10.4+	Amended and Restated License Agreement by and between Discovery and Philip Morris USA Inc., d/b/a Chrysalis Technologies dated March 28, 2008.	Filed herewith.

10.5+	License Agreement by and between Discovery Laboratories, Inc. and Philip Morris Products S.A., dated March 28, 2008.	Filed herewith.

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.	Filed herewith.

31.2	Certification of Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(a) of the Exchange Act.	Filed herewith.

32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

+Confidential treatment requested as to certain portions of these exhibits. Such portions have been redacted and filed separately with the Commission.

Delaware		94-3171943
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

	2600 Kelly Road, Suite 100
	Warrington, Pennsylvania 18976-3622
	(Address of principal executive offices)

	September 30,			December 31,			March 31,			December 31,
	2007			2006			2008			2007
	(Unaudited)						(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	18,831		$	26,173		$	19,050		$	36,929
Available-for-sale marketable securities								22,495			16,078
Receivable from collaborative arrangement								2,000			—
Prepaid expenses and other current assets								442			611
Total Current Assets								43,987			53,618
Property and equipment, net								6,766			7,069
Restricted cash		646			829			600			600
Available-for-sale securities		13,609			—
Prepaid expenses and other current assets		298			565

Total Current Assets		33,384			27,567

Property and equipment, net		7,186			4,794
Deferred financing costs and other assets		1,778			2,039			1,320			1,457
Total Assets	$	42,348		$	34,400		$	52,673		$	62,744
LIABILITIES & STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses	$	6,819		$	5,953
Capitalized leases and note payable, current portion		2,146			2,015

Accounts payable							$	1,927		$	757
Accrued expenses								4,608			7,087
Equipment loan, current portion								2,794			2,625
Total Current Liabilities		8,965			7,968			9,329			10,469

Loan payable, non-current portion, including accrued interest		9,452			8,907
Capitalized leases and note payable, non-current portion		2,768			2,687
Loan payable, including accrued interest								9,781			9,633
Equipment loan, non-current portion								2,384			2,991
Other liabilities		895			516			881			870

Total Liabilities		22,080			20,078			22,375			23,963

Stockholders’ Equity:
Common stock, $0.001 par value; 180,000 shares authorized; 84,995 and 69,871 shares issued; and 84,681 and 69,558 shares outstanding at September 30, 2007 and December 31, 2006, respectively.		85			70
Common stock, $0.001 par value; 180,000 shares authorized; 97,001 and 96,953 shares issued; and 96,688 and 96,640 shares outstanding at March 31, 2008 and December 31, 2007, respectively.								97			97
Additional paid-in capital		299,556			265,604			331,181			329,999
Accumulated deficit		(276,339	)		(248,298	)		(298,017	)		(288,303	)
Treasury stock (at cost); 313 shares		(3,054	)		(3,054	)		(3,054	)		(3,054	)
Other comprehensive income		20			—			91			42

Total Stockholders’ Equity		20,268			14,322			30,298			38,781
Total Liabilities & Stockholders’ Equity	$	42,348		$	34,400		$	52,673		$	62,744

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2007			2006			2007			2006			2008			2007
Revenue	$	-		$	-		$	-		$	-

Revenue from collaborative arrangement and grants													$	2,050		$	—

Expenses:
Research and development		6,184			5,204			18,400			18,728			7,232			5,422
General and administrative		3,147			2,723			9,366			15,429			4,505			2,754
Restructuring charge		—			—			—			4,805
Total expenses		9,331			7,927			27,766			38,962			11,737			8,176
Operating loss		(9,331	)		(7,927	)		(27,766	)		(38,962	)		(9,687	)		(8,176	)
Other income / (expense):
Interest and other income		457			291			1,321			1,468			441			306
Interest and other expense		(473	)		(362	)		(1,596	)		(994	)		(468	)		(440	)
Other income / (expense), net		(16	)		(71	)		(275	)		474			(27	)		(134	)
Net loss	$	(9,347	)	$	(7,998	)	$	(28,041	)	$	(38,488	)	$	(9,714	)	$	(8,310	)
Net loss per common share - Basic and diluted	$	(0.11	)	$	(0.13	)	$	(0.35	)	$	(0.62	)	$	(0.10	)	$	(0.12	)
Weighted average number of common shares outstanding - basic and diluted		84,642			62,312			79,485			61,703			96,649			69,989

	Nine Months Ended						Three Months Ended
	September 30,						March 31,
	2007			2006			2008			2007
Cash flows from operating activities:
Net loss	$	(28,041	)	$	(38,488	)	$	(9,714	)	$	(8,310	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,212			685			573			376
Stock-based compensation and 401(k) match		3,743			4,891			1,182			751
Loss on disposal of property and equipment		3			—			1			—
Changes in:
Prepaid expenses and other current assets		233			282
Receivable from collaborative arrangement								(2,000	)		—
Prepaid expenses and other assets								144			348
Accounts payable and accrued expenses		866			(673	)		(1,309	)		(834	)
Other assets		(149	)		2
Other liabilities and accrued interest on loan payable		924			383			159			179

Net cash used in operating activities		(21,209	)		(32,918	)		(10,964	)		(7,490	)

Cash flows from investing activities:
Purchase of property and equipment		(3,163	)		(967	)		(109	)		(275	)
Restricted cash		183			(183	)		—			160
Purchases of marketable securities		(26,800	)		(4,631	)		(17,773	)		(2,000	)
Proceeds from sales or maturity of marketable securities		13,211			7,884			11,405			—
Net cash (used in) / provided by investing activities		(16,569	)		2,103

Net cash used in investing activities								(6,477	)		(2,115	)

Cash flows from financing activities:
Proceeds from issuance of securities, net of expenses		30,224			2,800			—			2,005
Equipment financed through capital lease obligation		5,509			1,130
Principal payments under capital lease obligation		(5,297	)		(1,232	)
Net cash provided by financing activities		30,436			2,698
Proceeds from equipment loan								251			—
Principal payments under equipment loan obligations								(689	)		(494	)

Net cash (used in)/provided by financing activities								(438	)		1,511
Net decrease in cash and cash equivalents		(7,342	)		(28,117	)		(17,879	)		(8,094	)

Cash and cash equivalents - beginning of period		26,173			47,010			36,929			26,173

Cash and cash equivalents - end of period	$	18,831		$	18,893		$	19,050		$	18,079

Supplementary disclosure of cash flows information:
Interest paid	$	511		$	964		$	157		$	123
Non-cash transactions:
Unrealized gain/(loss) on marketable securities		20			2
Unrealized gain on marketable securities								49			—

							March 31,		March 31,
							2008		2007
	September 30, 2007			September 30, 2006
Expected volatility		97	%		101	%		77%		95%
Expected term		4 and 5 years			5 years			4 and 5 years		4 and 5 years
Risk-free rate		4.6	%		5.0	%		3.4% - 3.5%		4.6%
Expected dividends		—			—			—		—

(in thousands)									Three Months Ended
	Three Months Ended				Nine Months Ended				March 31,
	September 30,				September 30,				2008		2007
	2007		2006		2007		2006
(in thousands)
Research & Development	$	319	$	353	$	1,109	$	1,255	$	332	$	234
General & Administrative		737		567		2,343		2,878		723		424
Total	$	1,056	$	920	$	3,452	$	4,133	$	1,055	$	658

( in thousands)									Three Months Ended March 31,
	Three Months Ended September 30,				Nine Months Ended September 30,				2008		2007
( in thousands)	2007		2006		2007		2006
Research and Development Expenses:
Manufacturing development	$	3,141	$	2,341	$	8,408	$	7,732	$	4,366	$	2,864
Unallocated development - clinical and regulatory operations		1,994		1,753		6,329		6,291
Development operations (unallocated)										1,980		1,501
Direct pre-clinical and clinical program expenses		1,049		1,110		3,663		4,705		886		1,057
Total Research & Development Expenses	$	6,184	$	5,204	$	18,400	$	18,728	$	7,232	$	5,422

VWAP*	% of VWAP (Applicable Discount)
Greater than $10.50 per share		94	%	(6	)%
Less than or equal to $10.50 but greater than $7.00 per share		92	%	(8	)%
Less than or equal to $7.00 but greater than or equal to $2.00 per share		90	%	(10	)%