10-K

United States SECURITIES AND EXCHANGE COMMISSION

Washington , D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended: December 31, 2007

Commission File Number: 33-23094

Middlefield Banc Corp.

(Exact name of registrant as specified in its charter)

Ohio	34-1585111
( State or other jurisdiction of incorporation or organization)	( IRS Employer Identification No.)

15985 East High Street, Middlefield, Ohio 44062-0035
(440) 632-1666
( Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices )

     Securities registered pursuant to section 12(b) of the Act : none

     Securities registered pursuant to section 12(g) of the Act : common stock, without par value

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes o     No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes o     No þ

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by sections 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 þ     No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
	(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). . Yes o     No þ

     The aggregate market value on June 30, 2007 of common stock held by non-affiliates of the registrant was approximately $63.6 million. As of March 21, 2008, there were 1,707,015 shares of common stock issued and outstanding.

Documents Incorporated by Reference

     Portions of the registrant’s definitive proxy statements for the 2008 Annual Meeting of Shareholders are incorporated by reference in Part III of this report. Portions of the Annual Report to Shareholders for the year ended December 31, 2007 are incorporated by reference into Part I and Part II of this report.

Table of Contents

			Page
Part I
	Item 1	Business		2
	Item 1A	Risk Factors		15
	Item 2	Properties		17
	Item 3	Legal Proceedings		18
	Item 4	Submission of Matters to a Vote of Security Holders		18
Part II
	Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		18
	Item 6	Selected Financial Data		19
	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
	Item 7A	Quantitative and Qualitative Disclosures About Market Risk		19
	Item 8	Financial Statements and Supplementary Data		19
	Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		19
	Item 9a(T)	Controls and Procedures		19
	Item 9b	Other Information		19
Part III
	Item 10	Directors and Executive Officers of the Registrant		19
	Item 11	Executive Compensation		19
	Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		20
	Item 13	Certain Relationships and Related Transactions		20
	Item 14	Principal Accountant Fees and Services		20
Part IV
	Item 15	Exhibits, Financial Statement Schedules		20
Signatures				25
EX-13
EX-21
EX-23
EX-31.1
EX-31.2
EX-32

i

Item 1 — Business

     Middlefield Banc Corp . Incorporated in 1988 under the Ohio General Corporation Law, Middlefield Banc Corp. (“Company”) is a two-bank holding company registered under the Bank Holding Company Act of 1956. The Company’s two subsidiaries are:

1.	The Middlefield Banking Company (“MBC”), an Ohio-chartered commercial bank that began operations in 1901. MBC engages in a general commercial banking business in northeastern Ohio. The principal executive office is located at 15985 East High Street, Middlefield, Ohio 44062-0035, and its telephone number is (440) 632-1666.
2.	Emerald Bank (“EB”), an Ohio-chartered commercial bank headquartered in Dublin, Ohio. EB engages in a general commercial banking business in central Ohio. The principal executive office is located at 6215 Perimeter Drive, Dublin Ohio 43017, and its telephone number is (614) 793-4631.

     The Middlefield Banking Company . MBC was chartered under Ohio law in 1901. The Company became the holding company for MBC in 1988. MBC offers its customers a broad range of banking services, including checking, savings, and negotiable order of withdrawal (NOW) accounts; money market accounts; time certificates of deposit, commercial loans, real estate loans, and various types of consumer loans; safe deposit facilities, and travelers’ checks. MBC offers online banking and bill payment services to individuals and online cash management services to business customers through its website at www.middlefieldbank.com.

     Engaged in a general commercial banking business in northeastern Ohio, MBC offers commercial banking services principally to small and medium-sized businesses, professionals and small business owners, and retail customers. MBC has developed and continues to monitor and update a marketing program to attract and retain consumer accounts, and to offer banking services and facilities compatible with the needs of its customers.

     MBC’s loan products include operational and working capital loans; loans to finance capital purchases; term business loans; residential construction loans; selected guaranteed or subsidized loan programs for small businesses; professional loans; residential mortgage and commercial mortgage loans, and consumer installment loans to purchase automobiles, boats, and for home improvement and other personal expenditures. Although the bank makes agricultural loans, it currently has no significant agricultural loans.

     Emerald Bank. The Company acquired Emerald Bank on April 19, 2007 for a combination of cash and stock. Emerald Bank operates as a separate commercial bank subsidiary of Middlefield, offering essentially the same range of products and services in central Ohio as MBC does in northeastern Ohio.

     Market Area. MBC’s market area consists principally of Geauga, Portage, Trumbull, and Ashtabula Counties. Benefiting from the area’s proximity both to Cleveland and Warren, population and income levels have maintained steady growth over the years. EB’s sole office is located in Dublin in Franklin County, serving the central Ohio market.

Competition . The banking industry has been changing for many reasons, including continued consolidation within the banking industry, legislative and regulatory changes, and advances in technology. To deliver banking products and services more effectively and efficiently, banking institutions are opening in-store branches, installing more automated teller machines (ATMs) and investing in technology to permit telephone, personal computer, and internet banking. While all banks are experiencing the effects of the changing competitive and technological environment, the manner in which banks choose to compete is increasing the gap between large national and super-regional banks, on one hand, and community banks on the other. Large institutions are committed to becoming national or regional “brand names,” providing a broad selection of products at low cost and with advanced technology, while community banks provide most of the same products but with a commitment to personal service and with local ties to the customers and communities they serve. The Company seeks to take competitive advantage of its local orientation and community banking profile. It competes for loans principally through responsiveness to customers and its ability to communicate effectively with them and understand and address their needs. The Company competes for deposits principally by offering customers personal attention, a variety of banking services, attractive rates, and strategically located banking facilities. The Company seeks to provide high quality banking service to professionals and small and mid-sized businesses, as well as individuals, emphasizing quick and flexible responses to customer demands.

     Forward-looking Statements . This document contains forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) about The Company and subsidiaries. Information incorporated in this document by reference, future filings by the Company on Form 10-Q and Form 8-K, and future oral and written statements by the Company and its management may also contain forward-looking statements. Forward-looking statements include statements about anticipated operating and financial performance, such as loan originations, operating efficiencies, loan sales, charge-offs and loan loss provisions, growth opportunities, interest rates, and deposit growth. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “project,” “plan,” and similar expressions are intended to identify these forward-looking statements.

2

     Forward-looking statements are necessarily subject to many risks and uncertainties. A number of things could cause actual results to differ materially from those indicated by the forward-looking statements. These include the factors we discuss immediately below, those addressed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” other factors discussed elsewhere in this document or identified in our filings with the Securities and Exchange Commission, and those presented elsewhere by our management from time to time. Many of the risks and uncertainties are beyond our control. The following factors could cause our operating and financial performance to differ materially from the plans, objectives, assumptions, expectations, estimates, and intentions expressed in forward-looking statements:

• the strength of the United States economy in general and the strength of the local economies in which we conduct our operations; general economic conditions, either nationally or regionally, may be less favorable than we expect, resulting in a deterioration in the credit quality of our loan assets, among other things

• the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest-rate policies of the Federal Reserve Board

• inflation, interest rate, market, and monetary fluctuations

• the development and acceptance of new products and services of the Company and subsidiaries and the perceived overall value of these products and services by users, including the features, pricing, and quality compared to competitors’ products and services

• the willingness of users to substitute our products and services for those of competitors

• the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities, and insurance)

• changes in consumer spending and saving habits

     Forward-looking statements are based on our beliefs, plans, objectives, goals, assumptions, expectations, estimates, and intentions as of the date the statements are made. Investors should exercise caution because the Company cannot give any assurance that its beliefs, plans, objectives, goals, assumptions, expectations, estimates, and intentions will be realized. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise.

     Lending — Loan Portfolio Composition and Activity . The Company makes residential mortgage and commercial mortgage loans, home equity loans, secured and unsecured consumer installment loans, commercial and industrial loans, and real estate construction loans for owner-occupied and rental properties. The Company’s loan policy aspires to a loan composition mix consisting of approximately 60% to 70% residential real estate loans, 35% to 40% commercial loans, consumer loans of 5% to 15%, and credit card accounts of up to 5%.

     Although Ohio bank law imposes no material restrictions on the kinds of loans the Company may make, real estate-based lending has historically been the bank’s primary focus. For prudential reasons, the bank avoids lending on the security of real estate located in regions with which the bank is not familiar, and as a consequence almost all of the bank’s real-estate secured loans are secured by real property in northeastern Ohio. Ohio bank law does restrict the amount of loans an Ohio-chartered bank such as the banks may make, however, providing generally that loans and extensions of credit to any one borrower may not exceed 15% of capital. An additional margin of 10% of capital is allowed for loans fully secured by readily marketable collateral. This 15% legal lending limit has not been a material restriction on the banks lending. The banks can accommodate loan volumes exceeding the legal lending limit by selling loan participations to other banks. The subsidiaries’ internal policy are to maintain its credit exposure to any one borrower at less than $3.0 million, which is comfortably within the range of the bank’s legal lending limit. As of December 31, 2007, the Company’s 15%-of-capital limit on loans to a single borrower was approximately $5.2 million.

     The Company offers specialized loans for business and commercial customers, including equipment and inventory financing, real estate construction loans and Small Business Administration loans for qualified businesses. A substantial portion of the bank’s commercial loans are designated as real estate loans for regulatory reporting purposes because they are secured by mortgages on real property. Loans of that type may be made for purpose of financing commercial activities, such as accounts receivable, equipment purchases and leasing, but they are secured by real estate to provide the bank with an extra measure of security. Although these loans might be secured in whole or in part by real estate, they are treated in the discussions to follow as commercial and industrial loans. The Company’s consumer installment loans include secured and unsecured loans to individual borrowers for a variety of purposes, including personal, home improvements, revolving credit lines, autos, boats, and recreational vehicles.

3

     The following table shows the composition of the loan portfolio in dollar amounts and in percentages at December 31, 2007, 2006, 2005, 2004 and 2003, along with a reconciliation to loans receivable, net.

	Loan Portfolio Composition at December 31,
	2007					2006					2005						2004						2003
(Dollars in thousands)	Amount			Percent		Amount			Percent		Amount			Percent			Amount			Percent			Amount			Percent
Type of loan:
Commercial and industrial	$	67,010			21.65	$	68,496			27.49	$	65,252			27.88	%	$	52,148			24.18	%	$	42,063			21.81	%
Real estate construction		6,704			2.17		2,458			0.99		2,725			1.16			3,144			1.46			3,434			1.78
Mortgage:
Residential		193,514			62.53		162,917			65.38		151,866			64.88			147,425			68.36			134,007			69.48
Commercial		36,818			11.90		9,949			3.99		8,208			3.51			7,027			3.26			7,866			4.08
Consumer installment		5,400			1.75		5,371			2.16		6,004			2.57			5,909			2.74			5,510			2.85
Total loans		309,446			100		249,191			100		234,055			100	%		215,653			100	%		192,880			100	%
Less:
Allowance for loan losses		3,299					2,849					2,841						2,623						2,521
Net loans	$	306,147				$	246,342				$	231,214					$	213,030					$	190,359
Net loans as a percent of total assets		89.82	%				56.73	%				74.29	%					73.15	%					72.55	%

     The following table presents maturity information for the loan portfolio at December 31, 2007. The table does not include prepayments or scheduled principal repayments. All loans are shown as maturing based on contractual maturities.

	Loan Portfolio Maturity at December 31,2007
	Commercial
	and		Real Estate		Mortgage				Consumer
(Dollars in thousands)	Industrial		Construction		Residential		Commercial		Installment		Total
Amount due:
In one year or less	$	21,230	$	3,338	$	59,598	$	4,353	$	1,346	$	89,865
After one year through five years		28,680		1,259		108,556		21,367		3,777		163,639
After five years		17,100		2,107		25,360		11,098		277		55,942
Total amount due	$	67,010	$	6,704	$	193,514	$	36,818	$	5,400	$	309,446

Loans due on demand and overdrafts are included in the amount due in one year or less. The Company has no loans without a stated schedule of repayment or a stated maturity.

The following table shows the dollar amount of all loans due after December 31, 2007 that have pre-determined interest rates and the dollar amount of all loans due after December 31, 2007 that have floating or adjustable rates.

	Fixed		Adjustable
(Dollars in thousands)	Rate		Rate		Total
Commercial and industrial	$	27,819	$	39,191	$	67,010
Real estate construction		2,618		4,086		6,704
Mortgage:		—		—
Residential		51,323		142,191		193,514
Commercial		14,764		22,054		36,818
Consumer installment		5,059		341		5,400
	$	101,583	$	207,863	$	309,446

4

Residential Mortgage Loans. A significant portion of the Company’s lending consists of origination of conventional loans secured by 1-4 family real estate located in Franklin, Geauga, Portage, Trumbull, and Ashtabula Counties. These loans approximated $194 million or 62.5% of the Company’s total loan portfolio at December 31, 2007.

     The Company makes loans of up to 80% of the value of the real estate and improvements securing a loan (the “loan-to-value” or “LTV” ratio) on 1-4 family real estate. The Company generally does not lend in excess of 80% of the appraised value or sales price (whichever is less) of the property unless additional collateral is obtained, thereby lowering the total LTV. The Company offers residential real estate loans with terms of up to 30 years.

     Before 1996, nearly all residential mortgage loans originated by the Company were written on a balloon-note basis. During 1996, the Company began to originate fixed-rate mortgage loans for maturities up to 20 years. In late 1998, the Company began originating adjustable-rate mortgage loans and de-emphasized balloon-note mortgages. Approximately 73.5% of the portfolio of conventional mortgage loans secured by 1-4 family real estate at December 31, 2007 was adjustable rate. The Company’s mortgage loans are ordinarily retained in the loan portfolio. The Company’s residential mortgage loans have not been originated with loan documentation that would permit their sale to Fannie Mae and Freddie Mac.

     The Company’s home equity loan policy generally allows for a loan of up to 85% of a property’s appraised value, less the principal balance of the outstanding first mortgage loan. The Company’s home equity loans generally have terms of 10 years.

     At December 31, 2007, residential mortgage loans of approximately $3.2 million were over 90 days delinquent or non-accruing on that date, representing 1.63% of the residential mortgage loan portfolio.

     Commercial and Industrial Loans and Commercial Real Estate Loans . The Company’s commercial loan services include —

• accounts receivable, inventory and working capital loans

• renewable operating lines of credit

• loans to finance capital equipment

• term business loans

• short-term notes

• selected guaranteed or subsidized loan programs for small businesses

• loans to professionals

• commercial real estate loans

Commercial real estate loans include commercial properties occupied by the proprietor of the business conducted on the premises, and income-producing or farm properties. Although the Company makes agricultural loans, it currently does not have a significant amount of agricultural loans. The primary risk of commercial real estate loans is loss of income of the owner or occupier of the property and the inability of the market to sustain rent levels. Although commercial and commercial real estate loans generally bear somewhat more risk than single-family residential mortgage loans, commercial and commercial real estate loans tend to be higher yielding, tend to have shorter terms and commonly provide for interest-rate adjustments as prevailing rates change. Accordingly, commercial and commercial real estate loans enhance a lender’s interest rate risk management and, in management’s opinion, promote more rapid asset and income growth than a loan portfolio comprised strictly of residential real estate mortgage loans.

     Although a risk of nonpayment exists for all loans, certain specific types of risks are associated with various kinds of loans. One of the primary risks associated with commercial loans is the possibility that the commercial borrower will not generate income sufficient to repay the loan. The Company’s loan policy provides that commercial loan applications must be supported by documentation indicating that there will be cash flow sufficient for the borrower to service the proposed loan. Financial statements or tax returns for at least three years must be submitted, and annual reviews are undertaken for loans of $150,000 or more. The fair market value of collateral for collateralized commercial loans must exceed the Company’s loan exposure. For this purpose fair market value is determined by independent appraisal or by the loan officer’s estimate employing guidelines established by the loan policy. Term loans not secured by real estate generally have terms of five years or less, unless guaranteed by the U.S. Small Business Administration or other governmental agency, and terms loans secured by collateral having a useful life exceeding five years may have longer terms. The Company’s loan policy allows for terms of up to 15 years for loans secured by commercial real estate, and one year for business lines of credit. The maximum loan-to-value ratio for commercial real estate loans is 75% of the appraised value or cost, whichever is less.

     Real estate is commonly a material component of collateral for the Company’s loans, including commercial loans. Although the expected source of repayment of these loans is generally the operations of the borrower’s business or personal income, real estate collateral provides an additional measure of security. Risks associated with loans secured by real estate include fluctuating land values, changing local economic conditions, changes in tax policies, and a concentration of loans within a limited geographic area.

     At December 31, 2007, commercial and commercial real estate loans totaled $103.8million, or 33.6% of the Company’s total loan portfolio. At December 31, 2007, commercial and commercial real estate loans of approximately $1.8 million were over 90 days delinquent or non-accruing on that date, and represented 1.77% of the commercial and commercial real estate loan portfolios.

     Real Estate Construction . The Company originates several different types of loans that it categorizes as construction loans, including —

• residential construction loans to borrowers who will occupy the premises upon completion of construction,

• residential construction loans to builders,

• commercial construction loans, and

• real estate acquisition and development loans.

5

     Because of the complex nature of construction lending, these loans are generally recognized as having a higher degree of risk than other forms of real estate lending. The Company’s fixed-rate and adjustable-rate construction loans do not provide for the same interest rate terms on the construction loan and on the permanent mortgage loan that follows completion of the construction phase of the loan. It is the norm for the Company to make residential construction loans without an existing written commitment for permanent financing. The Company’s loan policy provides that the Company may make construction loans with terms of up to one year, with a maximum loan-to-value ratio for residential construction of 80%.

     At December 31, 2007, real estate construction loans totaled $6.7 million, or 2.2% of the Company’s total loan portfolio. At December 31, 2007, real estate-construction loans of approximately $643,000 were over 90 days delinquent or non-accruing on that date, and represented 9.56% of the real estate-construction loan portfolios.

     Consumer Installment Loans . The Company’s consumer installment loans include secured and unsecured loans to individual borrowers for a variety of purposes, including personal, home improvement, revolving credit lines, autos, boats, and recreational vehicles. The Company does not currently do any indirect lending. Unsecured consumer loans carry significantly higher interest rates than secured loans. The Company maintains a higher loan loss allowance for consumer loans, while maintaining strict credit guidelines when considering consumer loan applications.

     According to the Company’s loan policy, consumer loans secured by collateral other than real estate generally may have terms of up to five years, and unsecured consumer loans may have terms up to two and one-half years. Real estate security generally is required for consumer loans having terms exceeding five years.

     At December 31, 2007, the Company had approximately $5.4 million in its consumer installment loan portfolio, representing 1.8% of total loans. Consumer installment loans of approximately $23,000 were over 90 days delinquent or non-accruing on that date, representing .43% of the installment loan portfolio.

     Loan Solicitation and Processing . Loan originations are developed from a number of sources, including continuing business with depositors, other borrowers and real estate builders, solicitations by Company personnel and walk-in customers.

     When a loan request is made, the Company reviews the application, credit bureau reports, property appraisals or evaluations, financial information, verifications of income, and other documentation concerning the creditworthiness of the borrower, as applicable to each loan type. The Company’s underwriting guidelines are set by senior management and approved by the board. The loan policy specifies each individual officer’s loan approval authority, loans exceeding an individual officer’s approval authority are submitted to a committee consisting of loan officers, which has authority to approve loans up to $500,000. The full board acts as a loan committee for loans exceeding that amount.

     Income from Lending Activities . The Company earns interest and fee income from its lending activities. Net of origination costs, loan origination fees are amortized over the life of a loan. The Company also receives loan fees related to existing loans, including late charges. Income from loan origination and commitment fees and discounts varies with the volume and type of loans and commitments made and with competitive and economic conditions. Note 1 to the Consolidated Financial Statements included herein contains a discussion of the manner in which loan fees and income are recognized for financial reporting purposes.

     Nonperforming Loans . Late charges on residential mortgages and consumer loans are assessed if a payment is not received by the due date plus a grace period. When an advanced stage of delinquency appears on a single-family loan and if repayment cannot be expected within a reasonable time or a repayment agreement is not entered into, a required notice of foreclosure or repossession proceedings may be prepared by the Company’s attorney and delivered to the borrower so that foreclosure proceedings may be initiated promptly, if necessary. The Company also collects late charges on commercial loans.

     When the Company acquires real estate through foreclosure, voluntary deed, or similar means, it is classified as “other real estate owned” until it is sold. When property is acquired in this manner, it is recorded at the lower of cost (the unpaid principal balance at the date of acquisition) or fair value. Any subsequent write-down is charged to expense. All costs incurred from the date of acquisition to maintain the property are expensed. “Other real estate owned” is appraised during the foreclosure process, before acquisition. Losses are recognized for the amount by which the book value of the related mortgage loan exceeds the estimated net realizable value of the property.

     The Company undertakes regular review of the loan portfolio to assess its risks, particularly the risks associated with the commercial loan portfolio. This includes annual review of every commercial loan representing credit exposure of $150,000 or more. An independent firm performs semi-annual loan reviews for the Company.

     Classified Assets . FDIC regulations governing classification of assets require nonmember commercial banks — including the Company — to classify their own assets and to establish appropriate general and specific allowances for losses, subject to FDIC review. The regulations are designed to encourage management to evaluate assets on a case-by-case basis, discouraging automatic classifications. Under this classification system, problem assets of insured institutions are classified as “substandard,” “doubtful,” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses make collection of principal in full — on the basis of currently existing facts, conditions, and values — highly questionable and improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the Company to risk sufficient to warrant classification in one of the above categories, but that possess some weakness, are required to be designated “special mention” by management.

6

     When an insured institution classifies assets as either “substandard” or “doubtful,” it may establish allowances for loan losses in an amount deemed prudent by management. When an insured institution classifies assets as “loss,” it is required either to establish an allowance for losses equal to 100% of that portion of the assets so classified or to charge off that amount. An FDIC-insured institution’s determination about classification of its assets and the amount of its allowances is subject to review by the FDIC, which may order the establishment of additional loss allowances. Management also employs an independent third party to semi-annually review and validate the internal loan review process and loan classifications. As of December 31, 2007, 2006, 2005, 2004 and 2003 classified assets were as follows:

	Classified Assets at December 31,
	2007					2006					2005					2004					2003
			Percent of					Percent of					Percent of					Percent of					Percent of
(Dollars in thousands)	Amount		total loans			Amount		total loans			Amount		total loans			Amount		total loans			Amount		total loans
Classified loans:
Special mention	$	5,302		1.71	%	$	7,394		2.97	%	$	6,567		2.81	%	$	4,094		1.90	%	$	2,876		1.49	%
Substandard		1,029		0.33	%		1,515		0.61	%		2,020		0.86	%		3,097		1.44	%		1,920		1.00	%
Doubtful		835		0.27	%		—		—			—		0.00	%		163		0.08	%		199		0.10	%
Loss		—		—			—		—			—		—			—		—			—		—
Total amount due	$	7,166		2.31	%	$	8,909		3.58	%	$	8,587		3.67	%	$	7,354		3.42	%	$	4,995		3.41	%

Investments. Investment securities provide a return on residual funds after lending activities. Investments may be in federal funds sold, corporate securities, U.S. Government and agency obligations, state and local government obligations and government-guaranteed, mortgage-backed securities. The Company generally does not invest in securities that are rated less than investment grade by a nationally recognized statistical rating organization. Ohio bank law prescribes the kinds of investments an Ohio-chartered bank may make. Permitted investments include local, state, and federal government securities, mortgage-backed securities, and securities of federal government agencies. An Ohio-chartered bank also may invest up to 10% of its assets in corporate debt and equity securities, or a higher percentage in certain circumstances. Similar to the legal lending limit on loans to any one borrower, Ohio bank law also limits to 15% of capital the amount an Ohio-chartered bank may invest in the securities of any one issuer, other than local, state, and federal government and federal government agency issuers and mortgage-backed securities issuers. These Ohio bank law provisions have not been a material constraint upon the bank’s investment activities.

     All securities-related activity is reported to the Company’s board of directors. General changes in investment strategy are required to be reviewed and approved by the board. Senior management can purchase and sell securities in accordance with the Company’s stated investment policy.

     Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold a security until maturity or on a long-term basis, the security is classified as held-to-maturity and is reflected on the balance sheet at historical cost. Securities to be held for indefinite periods and not intended to be held to maturity or on a long-term basis are classified as available-for-sale. Available-for-sale securities are reflected on the balance sheet at their market value.

7

The following table sets forth the amortized cost and fair value of the Company’s investment portfolio at the dates indicated.

	Investment Portfolio Amortized Cost and Fair Value at December 31,
	2007									2006									2005
			Gross		Gross							Gross		Gross							Gross		Gross
	Amortized		unrealized		unrealized			Fair		Amortized		unrealized		unrealized			Fair		Amortized		unrealized		unrealized			Fair
(Dollars in thousands)	cost		gains		losses			value		cost		gains		losses			value		cost		gains		losses			value
Available for Sale:
U.S. Government agency securities	$	7,873	$	55	$	(1	)	$	7,927	$	7,253	$	2	$	(110	)	$	7,145	$	7,261	$	10	$	(112	)	$	7,159
Obligations of states and political subdivisions:
Taxable		749		—		(7	)		742		748		—		(21	)		727		748		—		(23	)		725
Tax-exempt		47,263		188		(522	)		46,929		38,182		140		(354	)		37,968		28,231		98		(331	)		27,998
Corporate securities		—		—		—			—		—		—		—			—		—		—		—			—
Mortgage-backed securities		29,219		162		(335	)		29,046		16,959		—		(490	)		16,469		22,229		16		(640	)		21,605
Equity securities		944		396		(16	)		1,324		694		48		(3	)		739		444		1		(45	)		400
Total	$	86,048	$	801	$	(881	)	$	85,968	$	63,836	$	190	$	(978	)	$	63,048	$	58,913	$	125	$	(1,151	)	$	57,887
Held to Maturity:
Obligations of states and political subdivisions:	$	—	$	—	$	—		$	—	$	126	$	8	$	—		$	134	$	221	$	12	$	—		$	233
Total	$	—	$	—	$	—		$	—	$	126	$	8	$	—		$	134	$	221	$	12	$	—		$	233
Total Investment Securities	$	86,048	$	801	$	(881	)	$	85,968	$	63,962	$	198	$	(978	)	$	63,182	$	59,134	$	137	$	(1,151	)	$	58,120

The contractual maturity of investment securities at December 31, 2007 is shown below.

																					Total investment
	One year					More than one					More than five					More than					securities and mortgage-
	or less					to five years					to ten years					ten years					backed securities
	Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average			Fair
	cost		yield			cost		yield			cost		yield			cost		yield			cost		yield			Value
U.S. Government agency securities	$	—		—		$	3,103		4.70		$	2,994		4.70		$	1,775		5.92		$	7,873		4.98		$	7,927
Obligations of states and political subdivisions:
Taxable		250		3.20			499		4.15			—		—			—		—			749		3.83			742
Tax-exempt		4,049		4.00			6,542		3.89			10,100		4.26			26,572		4.32			47,263		4.22			46,929
Mortgage-backed securities		—		—			137		5.18			1,220		4.47			27,863		5.13			29,219		5.10			29,046
Equity Securities		944		—			—		—			—		—			—		—			944		—			1,324
Total	$	5,243		3.24	%	$	10,281		4.16	%	$	14,314		4.37	%	$	56,210		4.77	%	$	86,048		4.54	%	$	85,968

     Expected maturities of investment securities could differ from contractual maturities because the borrower, or issuer, could have the right to call or prepay obligations with or without call or prepayment penalties. The average yields in the above table are not calculated on a tax equivalent basis.

     As of December 31, 2007, the Company also held 17,310 shares of $100 par value Federal Home Loan Bank of Cincinnati stock, which is a restricted security. FHLB stock represents an equity interest in the FHLB, but it does not have a readily determinable market value. The stock can be sold at its par value only, and only to the FHLB or to another member institution. Member institutions are required to maintain a minimum stock investment in the FHLB, based on total assets, total mortgages, and total mortgage-backed securities. The Company’s minimum investment in FHLB stock at December 31, 2007 was approximately $1,731,000.

     Sources of Funds — Deposit Accounts . Deposit accounts are a major source of funds for the Company. The Company offers a number of deposit products to attract both commercial and regular consumer checking and savings customers, including regular and money market savings accounts, NOW accounts, and a variety of fixed-maturity, fixed-rate certificates with maturities ranging from seven days to 60 months. These accounts earn interest at rates established by management based on competitive market factors and management’s desire to increase certain types or maturities of deposit liabilities. The Company also provides travelers’ checks, official checks, money orders, ATM services, and IRA accounts.

8

     The following table shows the amount of time deposits of $100,000 or more as of December 31, 2007, including certificates of deposit, by time remaining until maturity.

	Maturity of Time Deposits of
	$100,000 or more at
	December 31,2007
	Amount		Percent of Total
Within three months	$	8,431,158		16.53	%
Beyond three but within six months		8,615,730		16.89
Beyond six but within twelve months		15,291,877		29.97
Beyond one year		18,677,293		36.61
Total	$	51,016,058		100.00

     Borrowings . Deposits and repayment of loan principal are the Company’s primary sources of funds for lending activities and other general business purposes. However, when the supply of lendable funds or funds available for general business purposes cannot satisfy the demand for loans or general business purposes, the Company can obtain funds from the FHLB of Cincinnati. Interest and principal are payable monthly, and the line of credit is secured by a blanket pledge collateral agreement. At December 31, 2007, the Company had $24.2 million of FHLB borrowings outstanding. The Company also has access to credit through the Federal Reserve Bank of Cleveland and other funding sources.

     The outstanding balances and related information about short-term borrowings, which includes securities sold under agreements to repurchase are summarized as follows:

	2007			2006			2005
Balance at year-end	$	1,510,607		$	1,609,738			6,710,914
Average balance outstanding		2,383,902			3,281,340			1,844,018
Maximum month-end balance		5,768,057			8,245,406			6,710,914
Weighted-average rate at year-end		2.96	%		4.35	%		4.38	%
Weighted-average rate during the year		3.89	%		5.10	%		5.63	%

Personnel.

     As of December 31, 2007 the Company had 91 full-time equivalent employees. None of the employees is represented by a collective bargaining group. Management considers its relations with employees to be excellent.

Supervision and Regulation

     The following discussion of bank supervision and regulation is qualified in its entirety by reference to the statutory and regulatory provisions discussed. Changes in applicable law or in the policies of various regulatory authorities could affect materially the business and prospects of the Company.

     The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956. As such, the Company is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System, acting primarily through the Federal Reserve Bank of Cleveland. Middlefield is required to file annual reports and other information with the Federal Reserve. Both subsidiaries are Ohio-chartered commercial banks. As a state-chartered, nonmember banks, the banks are primarily regulated by the FDIC and by the Ohio Division of Financial Institutions.

     The Company and the banks are subject to federal banking laws, and the Company is subject also to Ohio bank law. These federal and state laws are intended to protect depositors, not stockholders. Federal and state laws applicable to holding companies and their financial institution subsidiaries regulate the range of permissible business activities, investments, reserves against deposits, capital levels, lending activities and practices, the nature and amount of collateral for loans, establishment of branches, mergers, dividends, and a variety of other important matters. The Company is subject to detailed, complex, and sometimes overlapping federal and state statutes and regulations affecting routine banking operations. These statutes and regulations include but are not limited to state usury and consumer credit laws, the Truth-in-Lending Act and Regulation Z, the Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act, and the Community Reinvestment Act. The Company must comply with Federal Reserve Board regulations requiring depository institutions to maintain reserves against their transaction accounts (principally NOW and regular checking accounts). Because required reserves are commonly maintained in the form of vault cash or in a noninterest-bearing account (or pass-through account) at a Federal Reserve Bank, the effect of the reserve requirement is to reduce an institution’s earning assets.

     The Federal Deposit Insurance Corporation Improvement Act of 1991 expanded significantly the authority of federal agencies to regulate the activities of federally chartered and state-chartered financial institutions and their holding companies. The Federal Reserve Board and the FDIC have extensive authority to prevent and to remedy unsafe and unsound practices and violations of applicable laws and regulations by institutions and holding companies. The agencies may assess civil money penalties, issue cease-and-desist or removal orders, seek injunctions, and publicly disclose those actions. In addition, the Ohio Division of Financial Institutions possesses enforcement powers to address violations of Ohio banking law by Ohio-chartered banks.

9

     Regulation of Bank Holding Companies — Bank and Bank Holding Company Acquisitions . The Bank Holding Company Act requires every bank holding company to obtain approval of the Federal Reserve before —

• directly or indirectly acquiring ownership or control of any voting shares of another bank or bank holding company, if after the acquisition the acquiring company would own or control more than 5% of the shares of the other bank or bank holding company (unless the acquiring company already owns or controls a majority of the shares),

• acquiring all or substantially all of the assets of another bank, or

• merging or consolidating with another bank holding company.

     The Federal Reserve will not approve an acquisition, merger, or consolidation that would have a substantially anticompetitive result, unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in satisfying the convenience and needs of the community to be served. The Federal Reserve also considers capital adequacy and other financial and managerial factors in its review of acquisitions and mergers.

     Additionally, the Bank Holding Company Act, the Change in Bank Control Act and the Federal Reserve Board’s Regulation Y require advance approval of the Federal Reserve to acquire “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of a class of voting securities of the bank holding company. If the holding company has securities registered under Section 12 of the Securities Exchange Act of 1934, as Middlefield does, or if no other person owns a greater percentage of the class of voting securities, control is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities. Approval of the Ohio Division of Financial Institutions is also necessary to acquire control of an Ohio-chartered bank.

     Nonbanking Activities . With some exceptions, the Bank Holding Company Act has for many years also prohibited a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve non-bank activities that, by statute or by Federal Reserve Board regulation or order, are held to be closely related to the business of banking or of managing or controlling banks. In making its determination that a particular activity is closely related to the business of banking, the Federal Reserve considers whether the performance of the activities by a bank holding company can be expected to produce benefits to the public — such as greater convenience, increased competition, or gains in efficiency in resources — that will outweigh the risks of possible adverse effects such as decreased or unfair competition, conflicts of interest, or unsound banking practices. Some of the activities determined by Federal Reserve Board regulation to be closely related to the business of banking are: making or servicing loans or leases; engaging in insurance and discount brokerage activities; owning thrift institutions; performing data processing services; acting as a fiduciary or investment or financial advisor; and making investments in corporations or projects designed primarily to promote community welfare.

     Financial Holding Companies . On November 12, 1999 the Gramm-Leach-Bliley Act became law, repealing much of the 1933 Glass-Steagall Act’s separation of the commercial and investment banking industries. The Gramm-Leach-Bliley Act expands the range of nonbanking activities a bank holding company may engage in, while preserving existing authority for bank holding companies to engage in activities that are closely related to banking. The new legislation creates a new category of holding company called a “financial holding company.” Financial holding companies may engage in any activity that is —

• financial in nature or incidental to that financial activity, or

• complementary to a financial activity and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.

     Activities that are financial in nature include —

• acting as principal, agent, or broker for insurance,

• underwriting, dealing in, or making a market in securities, and

• providing financial and investment advice.

     The Federal Reserve Board and the Secretary of the Treasury have authority to decide that other activities are also financial in nature or incidental to financial activity, taking into account changes in technology, changes in the banking marketplace, competition for banking services, and so on. The Company is engaged solely in activities that were permissible for a bank holding company before enactment of the Gramm-Leach-Bliley Act. Although the Company has become a financial holding company, the Company has no immediate plans to use the expanded authority to engage in activities other than those in which it is currently engaged. Federal Reserve Board rules require that all of the depository institution subsidiaries of a financial holding company be and remain well capitalized and well managed. If all depository institution subsidiaries of a financial holding company do not remain well capitalized and well managed, the financial holding company must enter into an agreement acceptable to the Federal Reserve Board, undertaking to comply with all capital and management requirements within 180 days. In the meantime the financial holding company may not use its expanded authority to engage in nonbanking activities without Federal Reserve Board approval and the Federal Reserve may impose other limitations on the holding company’s or affiliates’ activities. If a financial holding company fails to restore the well-capitalized and well-managed status of a depository institution subsidiary, the Federal Reserve may order divestiture of the subsidiary.

10

     Holding Company Capital and Source of Strength . The Federal Reserve considers the adequacy of a bank holding company’s capital on essentially the same risk-adjusted basis as capital adequacy is determined by the FDIC at the bank subsidiary level. In general, bank holding companies are required to maintain a minimum ratio of total capital to risk-weighted assets of 8% and Tier 1 capital — consisting principally of stockholders’ equity — of at least 4%. Bank holding companies are also subject to a leverage ratio requirement. The minimum required leverage ratio for the very highest rated companies is 3%, but as a practical matter the minimum required leverage ratio for most bank holding companies is 4% or higher. It is also Federal Reserve Board policy that bank holding companies serve as a source of strength for their subsidiary banking institutions.

     Under Bank Holding Company Act section 5(e), the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary if the Federal Reserve Board determines that the activity or control constitutes a serious risk to the financial safety, soundness or stability of a subsidiary bank. And with the Federal Deposit Insurance Corporation Improvement Act of 1991’s addition of the prompt corrective action provisions to the Federal Deposit Insurance Act, section 38(f)(2)(I) of the Federal Deposit Insurance Act now provides that a federal bank regulatory authority may require a bank holding company to divest itself of an undercapitalized bank subsidiary if the agency determines that divestiture will improve the bank’s financial condition and prospects.

     Liability of Commonly Controlled Institutions. Adding subsection (e) to section 5 of the Federal Deposit Insurance Act, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 allows the FDIC to demand from one institution payment for losses incurred or to be incurred by the FDIC because of the default of another institution or because of assistance provided by the FDIC to the other institution in danger of default, if the institutions are commonly controlled.

     Federal Deposit Insurance . The FDIC insures deposits of banks, savings banks, and savings associations, and it safeguards the safety and soundness of the banking industry. Two separate insurance funds are maintained and administered by the FDIC. In general, bank deposits are insured through the Bank Insurance Fund. Deposits in savings associations are insured through the Savings Association Insurance Fund.

     As an FDIC member institution, deposits in the bank are insured to a maximum of $100,000 per depositor. The banks are required to pay semiannual deposit insurance premium assessments to the FDIC. In general terms, each institution is assessed insurance premiums according to how much risk to the insurance fund the institution represents. Well-capitalized institutions with few supervisory concerns are assessed lower premiums than other institutions. The premium range is currently from $0.00 for the highest-rated institutions to $0.27 per $100 of domestic deposits.

     The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC also may suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital.

     Interstate Banking and Branching . In 1994 the Riegle-Neal Interstate Banking and Branching Efficiency Act eased restrictions on interstate banking. The Riegle-Neal Act allows the Federal Reserve to approve an application by an adequately capitalized and adequately managed bank holding company to acquire a bank located in a state other than the acquiring company’s home state, without regard to whether the transaction is prohibited by the laws of any state. The Federal Reserve may not approve acquisition of a bank that has not been in existence for the minimum time period (up to five years) specified by the statutory law of the acquired, or “target,” bank’s state. The Riegle-Neal Act also prohibits the Federal Reserve from approving an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch. The Riegle-Neal Act does not affect the authority of states to limit the percentage of total insured deposits in the state that may be held or controlled by a bank or bank holding company if the limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% statewide concentration limit contained in the Riegle-Neal Act.

     Branching between states may be accomplished by merging commonly controlled banks located in different states into one legal entity. Branching may also be accomplished by establishing de novo branches or acquiring branches in another state. Under section 24(j) of the Federal Deposit Insurance Act, a branch of a bank operating out-of-state — in a “host state” — is subject to the law of the host state regarding community reinvestment, fair lending, consumer protection, and establishment of branches. The Riegle-Neal Act authorizes the FDIC to approve interstate branching de novo by state-chartered banks solely in states that specifically allow it. Ohio bank law allows de novo branching in Ohio by an out-of-state bank. The FDIC has adopted regulations under the Riegle-Neal Act to prohibit an out-of-state bank from using the new interstate branching authority primarily for the purpose of deposit production. These regulations include guidelines to ensure that interstate branches operated by an out-of-state bank in a host state are reasonably helping to satisfy the credit needs of the communities served by the out-of-state bank.

11

     Capital — Risk-Based Capital Requirements . The Federal Reserve Board and the FDIC employ similar risk-based capital guidelines in their examination and regulation of bank holding companies and financial institutions. If capital falls below the minimum levels established by the guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities. Failure to satisfy capital guidelines could subject a banking institution to a variety of enforcement actions by federal bank regulatory authorities, including the termination of deposit insurance by the FDIC and a prohibition on the acceptance of “brokered deposits.”

     In the calculation of risk-based capital, assets and off-balance sheet items are assigned to broad risk categories, each with an assigned weighting (0%, 20%, 50% and 100%). Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property, which carry a 50% rating. Most investment securities are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk-weight, and direct obligations of or obligations guaranteed by the United States Treasury or United States Government agencies, which have a 0% risk-weight. Off-balance sheet items are also taken into account in the calculation of risk-based capital, with each class of off-balance sheet item being converted to a balance sheet equivalent according to established “conversion factors.” From these computations, the total of risk-weighted assets is derived. Risk-based capital ratios therefore state capital as a percentage of total risk-weighted assets and off-balance sheet items. The ratios established by guideline are minimums only.

     Current risk-based capital guidelines require bank holding companies and banks to maintain a minimum risk-based total capital ratio equal to 8% and a Tier 1 capital ratio of 4%. Intangibles other than readily marketable mortgage servicing rights are generally deducted from capital. Tier 1 capital includes stockholders’ equity, qualifying perpetual preferred stock (within limits and subject to conditions, particularly if the preferred stock is cumulative preferred stock), and minority interests in equity accounts of consolidated subsidiaries, less intangibles, identified losses, investments in securities subsidiaries, and certain other assets. Tier 2 capital includes —

• the allowance for loan losses, up to a maximum of 1.25% of risk-weighted assets,

• any qualifying perpetual preferred stock exceeding the amount includable in Tier 1 capital,

• mandatory convertible securities, and

• subordinated debt and intermediate term preferred stock, up to 50% of Tier 1 capital.

     The FDIC also employs a market risk component in its calculation of capital requirements for nonmember banks. The market risk component could require additional capital for general or specific market risk of trading portfolios of debt and equity securities and other investments or assets. The FDIC’s evaluation of an institution’s capital adequacy takes account of a variety of other factors as well, including interest rate risks to which the institution is subject, the level and quality of an institution’s earnings, loan and investment portfolio characteristics and risks, risks arising from the conduct of nontraditional activities, and a variety of other factors.

     Accordingly, the FDIC’s final supervisory judgment concerning an institution’s capital adequacy could differ significantly from the conclusions that might be derived from the absolute level of an institution’s risk-based capital ratios. Therefore, institutions generally are expected to maintain risk-based capital ratios that exceed the minimum ratios discussed above. This is particularly true for institutions contemplating significant expansion plans and institutions that are subject to high or inordinate levels of risk. Moreover, although the FDIC does not impose explicit capital requirements on holding companies of institutions regulated by the FDIC, the FDIC can take account of the degree of leverage and risks at the holding company level. If the FDIC determines that the holding company (or another affiliate of the institution regulated by the FDIC) has an excessive degree of leverage or is subject to inordinate risks, the FDIC may require the subsidiary institution(s) to maintain additional capital or the FDIC may impose limitations on the subsidiary institution’s ability to support its weaker affiliates or holding company.

     The banking agencies have also established a minimum leverage ratio of 3%, which represents Tier 1 capital as a percentage of total assets, less intangibles. However, for bank holding companies and financial institutions seeking to expand and for all but the most highly rated banks and bank holding companies, the banking agencies expect an additional cushion of at least 100 to 200 basis points. At December 31, 2007, the Company was in compliance with all regulatory capital requirements.

     Prompt Corrective Action . To resolve the problems of undercapitalized institutions and to prevent a recurrence of the banking crisis of the 1980s and early 1990s, the Federal Deposit Insurance Corporation Improvement Act of 1991 established a system known as “prompt corrective action.” Under the prompt corrective action provisions and implementing regulations, every institution is classified into one of five categories, depending on its total risk-based capital ratio, its Tier 1 risk-based capital ratio, its leverage ratio, and subjective factors. The categories are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A financial institution’s operations can be significantly affected by its capital classification. For example, an institution that is not “well capitalized” generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized institution must guarantee, in part, aspects of the institution’s capital plan. Financial institution regulatory agencies generally are required to appoint a receiver or conservator shortly after an institution enters the category of weakest capitalization. The Federal Deposit Insurance Corporation Improvement Act of 1991 also authorizes the regulatory agencies to reclassify an institution from one category into a lower category if the institution is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. Undercapitalized institutions are required to take specified actions to increase their capital or otherwise decrease the risks to the federal deposit insurance funds.

12

     The following table illustrates the capital and prompt corrective action guidelines applicable to the Company and its subsidiaries, as well as its total risk-based capital ratio, Tier 1 capital ratio and leverage ratio as of December 31, 2007.

	2007					2006
	Amount		Ratio			Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Actual	$	42,664,943		14.56	%	$	41,978,838		18.05	%
For Capital Adequacy Purposes		23,441,926		8.00			18,605,783		8.00
To Be Well Capitalized		29,302,408		10.00			23,257,229		10.00
Tier I Capital (to Risk-Weighted Assets)
Actual	$	39,194,767		13.38	%	$	39,109,743		16.82	%
For Capital Adequacy Purposes		11,720,963		4.00			9,302,892		4.00
To Be Well Capitalized		17,581,445		6.00			13,954,337		6.00
Tier I Capital (to Average Assets)
Actual	$	39,194,767		9.23	%	$	39,109,743		11.82	%
For Capital Adequacy Purposes		16,990,099		4.00			13,236,186		4.00
To Be Well Capitalized		21,237,623		5.00			16,545,233		5.00

     Limits on Dividends and Other Payments . The Company’s ability to obtain funds for the payment of dividends and for other cash requirements depends on the amount of dividends that may be paid to it by the banks. Under Ohio bank law, an Ohio-chartered bank may not pay a cash dividend if the amount of the dividend exceeds “undivided profits,” which is defined in Ohio bank law to mean the cumulative undistributed amount of the bank’s net income. But with the approval of two thirds of the outstanding shares and approval of the superintendent of the Division of Financial Institutions, an Ohio-chartered bank may pay cash dividends from surplus. Lastly, approval of the superintendent is also required if the total of all dividends and distributions declared on the bank’s shares in any year exceeds the total of the bank’s net income for the year plus retained net income for the two preceding years.

     State-chartered banks’ ability to pay dividends may be affected by capital maintenance requirements of their primary federal bank regulatory agency as well. Moreover, regulatory authorities may prohibit banks and bank holding companies from paying dividends if payment of dividends would constitute an unsafe and unsound banking practice.

     A 1985 policy statement of the Federal Reserve Board declares that a bank holding company should not pay cash dividends on common stock unless the organization’s net income for the past year is sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality, and overall financial condition.

     Recent Legislation . On July 30, 2002 the Sarbanes-Oxley Act of 2002 became law. The goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures made under the securities laws. The proposed changes are intended to allow shareholders to monitor the performance of companies and directors more easily and efficiently.

     The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the SEC under the Securities Exchange Act of 1934. The Act includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC, securities exchanges, and Nasdaq to adopt extensive additional disclosure, corporate governance, and other related rules. The final scope of all of these new requirements is not yet clear. Some of the changes are effective already, but others will become effective in the future.

     The Sarbanes-Oxley Act has an impact on a wide variety of corporate governance and disclosure issues, including the composition of audit committees, certification of financial statements by the chief executive officer and the chief financial officer, forfeiture of bonuses and profits made by directors and senior officers in the 12-month period covered by restated financial statements, a prohibition on insider trading during pension plan black-out periods, disclosure of off-balance sheet transactions, a prohibition on personal loans to directors and officers (excluding Federally insured financial institutions), expedited filing requirements for stock transaction reports by officers and directors, the formation of a public accounting oversight board, auditor independence, and various increased criminal penalties for violations of securities laws.

13

     Transactions with Affiliates . Although the banks are not member banks of the Federal Reserve System, they required by the Federal Deposit Insurance Act to comply with section 23A and section 23B of the Federal Reserve Act — pertaining to transactions with affiliates — as if they were member banks. These statutes are intended to protect banks from abuse in financial transactions with affiliates, preventing federally insured deposits from being diverted to support the activities of unregulated entities engaged in nonbanking businesses. An affiliate of a bank includes any company or entity that controls or is under common control with the bank. Generally, section 23A and section 23B of the Federal Reserve Act —

• limit the extent to which a bank or its subsidiaries may lend to or engage in various other kinds of transactions with any one affiliate to an amount equal to 10% of the institution’s capital and surplus, limiting the aggregate of covered transactions with all affiliates to 20% of capital and surplus,

• impose restrictions on investments by a subsidiary bank in the stock or securities of its holding company,

• impose restrictions on the use of a holding company’s stock as collateral for loans by the subsidiary bank, and

• require that affiliate transactions be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate.

     The Company’s authority to extend credit to insiders — meaning executive officers, directors and greater than 10% stockholders — or to entities those persons control, is subject to section 22(g) and section 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these laws require insider loans to be made on terms substantially similar to those offered to unaffiliated individuals, place limits on the amount of loans a bank may make to insiders based in part on the Company’s capital position, and require that specified approval procedures be followed. Loans to an individual insider may not exceed the legal limit on loans to any one borrower, which in general terms is 15% of capital but can be higher in some circumstances. And the aggregate of all loans to all insiders may not exceed the Company’s unimpaired capital and surplus. Insider loans exceeding the greater of 5% of capital or $25,000 must be approved in advance by a majority of the board, with any “interested” director not participating in the voting. Lastly, loans to executive officers are subject to special limitations. Executive officers may borrow in unlimited amounts to finance their children’s education or to finance the purchase or improvement of their residence, and they may borrow no more than $100,000 for most other purposes. Loans to executive officers exceeding $100,000 may be allowed if the loan is fully secured by government securities or a segregated deposit account. A violation of these restrictions could result in the assessment of substantial civil monetary penalties, the imposition of a cease-and-desist order or other regulatory sanctions.

     Community Reinvestment Act . Under the Community Reinvestment Act of 1977 and implementing regulations of the banking agencies, a financial institution has a continuing and affirmative obligation — consistent with safe and sound operation — to address the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop the types of products and services it believes are best suited to its particular community. The CRA requires that bank regulatory agencies conduct regular CRA examinations and provide written evaluations of institutions’ CRA performance. The CRA also requires that an institution’s CRA performance rating be made public. CRA performance evaluations are based on a four-tiered rating system: Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance.

     Although CRA examinations occur on a regular basis, CRA performance evaluations have been used principally in the evaluation of regulatory applications submitted by an institution. CRA performance evaluations are considered in evaluating applications for such things as mergers, acquisitions, and applications to open branches. Over the 25 years that the CRA has existed, and particularly in the last decade, institutions have faced increasingly difficult regulatory obstacles and public interest group objections in connection with their regulatory applications, including institutions that have received the highest possible CRA ratings.

     A bank holding company cannot elect to be a “financial holding company” — with the expanded securities, insurance and other powers that designation entails — unless all of the depository institutions owned by the holding company have a CRA rating of satisfactory or better. The Gramm-Leach-Bliley Act also provides that a financial institution with total assets of $250 million or greater will be subject to CRA examinations no more frequently than every 2 years.” Following a CRA examination as of September 19, 2005, the MBC received a rating of “Outstanding.” Lastly, the Gramm-Leach-Bliley Act requires public disclosure of private CRA agreements entered into between banking organizations and other parties, and annual reporting by banking organizations of actions taken under the private CRA agreements. This last provision of the Gramm-Leach-Bliley Act addresses the increasingly common practice whereby a bank or holding company undertaking acquisition of another bank or holding company enters into an agreement with parties who might otherwise file with bank regulators a CRA protest of the acquisition. The details of these agreements have not been universally disclosed by acquiring institutions in the past.

     Federal Home Loan Bank. The Federal Home Loan Bank serves as a credit source for their members. As a member of the FHLB of Cincinnati, the Company is required to maintain an investment in the capital stock of the FHLB of Cincinnati in an amount calculated by reference to it’s amount of loans, and or “advances,” from the FHLB. The Company is in compliance with this requirement, with an investment in FHLB stock of $1,731,300 at December 31, 2007.

     Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLB. The standards take into account a member’s performance under the Community Reinvestment Act and its record of lending to first-time home buyers.

     State Banking Regulation . As Ohio-chartered banks, the banks are subject to regular examination by the Ohio Division of Financial Institutions. State banking regulation affects the internal organization of the banks as well as their savings, lending, investment, and other activities. State banking regulation may contain limitations on an institution’s activities that are in addition to limitations imposed under federal banking law. The Ohio Division of Financial Institutions may initiate supervisory measures or formal enforcement actions, and if the grounds provided by law exist it may take possession and control of an Ohio-chartered bank.

14

     Monetary Policy . The earnings of financial institutions are affected by the policies of regulatory authorities, including monetary policy of the Federal Reserve Board. An important function of the Federal Reserve System is regulation of aggregate national credit and money supply. The Federal Reserve Board accomplishes these goals with measures such as open market transactions in securities, establishment of the discount rate on bank borrowings, and changes in reserve requirements against bank deposits. These methods are used in varying combinations to influence overall growth and distribution of financial institutions’ loans, investments and deposits, and they also affect interest rates charged on loans or paid on deposits. Monetary policy is influenced by many factors, including inflation, unemployment, short-term and long-term changes in the international trade balance, and fiscal policies of the United States government. Federal Reserve Board monetary policy has had a significant effect on the operating results of financial institutions in the past, and it can be expected to influence operating results in the future.

Item 1.A — Risk Factors

     Our market is very competitive . We face competition both in making loans and in attracting deposits. Competition is based on interest rates and other credit and service charges, the quality of services rendered, the convenience of banking facilities, the range and type of products offered and, in the case of loans to larger commercial borrowers, lending limits, among other factors. Competition for loans comes principally from commercial banks, savings banks, savings and loan associations, credit unions, mortgage banking companies, insurance companies, and other financial service companies. Our most direct competition for deposits has historically come from commercial banks, savings banks, and savings and loan associations. We face additional competition for deposits from non-depository institutions such as mutual funds, securities and brokerage firms, and insurance companies.

     Competition among financial institutions and other financial service organizations is increasing with the continuing consolidation of the financial services industry. Additionally, legislative and regulatory changes could affect competition. Congress’ elimination in 1994 of many restrictions on interstate branching could increase competition from large banks headquartered outside of northeastern Ohio. Congress’ repeal in late 1999 of much of the Glass-Steagall Act (which had separated the commercial and investment banking industries) and elimination of the barriers between the banking and insurance industries might make competition even more intense. Because of our smaller size, we may have less opportunity to take advantage of the flexibility offered by that new legislation.

     The Company does not have the financial and other resources that larger competitors have; this could affect its ability to compete for large commercial loan originations and its ability to offer products and services competitors provide to customers. The northeastern Ohio and central Ohio markets in which the Company operates have high concentrations of financial institutions. Many of the financial institutions operating in our markets are branches of significantly larger institutions headquartered in Cleveland or in other major metropolitan areas, with significantly greater financial resources and higher lending limits. More geographically diversified than the Company, they are therefore less vulnerable to adverse changes in our local economy. And many of these institutions offer services that we do not or cannot provide. For example, the larger competitors’ greater resources offer advantages such as the ability to price services at lower, more attractive levels, and the ability to provide larger credit facilities than the Company can provide. Likewise, some of the competitors are not subject to the same kind and amount of regulatory restrictions and supervision to which the Company is subject. Because the Company is smaller than many commercial lenders in its market, it is on occasion prevented from making commercial loans in amounts competitors can offer. The Company accommodates loan volumes in excess of its lending limits from time to time through the sale of loan participations to other banks.

     The business of banking is changing rapidly with changes in technology, which poses financial and technological challenges to small and mid-sized institutions . With frequent introductions of new technology-driven products and services, the banking industry is undergoing rapid technological changes. In addition to enhancing customer service, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Financial institutions’ success is increasingly dependent upon use of technology to provide products and services that satisfy customer demands and to create additional operating efficiencies. Many of the Company’s competitors have substantially greater resources to invest in technological improvements, which could enable them to perform various banking functions at lower costs than the Company, or to provide products and services that the Company is not able to provide economically. We cannot assure you that we will be able to develop and implement new technology-driven products or services or that we will be successful in marketing these products or services to customers.

     Because of the demand for technology-driven products, banks rely increasingly on unaffiliated vendors to provide data processing services and other core banking functions. The use of technology-related products, services, delivery channels, and processes exposes banks to various risks, particularly transaction, strategic, reputation, and compliance risk. We cannot assure you that we will be able to successfully manage the risks associated with our dependence on technology.

     The banking industry is heavily regulated; the compliance burden to the industry is considerable; the principal beneficiary of federal and state regulation is the public at large and depositors, not stockholders . The Company and it’s subsidiaries are and will remain subject to extensive state and federal government supervision and regulation. Affecting many aspects of the banking business, including permissible activities, lending, investments, payment of dividends, the geographic locations in which our services can be offered, and numerous other matters, state and federal supervision and regulation are intended principally to protect depositors, the public, and the deposit insurance funds administered by the FDIC. Protection of stockholders is not a goal of banking regulation.

     Applicable statutes, regulations, agency and court interpretations, and agency enforcement policies have undergone significant changes, some retroactively applied, and could change significantly again. Changes in applicable laws and regulatory policies could adversely affect the banking industry generally or the Company and the banks in particular. The burdens of federal and state banking regulation could place banks in general at a competitive disadvantage compared to less regulated competitors. We give you no assurance that we will be able to adapt successfully to industry changes caused by governmental actions.

15

     Federal and state banking agencies require banks and bank holding companies to maintain capital. Failure to maintain adequate capital or to comply with applicable laws, regulations, and supervisory agreements could subject a bank or bank holding company to federal or state enforcement actions, including termination of deposit insurance, imposition of fines and civil penalties, and, in the most severe cases, appointment of a conservator or receiver for a depositary institution.

     Success in the banking industry requires disciplined management of lending risks . There are many risks in the business of lending, including risks associated with the duration over which loans may be repaid, risks resulting from changes in economic conditions, risks inherent in dealing with individual borrowers, and risks resulting from changes in the value of loan collateral. We maintain an allowance for loan losses based on historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality, among other things. Our judgment about the adequacy of the loan loss allowance is based on assumptions that we believe are reasonable but that might nevertheless prove to be incorrect. We can give you no assurance that the allowance will be sufficient to absorb future charge-offs. Additions to the loan loss allowance could occur, which would decrease net income and capital.

     Changing interest rates have a direct and immediate impact on financial institutions . The risk of nonpayment of loans — or credit risk — is not the only lending risk. Lenders are subject also to interest rate risk. Fluctuating rates of interest prevailing in the market affect a bank’s net interest income, which is the difference between interest earned from loans and investments, on one hand, and interest paid on deposits and borrowings, on the other. In the early 1990s, many banking organizations experienced historically high interest rate spreads, meaning the difference between the interest rates earned on loans and investments and the interest rates paid on deposits and borrowings. Since then, however, interest rate spreads have generally narrowed due to changing market conditions and competitive pricing pressures. It has become increasingly difficult for depository institutions to maintain deposit growth at the same rate as loan growth. Under these circumstances, to maintain deposit growth an institution might have to offer more attractive deposit terms, further narrowing the institution’s interest rate spread. The Company cannot assure you that interest rate spreads will not narrow even more or that higher interest rate spreads will return.

     Banks manage interest rate risk exposure by closely monitoring assets and liabilities, altering from time to time the mix and maturity of loans, investments, and funding sources. Changes in interest rates could result in an increase in higher-cost deposit products within a bank’s existing portfolio, as well as a flow of funds away from bank accounts into direct investments (such as U.S. Government and corporate securities, and other investment instruments such as mutual funds) if the bank does not pay competitive interest rates. The percentage of household financial assets held in the form of deposits is shrinking. Banking customers are investing a growing portion of their financial assets in stocks, bonds, mutual funds, and retirement accounts. Changes in interest rates also affect the volume of loans originated, as well as the value of loans and other interest-earning assets, including investment securities.

     An economic downturn in our market area would adversely affect our loan portfolio and our growth prospects . Our lending market area is concentrated in northeastern and central Ohio, particularly Franklin, Geauga, Portage, Trumbull and Ashtabula Counties. A high percentage of our loan portfolio is secured by real estate collateral, primarily residential mortgage loans. Commercial and industrial loans to small and medium-sized businesses also represent a significant percentage of our loan portfolio. The asset quality of our loan portfolio is largely dependent upon the area’s economy and real estate markets. A downturn in the economy in our primary lending area would adversely affect our operations and limit our future growth potential.

     The Company’s common stock is very thinly traded, and it is therefore susceptible to wide price swings . The Company’s common stock is not traded or authorized for quotation on any exchanges or on Nasdaq. However, bid prices for the Company common stock appear from time to time in the pink sheets under the symbol “MBCN.” The “pink sheets” is a quotation servive for over-the-counter securities that is maintained by Pink Sheets LLC, a private company. Thinly traded, illiquid stocks are more susceptible to significant and sudden price changes than stocks that are widely followed by the investment community and actively traded on an exchange or Nasdaq. The liquidity of the common stock depends upon the presence in the marketplace of willing buyers and sellers. We cannot assure you that you will be able to find a buyer for your shares. Two regional broker/dealers facilitate trades of Middlefield common stock, matching interested buyers and sellers.

     We currently do not intend to seek listing of the common stock on a securities exchange and we do not intend to seek authorization for trading of the shares on Nasdaq. Even if we successfully list the common stock on a securities exchange or obtain Nasdaq trading authorization, we nevertheless could not assure you that an organized public market for the securities will develop or that there will be any private demand for the common stock. We could also fail subsequently to satisfy the standards for continued exchange listing or Nasdaq trading, such as standards having to do with the minimum number of public shareholders or the aggregate market value of publicly held shares.

     A stock that is not listed on a securities exchange or authorized for Nasdaq trading might not be accepted as collateral for loans. If accepted as collateral, the stock’s value could nevertheless be substantially discounted. Consequently, investors should regard the common stock as a long-term investment and should be prepared to bear the economic risk of an investment in the common stock for an indefinite period. Investors who need or desire to dispose of all or a part of their investments in the common stock might not be able to do so except by private, direct negotiations with third parties.

     Government regulation could restrict our ability to pay cash dividends . Dividends from the banks are the only significant source of cash for the Company. Statutory and regulatory limits could prevent the banks from paying dividends or transferring funds to the Company. As of December 31, 2007 the banks could have declared dividends of approximately $4.5 million to Company without having to obtain advance regulatory approval. We cannot assure you that the banks’ profitability will continue to allow it to pay dividends to the Company, and we therefore cannot assure you that the Company will be able to continue paying regular, quarterly cash dividends.

     We could incur liabilities under federal and state environmental laws if we foreclose on commercial properties . A high percentage of the Company’s loans are secured by real estate. Although the vast majority of these loans are residential mortgage loans with little associated environmental risk, some are commercial loans secured by property on which manufacturing and other commercial enterprises are carried on.

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The Company currently does not own any property acquired by foreclosure. However, the Company has in the past and could again acquire property by foreclosing on loans in default. Under federal and state environmental laws, the banks could face liability for some or all of the costs of removing hazardous substances, contaminants, or pollutants from properties acquired in this fashion. Although other persons might be primarily responsible for these costs, they might not be financially solvent or they might be unable to bear the full cost of clean up. Regardless of whether it forecloses on property, it is also possible that a lender exercising unusual influence over a borrower’s commercial activities could be required to bear a portion of the clean-up costs under federal or state environmental laws.

Item 2 — Properties

     The Company’s offices are:

Location	County	Owned/Leased	Other Information
Main Office:
15985 East High Street	Geauga	Owned
Middlefield, Ohio 44062-1666
Branches :
West Branch	Geauga	Owned
15545 West High Street
Middlefield, Ohio
Garrettsville Branch	Portage	Owned
8058 State Street
Garrettsville, Ohio
Mantua Branch 10519 South Main Street Mantua, Ohio	Portage	Leased	three-year lease renewed in November 2004, with option to renew for six additional consecutive three-year terms
Chardon Branch	Geauga	Owned	opened in September, 2001
348 Center Street
Chardon, Ohio
Orwell Branch	Ashtabula	Owned	opened in April, 2003
30 South Maple Avenue
Orwell, Ohio
Newbury Branch 11110 Kinsman Road Newbury, Ohio	Geauga	Leased	ten-year lease dated December 2006, with option to renew for four additional consecutive five-year terms
Cortland Loan Production 130 Windsor Drive	Trumbull	Leased	one-year lease dated November 2006, with option to renew
Cortland, Ohio
Emerald Bank 6215 Perimeter Drive Dublin, OH 43017	Franklin	Leased	twenty-year lease dated Febuary 2004, with the option to purchase after the tenth year

At December 31, 2007 the net book value of the Company’s investment in premises and equipment totaled $7.0 million.

     The Company’s electronic data processing functions are performed under contract with an electronic data processing services firm that performs services for financial institutions throughout the Midwest.

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Item 3 — Legal Proceedings

     From time to time the Company and the banks are involved in various legal proceedings that are incidental to its business. In the opinion of management, no current legal proceedings are material to the financial condition of Company or the banks, either individually or in the aggregate.

Item 4 — Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of The Company’s security holders during the fourth quarter of 2007.

Part II

Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     Information relating to the market for Middlefield’s common equity and related shareholder matters appears under “Market for Middlefield’s Common Equity and Related Stockholder Matters” in Middlefield’s 2007 Annual Report to Shareholders on page 56 and is incorporated herein by reference. Information relating to dividend restrictions for Registrant’s common stock appears under” Supervision and Regulation.”

Equity Compensation Plan information

The following table provides information as of December 31, 2007 with respect to shares of common stock that may be issued under the Company’s existing equity plan which has been previously approved by the stockholders.

					Number of Securities
	Number of				Remaining Available
	Securities				for Future Issuance
	to be Issued Upon		Weighted-Average		Under Equity
	Exercise of		Exercise Price of		Compensation Plans
	Outstanding		Outstanding		(Excluding Securities
Plan Category	Options or Rights		Options or Rights		Reflected in Column A)
Equity compensation plans approved by security holders:
1999 Stock Option Plan		88,211		27.86		153,932

Unregistered Sales of Equity Securities and Use of Proceeds

On April 19, 2007, the Corporation announced the adoption of a stock repurchase program that authorizes the repurchase of up to 4.99% or approximately 76,114 shares of its outstanding common stock in the open market or in privately negotiated transactions. This program expires in April 2008.

The following table summarizes the treasury stock purchased by the issuer during the fourth quarter of 2007:

					Total Number of		Maximum Number of
					Shares Purchased		Shares that May Yet
	Total Number of		Average Price Paid		Part of Publicly		Be Purchased Under
Date	Shares Purchased		Per Share		Announced Program		the Program
30-Oct-07		1,100		38.00		1,100		46,988
31-Oct-07		11,500		38.65		11,500		35,488
21-Nov-07		1,027		38.65		1,027		34,461
22-Nov-07		1,000		38.50		1,000		33,461
23-Nov-07		7,612		38.00		7,612		25,849
4-Dec-07		1,000		37.00		1,000		24,849
11-Dec-07		3,900		37.00		3,900		20,949
17-Dec-07		1,500		37.00		1,500		19,449

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Item 6 — Selected Financial Data

     The above-captioned information appears under “Selected Financial Data” in Middlefield’s 2007 Annual Report to Shareholders and is incorporated herein by reference.

Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The above-captioned information appears under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Middlefield’s 2007 Annual Report to Shareholders and is incorporated herein by reference.

Item 7A — Quantitative and Qualitative Disclosures About Market Risk

     The above-captioned information appears under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the section “ Interest Rate Sensitivity Simulation Analysis in Middlefield’s 2007 Annual Report to Shareholders and is incorporated herein by reference.

Item 8 — Financial Statements and Supplementary Data

     The Consolidated Financial Statements of The Company and its’ subsidiaries, together with the report thereon by S.R. Snodgrass, A.C. appears in the Middlefield’s 2007 Annual Report to Shareholders and are incorporated herein by reference.

Item 9 — Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None

Item 9a(T) — Controls and Procedures

          (a) Disclosure Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

          (b) Internal Controls Over Financial Reporting

Management’s annual report on internal control over financial reporting is incorporated herein by reference to Item 8 — the Company’s audited Consolidated Financial Statements in this Annual Report on Form 10-K.

          (c) Changes to Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three months ended December 31, 2007 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

Item 9b — Other Information

None

Part III

Item 10 — Directors and Executive Officers of the Registrant

     Incorporated by reference to the definitive proxy statement for the 2007 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2007.

Item 11 — Executive Compensation

     Incorporated by reference to the definitive proxy statement for the 2007 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2007.

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Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     Incorporated by reference to the definitive proxy statement for the 2007 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2007. The information required by this item concerning Equity Compensation Plan information is presented under the caption “EQUITY COMPENSATION PLAN INFORMATION” contained in Part II, Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”.

Item 13 — Certain Relationships and Related Transactions

     Incorporated by reference to the definitive proxy statement for the 2007 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2007.

Item 14 — Principal Accountant Fees and Services

     Incorporated by reference to the definitive proxy statement for the 2007 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2007.

Part IV

Item 15 — Exhibits, Financial Statement Schedules

(a)(1) Financial Statements

Index to Consolidated Financial Statements :

Consolidated Financial Statements as of December 31, 2007 and 2005 and for each of the three years in the period ended December 31, 2007:

      Report of Independent Registered Public Accounting firm

      Consolidated Balance Sheets

      Consolidated Statements of Income

      Consolidated Statements of Changes in Stockholders’ Equity

      Consolidated Statements of Cash Flows

      Notes to Consolidated Financial Statements

(a)(2) Financial Statement Schedules

     Financial Statement Schedules have been omitted because they are not applicable or the required information is shown elsewhere in the document in the Financial Statements or Notes thereto, or in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(a)(3) Exhibits

           See the list of exhibits below

(b) Exhibits Required by Item 601 of Regulation S-K

exhibit
number	description	location
2	Agreement and Plan of Merger among Middlefield Banc Corp., EB Interim Bank, and Emerald Bank, dated as of November 15, 2006, as amended by Amendment No. 1	Incorporated by reference to the prospectus/proxy statement, Appendix A, contained in Part I of Form S-4 Registration Statement Amendment No. 1 filed on February 9, 2007. Disclosure schedules referred to in the Agreement and Plan of Merger are omitted in reliance on Item 601(b)(2) of Regulation S-K. Upon request of the SEC, Middlefield Banc Corp. will furnish supplementally to the SEC a copy of the disclosure schedules
3.1	Second Amended and Restated Articles of Incorporation of Middlefield Banc Corp., as amended	Incorporated by reference to Exhibit 3.1 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2005, filed on March 29, 2006
3.2	Regulations of Middlefield Banc Corp.	Incorporated by reference to Exhibit 3.2 of Middlefield Banc

20

exhibit
number	description	location
		Corp.’s registration statement on Form 10 filed on April 17, 2001
4	Specimen stock certificate	Incorporated by reference to Exhibit 3.2 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001
4.1	Amended and Restated Trust Agreement, dated as of December 21, 2006, between Middlefield Banc Corp., as Depositor, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee, and Administrative Trustees	Incorporated by reference to Exhibit 4.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006
4.2	Junior Subordinated Indenture, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company	Incorporated by reference to Exhibit 4.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006
4.3	Guarantee Agreement, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company	Incorporated by reference to Exhibit 4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006
10.1*	1999 Stock Option Plan of Middlefield Banc Corp.	Incorporated by reference to Exhibit 10.1 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001
10.2*	Severance Agreement dated July 11, 2006 between Middlefield Banc Corp. and Thomas G. Caldwell	Incorporated by reference to Exhibit 10.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on July 12, 2006
10.3*	Severance Agreement dated July 11, 2006 between Middlefield Banc Corp. and James R. Heslop II	Incorporated by reference to Exhibit 10.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on July 12, 2006
10.40*	Severance Agreement dated July 11, 2006 between Middlefield Banc Corp. and Jay P. Giles	Incorporated by reference to Exhibit 10.4 of Middlefield Banc Corp.’s Form 8-K Current Report filed on July 12, 2006
10.4.1*	Severance Agreement dated July 11, 2006 between Middlefield Banc Corp. and Teresa M. Hetrick	Incorporated by reference to Exhibit 10.4.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on July 12, 2006
10.4.2*	Severance Agreement dated July 11, 2006 between Middlefield Banc Corp. and Jack L. Lester	Incorporated by reference to Exhibit 10.4.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on July 12, 2006
10.4.3*	Severance Agreement dated July 11, 2006 between Middlefield Banc Corp. and Donald L. Stacy	Incorporated by reference to Exhibit 10.4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on July 12, 2006
10.4.4*	Severance Agreement dated July 11, 2006 between Middlefield Banc Corp. and Alfred F. Thompson Jr.	Incorporated by reference to Exhibit 10.4.4 of Middlefield Banc Corp.’s Form 8-K Current Report filed on July 12, 2006

21

exhibit
number	description	location
10.50*	Federal Home Loan Bank of Cincinnati Agreement for Advances and Security Agreement dated September 14, 2000	Incorporated by reference to Exhibit 10.4 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001
10.60*	Amended Director Retirement Agreement with Richard T. Coyne	Incorporated by reference to Exhibit 10.6 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
10.70*	Amended Director Retirement Agreement with Frances H. Frank	Incorporated by reference to Exhibit 10.7 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
10.80*	Amended Director Retirement Agreement with Thomas C. Halstead	Incorporated by reference to Exhibit 10.8 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
10.90*	Director Retirement Agreement with George F. Hasman	Incorporated by reference to Exhibit 10.9 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2001, filed on March 28, 2002
10.10*	Director Retirement Agreement with Donald D. Hunter	Incorporated by reference to Exhibit 10.10 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2001, filed on March 28, 2002
10.11*	Director Retirement Agreement with Martin S. Paul	Incorporated by reference to Exhibit 10.11 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2001, filed on March 28, 2002
10.12*	Amended Director Retirement Agreement with Donald E. Villers	Incorporated by reference to Exhibit 10.12 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
10.13*	Executive Survivor Income Agreement (aka DBO agreement [death benefit only]) with Donald L. Stacy	Incorporated by reference to Exhibit 10.14 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.14*	DBO Agreement with Jay P. Giles	Incorporated by reference to Exhibit 10.15 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.15*	DBO Agreement with Alfred F. Thompson Jr.	Incorporated by reference to Exhibit 10.16 of Middlefield Banc Corp.’s Annual Report on

22

exhibit
number	description	location
		Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.16*	DBO Agreement with Nancy C. Snow	Incorporated by reference to Exhibit 10.17 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.17*	DBO Agreement with Theresa M. Hetrick	Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.18*	DBO Agreement with Jack L. Lester	Incorporated by reference to Exhibit 10.19 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.19*	DBO Agreement with James R. Heslop II	Incorporated by reference to Exhibit 10.20 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.20*	DBO Agreement with Thomas G. Caldwell	Incorporated by reference to Exhibit 10.21 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.21*	Form of Indemnification Agreement with directors of Middlefield Banc Corp. and executive officers of Middlefield Banc Corp. and The Middlefield Banking Company	Incorporated by reference to Exhibit 99.1 of Middlefield Banc Corp.’s registration statement on Form 10, Amendment No. 1, filed on June 14, 2001
10.22*	Annual Incentive Plan Summary	Incorporated by reference to the summary description of the annual incentive plan included as Exhibit 10.22 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 16, 2005
10.23*	Executive Deferred Compensation Agreement with Thomas G. Caldwell	Incorporated by reference to Exhibit 10.23 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 4, 2007
10.24*	Executive Deferred Compensation Agreement with James R. Heslop II	Incorporated by reference to Exhibit 10.24 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 4, 2007
10.25*	Executive Deferred Compensation Agreement with Donald L. Stacy	Incorporated by reference to Exhibit 10.25 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 4, 2007

23

exhibit
number	description	location
13	Portions of the Annual Report for the year ended December 31, 2006 incorporated by reference into this Form 10-K	filed herewith
21	Subsidiaries of Middlefield Banc Corp.	filed herewith
23	Consent of S.R. Snodgrass, A.C., independent auditors of Middlefield Banc Corp.	filed herewith
31.10	Rule 13a-14(a) certification of Chief Executive Officer	filed herewith
31.20	Rule 13a-14(a) certification of Chief Financial Officer	filed herewith
32	Rule 13a-14(b) certification	filed herewith

^* management contract or compensatory plan or arrangement

24

Signatures

     Pursuant to the requirements of Section 13 or 15(d) 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.

Middlefield Banc Corp.
By:	/s/ Thomas G. Caldwell
	Thomas G. Caldwell
	President and Chief Executive Officer
	March 21, 2008

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Thomas G. Caldwell Thomas G. Caldwell	March 21, 2008
President, Chief Executive Officer, and Director
/s/ Donald L. Stacy Donald L. Stacy, Treasurer and Chief Financial Officer	March 21, 2008
Principal Financial & Accounting Officer
/s/ Richard T. Coyne Richard T. Coyne, Chairman of the Board	March 21, 2008
/s/ Frances H. Frank Frances H. Frank, Director	March 21, 2008
/s/ Thomas C. Halstead Thomas C. Halstead, Director	March 21, 2008
/s/ James R. Heslop, II James R. Heslop, II, Executive Vice President,	March 21, 2008
Chief Operating Officer, and Director
/s/ Kenneth E. Jones Kenneth E Jones, Director	March 21, 2008
/s/ James McCaskey James McCaskey, Director	March 21, 2008
/s/ Carolyn Turk Carolyn Turk, Director	March 21, 2008
/s/ William J. Skidmore William J. Skidmore, Director	March 21, 2008
/s/ Donald E. Villers Donald E. Villers, Director	March 21, 2008

25

REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Middlefield Banc Corp.

We have audited the accompanying consolidated balance sheet of Middlefield Banc Corp. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Middlefield Banc Corp. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ending December 31, 2007, in conformity with U.S. generally accepted accounting principles.

We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, included in the accompanying Management’s Report on Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.

/s/ S. R. Snodgrass, A.C.  

S. R. Snodgrass, A.C. 

Wexford, PA
March 14, 2008

26

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course by management or employees in the normal course of performing their assigned functions.

     Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that, as of December 31, 2007, the Company’s internal control over financial reporting was effective.

     This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

/s/ Thomas G. Caldwell
By:	Thomas G. Caldwell
	President and Chief Executive Officer (Principal Executive Officer)

Date: March 21, 2008

/s/ Donald L. Stacy
By:		Donald L. Stacy
	Treasurer (Principal Financial & Accounting Officer)

Date: March 21, 2008

27

EX-13

Exhibit 13

Branching out

2007 Annual Report

Branching out

Table of contents

Statistical Summary	2
Decade of Progress	4
Letter to Our Shareholders	8
Letter from the Chairman	10
Middlefield Banc Corp. Board of Directors	11
Emerald Bank Directors, Staff & Officers	15
The Middlefield Banking Company Board of Directors	16
The Middlefield Banking Company Staff	17
The Middlefield Banking Company Officers	18
The Middlefield Banking Company Branch Locations	19
Financials	21

2   •   Middlefield Banc Corp.

Statistical Summary

Net Income (in thousands)

$	2,799	$	3,273	$	3,701	$	3,884	$	3,375
	’03		’04		’05		’06		’07

Total Assets (in thousands)

$	262,369	$	291,214	$	311,214	$	340,852	$	434,273
	’03		’04		’05		’06		’07

Equity Capital (in thousands)

$	23,504	$	24,822	$	27,289	$	30,464	$	34,961
	’03		’04		’05		’06		’07

Net Loans Outstanding (in thousands)

$	190,369	$	213,030	$	231,214	$	246,342	$	306,147
	’03		’04		’05		’06		’07

Basic Earnings Per share

$	1.89	$	2.18	$	2.50	$	2.60	2.17
	’03		’04		’05		’06	’07

Dividends Per Share

$	0.65	$	0.77	$	0.80	$	0.87	$	0.94
	’03		’04		’05		’06		’07

2007 Annual Report   •   3

Book Value Per Share

$	16.49	$	17.67	$	19.25	$	20.30	$	27.61
	'03		'04		'05		'06		'07

Return on Average Assets

1.13	%	1.17	%	1.23	%	1.22	%	0.85	%
'03		'04		'05		'06		'07

Return on Average Equity

12.39	%	13.36	%	14.43	%	13.59	%	10.06	%
'03		'04		'05		'06		'07

Decade of Progress

Decade of Progress

	1998			1999			2000
Interest income	$	10,901,445		$	11,448,619		$	12,770,170
Interest expense	$	5,084,615		$	5,048,276		$	5,909,884
Net interest income	$	5,816,830		$	6,400,343		$	6,860,286
Provision for loan loss	$	270,000		$	296,000		$	275,000
Net interest income after provision for loan losses	$	5,546,830		$	6,104,343		$	6,585,286
Noninterest income, including security gains/losses	$	598,771		$	804,358		$	982,663
Nonintest expense	$	3,824,819		$	4,254,374		$	4,408,617
Income before income taxes	$	2,320,782		$	2,654,327		$	3,159,332
Income taxes	$	630,337		$	735,318		$	992,661
Net income	$	1,690,445		$	1,919,009		$	2,166,671
Total Assets	$	155,557,609		$	165,512,453		$	176,488,813
Deposits	$	128,827,889		$	135,094,459		$	147,166,046
Equity Capital	$	16,656,797		$	17,689,055		$	18,243,362
Loans Outstanding, Net	$	102,728,454		$	119,471,741		$	133,266,893
Allowance For Loan Losses	$	1,538,726		$	1,756,137		$	2,037,322
Net Charge-Offs (Recoveries)	$	66,074		$	78,589		$	(6,185	)
Full Time Employees (Average Equivalents)		59			61			57
Number of Offices		4			4			4
Earnings Per Share		1.10			1.25			1.50
Dividends Per Share		0.33			0.38			0.40
Book Value Per Share		11.36			12.13			12.96
Dividends Pay-out Ratio		29.53	%		29.82	%		27.47	%
Cash Dividends Paid	$	499,215		$	572,343		$	595,255
Return on Average Assets		1.15	%		1.21	%		1.31	%
Return on Average Equity		10.43	%		11.17	%		12.83	%

4   •   Middlefield Banc Corp.

2001			2002			2003			2004			2005			2006			2007
$	13,706,569		$	14,119,963		$	14,647,163		$	15,732,536		$	17,378,504		$	19,494,550		$	24,871,934
$	6,747,922		$	6,148,086		$	5,724,907		$	5,768,898		$	6,654,614		$	8,567,442		$	13,530,919
$	6,958,647		$	7,971,877		$	8,922,256		$	9,963,638		$	10,723,890		$	10,927,108		$	11,341,015
$	170,000		$	300,000		$	315,000		$	174,000		$	302,000		$	60,000		$	429,391
$	6,788,647		$	7,671,877		$	8,607,256		$	9,789,638		$	10,421,890		$	10,867,108		$	10,911,624
$	1,194,193		$	1,143,217		$	1,428,144		$	1,779,231		$	2,119,237		$	2,427,455		$	2,632,592
$	4,741,374		$	5,206,339		$	6,105,450		$	6,965,706		$	7,424,640		$	7,938,373		$	9,372,650
$	3,241,466		$	3,608,755		$	3,929,950		$	4,603,163		$	5,116,487		$	5,356,190		$	4,171,566
$	970,859		$	1,107,806		$	1,131,330		$	1,330,000		$	1,415,156		$	1,471,943		$	796,223
$	2,270,607		$	2,500,949		$	2,798,620		$	3,273,163		$	3,701,331		$	3,884,247		$	3,375,343
$	197,857,964		$	226,245,533		$	262,369,448		$	291,213,986		$	311,214,191		$	340,603,704		$	434,273,056
$	167,382,728		$	187,384,494		$	219,839,910		$	239,885,451		$	249,449,640		$	271,050,193		$	362,918,000
$	19,786,807		$	21,746,408		$	23,504,314		$	24,822,024		$	27,289,365		$	30,463,934		$	34,961,384
$	150,766,103		$	172,642,646		$	190,358,883		$	213,029,852		$	231,213,699		$	246,341,647		$	306,146,646
$	2,062,252		$	2,300,485		$	2,521,270		$	2,623,431		$	2,841,098		$	2,848,887		$	3,299,276
$	145,070		$	61,767		$	94,215		$	71,839		$	84,333		$	52,211		$	422,529
	64			66			72			73			75			80			91
	5			5			6			6			6			8			9
	1.54			1.68			1.89			2.18			2.50			2.60			2.17
	0.52			0.58			0.65			0.72			0.80			0.87			0.94
	13.93			15.35			16.49			17.67			19.25			20.30			22.56
	34.00	%		34.30	%		34.37	%		32.72	%		31.69	%		33.43	%		43.07	%
$	772,068		$	857,751		$	961,901		$	1,070,833		$	1,173,044		$	1,298,567		$	1,453,707
	1.22	%		1.17	%		1.13	%		1.17	%		1.23	%		1.22	%		0.85	%
	11.89	%		12.08	%		12.39	%		13.36	%		14.43	%		13.59	%		10.06	%

NOTES: (1) The above per share amounts have been restated to reflect a 10% stock dividend paid in 1998, a two for one stock split effected in 2000 and 5% stock dividends paid in 2002, 2003, 2004, 2005, 2006 and 2007.

2007 Annual Report   •   5

Reaching out to you

Reaching out to you

Letter to Our Shareholders

Letter to Our Shareholders

Thomas G. Caldwell — President and Chief Executive Officer

To our Shareholders and Friends

It is my pleasure to present to you the annual report on the performance of our company during 2007. As was noted in this letter last year, 2007 was the most transformational year in our history to date. I believe that upon your review of our performance, you will find that it was a period of growth, promise, and challenges met.

On April 19, 2007, Middlefield Banc Corp. completed the acquisition of Emerald Bank, thereby becoming a two bank financial holding company. Emerald, which opened for business in June of 2004, is headquartered in Dublin, Ohio. As a part of the greater Columbus metropolitan area, Emerald Bank will provide the opportunity to diversify our risk in a growing, robust market.

The year just concluded also witnessed the first full year of operation for both our Cortland loan production office and our Newbury banking office. Although the cost of this expansion had the expected negative impact on earnings, we are excited by the strong progress that has been made in these two new markets. In keeping with our original plan, a full service banking office is presently under construction in Cortland, with an opening anticipated in the second quarter of 2008.

Additionally, on August 1, The Middlefield Banking Company assumed the deposits previously associated with the Middlefield office of another financial institution. This added just over $21.1 million to our balance sheet and provided us with the opportunity to offer a high level of banking services to a broadened customer base.

Our strong growth during the past year is fully evidenced in our asset totals. At the conclusion of 2007, total assets stood at $434.3 million, an increase of 27.4% from the total of $340.9 million at year-end 2006. Net loans for the same period grew 24.3%, or $59.8 million to end 2007 at $306.1 million. Our primary funding source continued to be local market deposits, with totals standing at $362.9 million at December 31, 2007. This represents an increase of $91.9 million, or 33.9% from the prior year-end.

The capital position of our company remains strong, having ended the year at $35.0 million. This increase of $4.5 million from year-end 2006 was achieved through strong earnings performance during the year, while continuing a modest stock repurchase program. As has been our recent practice, we were pleased to provide our stockholders with a 5% stock dividend during December of 2007. It is our belief that a strong cash dividend, supplemented as appropriate by stock dividends, works to provide a proper return on your investment.

From a broader historical perspective, 2007 will be remembered as one of economic turmoil. Many of our larger brethren, hedge funds, insurance companies, and mortgage companies suffered severe financial setbacks as the so-called subprime mortgage business encountered devastating losses. Although perhaps initially well intentioned in seeking to make more Americans homeowners, this financial crisis has provided striking insights into a business approach guided by a seemingly insatiable thirst for excesses.

8     •     Middlefield Banc Corp.

While we were not immune from a higher level of delinquency and loan losses, our problems were created by weaker economic conditions within our local markets. It is, in fact, this local focus that sets us apart from those behemoths that have suffered so severely. We are very fortunate to deal one-to-one with our neighbors and friends as we provide personalized banking service. This stands in stark contrast to those who buy and sell mortgages merely as commodities.

This bursting financial bubble only served to exacerbate the competitive pressures of the year. An already compressed net interest margin felt further pressure as lenders scrambled to find good loans and depositors sought to maximize their returns.

In the face of the many challenges and economic hurdles present, Middlefield Banc Corp. recorded net income of $3.4 million during 2007. Although this is our lowest level of earnings since 2004, we are confident that the actions taken during the year will serve us well in the continued growth of our company.

In September of 2007, the Board of Directors and members of senior management gathered in a strategic planning retreat. The product of this effort is a plan that we find to be aggressive and energizing. We will use this blueprint as our guide to build Middlefield Banc Corp. through the coming years. It is our belief that these efforts will only serve to reward your trust in us and your investment in the company.

Middlefield Banc Corp. board member Thomas C. Halstead will be retiring in the coming months. The entire corporation wants to thank Mr. Halstead for his many years of dedicated service and leadership. We wish him well in his future endeavors.

On a more personal note, I am humbled by the dynamic growth of Middlefield Banc Corp. Having assumed the leadership role in 1995, I have witnessed the expansion from a single bank holding company with assets of approximately $130 million to one with two banking affiliates and total assets well over $400 million. This achievement has been possible only through the dedicated efforts of many fine individuals. To them, I extend a special thank you.

Our excitement and enthusiasm for the future continues. We welcome your presence as we continue to mold a company dedicated to delivering only the highest quality of financial services.

Sincerely,

Thomas G. Caldwell
President and Chief Executive Officer

2007 Annual Report   •   9

Letter from the Chairman

Letter from the Chairman

Richard T. Coyne — Chairman, Board of Directors

Chairman’s Report to the Shareholders

2007 was a highly productive year for the Middlefield Banc Corp. when reviewed in the context of long-term strategy. We have worked consistently, not only to insure Middlefield Banc Corp.’s future but also to accelerate it.

When you read our Decade of Progress you will learn that the changes made over the last ten years have been significant. Assets grew to $434 million and shareholders’ equity increased to $35 million.

Middlefield Banc Corp. has strengthened its business, and established leading positions in markets where it chooses to participate.

I am confident the Middlefield Banc Corp. has officers and employees who are dedicated to fulfilling our goals.

Banking is about people, our customers and their hopes and dreams. We are committed to work towards servicing our customers and providing you, our shareholders, with solid returns on your investment.

Very truly yours,

Richard T. Coyne
Chairman, Board of Directors

10    •   Middlefield Banc Corp.

Middlefield Banc Corp. Board of Directors

Back row, left to right: Kenneth E. Jones, Thomas C. Halstead, Frances H. Frank, Carolyn J. Turk, James J. McCaskey, Donald E. Villers Front row, left to right: William J. Skidmore, Thomas G. Caldwell, Richard T. Coyne, James R. Heslop, II

Richard T. Coyne — 1997
Chairman, Board of Directors, Middlefield Banc Corp.
The Middlefield Banking Company
Retired: Jaco Products and Capital Plastics

Donald E. Villers — 1987
Retired: Copperweld Steel

Thomas C. Halstead — 1988
Retired Retail Merchant

Frances H. Frank — 1995
Secretary/Treasurer
The Frank Agency, Inc.

Thomas G. Caldwell — 1997
President and Chief Executive Officer
Middlefield Banc Corp.
The Middlefield Banking Company

James R. Heslop, II — 2001
Executive Vice President/Chief Operating Officer
Middlefield Banc Corp.
The Middlefield Banking Company

James J. McCaskey — 2004
President
McCaskey Landscape and Design, LLC

Carolyn J. Turk, C.P.A. — 2004
Chief Financial Officer/Treasurer
Molded Fiber Glass Companies

William J. Skidmore — 2007
Northeast Ohio Senior District Manager
Waste Management of Ohio, Inc.

Kenneth E. Jones — 2008
President
Chesapeake Financial Advisors

2007 Annual Report   •   11

     Nuturing growth

Emerald Bank Directors, Staff & Officers

Board of Directors

Kenneth E. Jones — 2004
Chairman, Board of Directors, Emerald Bank
President
Chesapeake Financial Advisors

Glenn E. Aidt — 2004
President and Chief Executive Officer
Emerald Bank

George J. Kontogiannis, AIA — 2004
Chief Executive Officer
The Kontogiannis Companies

Joseph C. Zanetos — 2004
President
Anthony-Thomas Candy Co.

Clayton W. Rose, III, C.P.A. — 2006
Shareholder
Rea & Associates, Inc.

Thomas G. Caldwell — 2007
President and Chief Executive Officer
Middlefield Banc Corp.
The Middlefield Banking Company

Richard T. Coyne — 2007
Chairman, Board of Directors, Middlefield Banc Corp.
The Middlefield Banking Company
Retired: Jaco Products and Capital Plastics

Staff

Barbara Howard — 2004 — Accounting
Valorie Thorpe — 2004 — Branch Supervisor
Georgia Wilkerson — 2004 — Loan Processing
Elaine Gaub — 2005 — Customer Services
Lisa Stokes — 2006 — Customer Services
Mark Zielinski — 2006 — Regional Loan Specialist

Officers

Glenn E. Aidt — 2004
President and Chief Executive Officer

Michael Hufford — 2004
Senior Vice President
Chief Lending Officcer

Emerald Bank Drive up ATM
6215 Perimeter Drive, Dublin, OH 43017
614.793.4631 • fax: 614.793.8922

2007 Annual Report   •   15

The Middlefield Banking Company Board of Directors

Board of Directors

Richard T. Coyne — 1997
Chairman, Board of Directors, Middlefield Banc Corp.
The Middlefield Banking Company
Retired: Jaco Products and Capital Plastics

Donald E. Villers — 1987
Retired: Copperweld Steel

Thomas C. Halstead — 1988
Retired Retail Merchant

Frances H. Frank — 1995
Secretary/Treasurer
The Frank Agency, Inc.

Thomas G. Caldwell — 1997
President and Chief Executive Officer
Middlefield Banc Corp.
The Middlefield Banking Company

James R. Heslop, II — 1999
Executive Vice President/Chief Operating Officer
Middlefield Banc Corp.
The Middlefield Banking Company

James J. McCaskey — 2003
President
McCaskey Landscape and Design, LLC

Carolyn J. Turk, C.P.A. — 2003
Chief Financial Officer/Treasurer
Molded Fiber Glass Companies

William J. Skidmore — 2007
Northeast Ohio Senior District Manager
Waste Management of Ohio, Inc.

16   •   Middlefield Banc Corp.

The Middlefield Banking Company Staff

Staff

Main Office:
Louise Fenselon — 1984 — Head Teller
Bonnie Steele — 1985 — Customer Services
Diana Koller — 1998 — Teller
Kori Wilson — 2005 — Customer Services
Amanda Cummings — 2006 — Teller*
Jeanette Meardith — 2006 — Receptionist
Heather Petrik — 2006 — Teller*
Amanda Wright — 2006 — Teller*
Darlene Beaver — 2007 — Teller*
Linda Chandler — 2007 — Teller
Whitney Corey — 2007 — Teller*
Denise Kress — 2007 — Customer Services
Katie Wolfert — 2007 — Teller*

West Branch:
Patti Russo — 1982 — Customer Services
Rachel Lilly — 1985 — Head Teller
Rachel Reese — 2005 — Teller
Jenna Janssen — 2006 — Teller*
Amy Kothera — 2006 — Teller
Kristina Stephens — 2006 — Teller
Ryan Painter — 2007 — Teller*

Mantua Branch:
Joan Sweet — 2002 — Branch Supervisor
Rebecca Reinard — 2002 — Head Teller
Jodie Lawless — 2004 — Teller
Jamie Alexander — 2007— Teller*

Chardon Branch:
Amanda DiMeolo — 2001 — Customer Services
Gretchen Mihalic — 2001 — Teller*
Kim Koynock — 2005 — Teller*
Beverly Palinsky — 2005 — Teller*
Dorothy Brown — 2006 — Teller

Newbury Branch:
Kathryn Shanholtzer — 2007 — Branch Manager
Elizabeth Hagood — 2006 — Customer Services
Joan Limpert — 2006 — Teller
Diane Thomas — 2006 — Teller*

Garrettsville Branch:
Vickie Moss — 1998 — Teller
Colleen Steele — 1998 — Teller
Michelle Lutz — 2001 — Head Teller*
Nicole Meszaros — 2005 — Teller
Dawn Semich — 2005 — Customer Services
LynnRae Derthick — 2006 — Teller
Leah Ebright — 2006 — Teller*

Orwell Branch:
Jennifer Gabrielson — 1997 — Branch Supervisor
Tiffany Perkins — 2005 — Teller
Jessica Slusher — 2006 — Teller*
Lisa Swango — 2006 — Customer Services
Michelle Scott — 2007 — Teller*

Loan Department:
Helen Stowe — 1985 — Loan Administrative Assistant
Jane Armstrong — 1998 — Lender
Vivian Helmick — 1998 — Loan Administrative Assistant
Carolyn Fackler — 2001 — Loan Administrative Assistant
Sarah Brook — 2004 — Loan Administrative Assistant
Jamie Fleming — 2004 — Loan Collection Manager
Sue Trumbull — 2005 — Loan Receptionist
Sheila Grant — 2006 — Loan Administrative Assistant
Brian Martinko — 2006 — Lender
Kevin Mitchell — 2007 — Lender

Operations:
Karen Westover — 1983 — Bookkeeper
Pamela Malcuit — 1989 — Bookkeeper
Donna Williams — 1990 — Bookkeeper
Lauren Harth — 1995 — Audit Assistant*
Tara Morgan — 1997 — Proof Operator
Derrick Pilarczyk — 1999 — Facility Maintenance
Lisa Sanborn — 2000 — Bookkeeper
Melody Askey — 2005 — Compliance Assistant
Ashley Conroy- Vargo — 2007 — Float Teller

Financial Services:
Thomas Hart — 2004 — Financial Consultant

* denotes part time

2007 Annual Report   •   17

The Middlefield Banking Company Officers

Officers

Thomas G. Caldwell — 1986
President and Chief Executive Officcer

James R. Heslop, II — 1996
Executive Vice President
Chief Operating Officer

Teresa M. Hetrick — 1996
Senior Vice President Operations/Administration

Jay P. Giles — 1998
Senior Vice President
Senior Lender

Donald L. Stacy — 1999
Senior Vice President
Chief Financial Officer

Dennis E. Linville — 2006
Senior Vice
President Area Executive

Kathleen M. Johnson — 1971
Vice President
Chief Accounting Officer

Joann Vance — 1986
Vice President
Human Resource Administrator

Christine A. Polzer — 1989
Vice President
Network Administrator

Jack L. Lester — 1990
Vice President
Compliance and Security Officer

Alfred F. Thompson, Jr. — 1996
Vice President
Loan Administration

Sharon R. Jarold — 2001
Vice President/Lending

Thomas Munson — 2003
Vice President/Lending

Karen Branham — 1983
Assistant Vice President

Gail Neikirk — 1983
Assistant Vice President

Thomas R. Neikirk — 1994
Assistant Vice President
West Branch Manager

Marlin J. Moschell — 2000
Assistant Vice President
Orwell Lending Officer

Timothy McCreary — 2004
Assistant Vice President
Chardon Branch Manager

Matthew Bellin — 2006
Assistant Vice President
Commercial Lender

Kathy Vanek — 1998
Banking Officer
Garrettsville Branch Manager

18   •   Middlefield Banc Corp.

The Middlefield Banking Company Branch Locations

2007 Annual Report   •   19

Financial table of contents

Consolidated Statements	22
Notes to Consolidated Financial Statements	26
Management’s Discussion and Analysis	52
Shareholder Information	70

Consolidated Statements

	Year Ended December 31,
Consolidated Balance Sheet	2007			2006
ASSETS
Cash and due from banks	$	9,072,972		$	6,893,148
Federal funds sold		8,631,963			6,200,000
Interest-bearing deposits in other institutions		110,387			546,454
Cash and cash equivalents		17,815,322			13,639,602
Investment securities available for sale		85,967,764			63,048,135
Investment securities held to maturity (fair value of $134,306 for 2006)		—			125,853
Loans		309,445,922			249,190,534
Less allowance for loan losses		3,299,276			2,848,887
Net loans		306,146,646			246,341,647
Premises and equipment		7,044,685			6,742,465
Goodwill		4,371,206			123,175
Bank-owned life insurance		7,153,381			6,872,743
Accrued interest and other assets		5,774,052			3,958,084
TOTAL ASSETS	$	434,273,056		$	340,851,704
LIABILITIES
Deposits:
Noninterest-bearing demand	$	41,348,219		$	41,002,573
Interest-bearing demand		19,566,035			11,724,173
Money market		22,684,041			14,738,767
Savings		76,895,857			54,246,499
Time		202,423,848			149,338,181
Total deposits		362,918,000			271,050,193
Short-term borrowings		1,510,607			1,609,738
Other borrowings		32,395,319			36,112,738
Accrued interest and other liabilities		2,487,746			1,615,101
TOTAL LIABILITIES	$	399,311,672		$	310,387,770
STOCKHOLDERS’ EQUITY
Common stock, no par value; 10,000,000 shares authorized, 1,701,546 and 1,519,887 shares issued		26,650,123			19,507,257
Retained earnings		13,746,956			14,685,971
Accumulated other comprehensive loss		(52,969	)		(520,987	)
Treasury stock, at cost; 151,745 shares in 2007 and 95,080 shares in 2006		(5,382,726	)		(3,208,307	)
TOTAL STOCKHOLDERS’ EQUITY		34,961,384			30,463,934
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	434,273,056		$	340,851,704

See accompanying notes to consolidated financial statements.

22   •   Middlefield Banc Corp.

	Year Ended December 31,
Consolidated Statement of Income	2007		2006			2005
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	21,063,258	$	17,092,516		$	15,040,518
Interest-bearing deposits in other institutions		155,550		20,175			15,500
Federal funds sold		498,040		117,115			35,173
Investment securities:
Taxable		1,265,673		1,143,375			1,353,035
Tax-exempt		1,773,292		1,038,318			864,745
Other dividend income		116,121		83,051			69,533
TOTAL INTEREST AND DIVIDEND INCOME		24,871,934		19,494,550			17,378,504
INTEREST EXPENSE
Deposits		11,633,010		7,157,226			5,520,206
Shortterm borrowings		92,720		167,475			103,836
Other borrowings		1,805,189		1,242,741			1,030,572
TOTAL INTEREST EXPENSE		13,530,919		8,567,442			6,654,614
NET INTEREST INCOME		11,341,015		10,927,108			10,723,890
Provision for loan losses		429,391		60,000			302,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		10,911,624		10,867,108			10,421,890
NONINTEREST INCOME
Service charges on deposit accounts		1,954,992		1,800,173			1,579,121
Investment securities gains (losses), net		7,942		(5,868	)		—
Earnings on bank-owned life insurance		280,638		239,761			208,677
Other income		389,020		393,389			331,439
TOTAL NONINTEREST INCOME		2,632,592		2,427,455			2,119,237
NONINTEREST EXPENSE
Salaries and employee benefits		4,458,075		3,675,120			3,568,603
Occupancy		745,935		507,250			495,982
Equipment		525,250		440,878			432,635
Data processing costs		699,185		634,707			625,856
Professional fees		422,991		333,932			293,138
Ohio state franchise tax		424,873		360,000			284,950
Advertising		316,112		331,644			302,679
Postage and freight		208,554		189,629			189,970
Other expense		1,571,675		1,465,213			1,230,826
TOTAL NONINTEREST EXPENSE		9,372,650		7,938,373			7,424,639
Income before income taxes		4,171,566		5,356,190			5,116,488
Income taxes		796,223		1,471,943			1,415,156
NET INCOME	$	3,375,343	$	3,884,247		$	3,701,332
EARNINGS PER SHARE
Basic	$	2.17	$	2.61		$	2.50
Diluted		2.14		2.57			2.47

See accompanying notes to consolidated financial statements.

2007 Annual Report   •   23

Consolidated Statements

								Accumulated
								Other						Total
Consolidated Statement of	Common Stock				Retained			Comprehensive			Treasury			Stockholders’			Comprehensive
Changes in Stockholders’ Equity	Shares		Amount		Earnings			Income (Loss)			Stock			Equity			Income (Loss)
Balance, December 31, 2004		1,355,488		12,815,927		15,004,552			(28,682	)		(2,969,773	)		24,822,023
Net income						3,701,332									3,701,332		$	3,701,332
Other comprehensive income:
Unrealized loss on available-for-sale securities, net of tax benefit of $334,058									(648,406	)					(648,406	)		(648,406	)
Comprehensive income																	$	3,052,926
Exercise of stock options		2,583		71,386											71,386
Common stock issued		7,158		285,669											285,669
Five percent stock dividend (including cash paid for fractional shares)		63,549		2,557,847		(2,572,949	)								(15,102	)
Dividend reinvestment plan		6,209		245,506											245,506
Cash dividends ($.80 per share)						(1,173,044	)								(1,173,044	)
Balance, December 31, 2005		1,434,987		15,976,335		14,959,891			(677,088	)		(2,969,773	)		27,289,365
Net income						3,884,247									3,884,247		$	3,884,247
Other comprehensive income:
Unrealized gain on available-for-sale securities, net of reclassification adjustment, net of taxes of $80,416									156,101						156,101			156.101
Comprehensive income																	$	4,040,348
Exercise of stock options		2,439		62,115											62,115
Purchase of treasury stock												(238,534	)		(238,534	)
Common stock issued		7,420		305,711											305,711
Five percent stock dividend (including cash paid for fractional shares)		67,284		2,842,749		(2,859,600	)								(16,851	)
Dividend reinvestment plan		7,757		320,347											320,347
Cash dividends ($.87 per share)						(1,298,567	)								(1,298,567	)
Balance, December 31, 2006		1,519,887		19,507,257		14,685,971			(520,987	)		(3,208,307	)		30,463,934
Net income (unaudited)						3,375,343									3,375,343		$	3,375,343
Other comprehensive income:
Unrealized loss on available-for-sale securities, net of taxes of $241,100									468,018						468,018			468,018
Comprehensive income																	$	3,843,361
Exercise of stock options		538		14,182											14,182
Stock based compensation expense recognized in earnings				26,435		12,695									39,130
Purchase of treasury stock (56,665 shares)												(2,174,419	)		(2,174,419	)
Common stock issued as a result of the acquisition of Emerald Bank		92,447		3,662,750											3,662,750
Common stock issued		5,735		221,360											221,360
Five percent stock dividend (including cash paid for fractional shares)		73,547		2,857,301		(2,873,346	)								(16,045	)
Dividend reinvestment plan		9,392		360,838											360,838
Cash dividends ($.94 per share)						(1,453,707	)								(1,453,707	)
Balance, December 31, 2007		1,701,546	$	26,650,123	$	13,746,956		$	(52,969	)	$	(5,382,726	)	$	34,961,384
Components of comprehensive (loss):						2007			2006			2005
Change in net unrealized gain (loss) on investments available for sale					$	472,771		$	152,228		$	(648,406	)
Realized (gains) losses included in net income, net of taxes of $2,448, $1,995, and $0						(4,753	)		3,873			—
TOTAL					$	468,018		$	156,101		$	(648,406	)

See accompanying notes to consolidated financial statements.

24   •   Middlefield Banc Corp.

	Year Ended December 31,
Consolidated Statement of Cash Flows	2007			2006			2005
OPERATING ACTIVITIES
Net income	$	3,375,343		$	3,884,247		$	3,701,332
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		429,391			60,000			302,000
Depreciation and amortization		597,741			578,592			448,386
Amortization of premium and discount on investment securities		226,766			233,044			289,111
Amortization of net deferred loan fees		(65,763	)		(78,577	)		(139,722	)
Investment securities gains (losses), net		(7,942	)		5,868			—
Earnings on bank-owned life insurance		(280,638	)		(239,761	)		(208,677	)
Deferred income taxes		97,308			(58,058	)		(85,339	)
Compensation expense on stock options		26,435			—			—
Increase in accrued interest receivable		(292,056	)		(87,907	)		(217,022	)
Increase in accrued interest payable		540,144			350,939			155,449
Other, net		(352,696	)		(142,067	)		(280,533	)
Net cash provided by operating activities		4,294,033			4,506,320			3,964,985
INVESTING ACTIVITIES
Decrease in interest-bearing deposits in other institutions, net		—			—			614,506
Investment securities available for sale:
Proceeds from repayments and maturities		10,583,584			11,109,971			11,361,937
Purchases		(32,990,009	)		(16,932,389	)		(13,279,687	)
Proceeds from sales		—			658,976			—
Investment securities held to maturity:
Proceeds from repayments and maturities		—			95,643			—
Proceeds from sale of securities		102,942			—			—
Increase in loans, net		(20,959,699	)		(15,109,371	)		(18,346,125	)
Acquisition of subsidiary bank		(1,828,301	)		—			—
Purchase of Federal Home Loan Bank stock		(91,100	)		(93,643	)		(63,300	)
Purchase of bank-owned life insurance		—			(1,000,000	)		—
Purchase of premises and equipment		(570,065	)		(585,837	)		(455,570	)
Proceeds from the sale of other real estate owned		61,229			—			—
Deposit acquisition premium		(2,124,212	)		—			—
Net cash used for investing activities		(47,815,631	)		(21,856,007	)		(20,168,239	)
FINANCING ACTIVITIES
Net increase in deposits		38,528,910			21,600,553			9,564,189
Increase (decrease) in short-term borrowings, net		(99,131	)		(5,101,176	)		4,839,151
Proceeds from other borrowings		2,000,000			16,248,000			7,000,000
Repayment of other borrowings		(8,967,419	)		(6,713,473	)		(4,105,113	)
Purchase of treasury stock		(2,174,419	)		(238,534	)		—
Exercise of stock options		14,182			62,115			71,386
Common stock issued		221,360			305,711			285,669
Proceeds from dividend reinvestment plan		360,838			320,347			245,506
Tax effect of stock options		12,695			—			—
Cash dividends		(1,469,752	)		(1,315,418	)		(1,188,146	)
Net cash received from deposit acquisition		19,270,054			—			—
Net cash provided by financing activities		47,697,318			25,168,125			16,712,642
Increase in cash and cash equivalents		4,175,720			7,818,438			509,388
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		13,639,602			5,821,164			5,311,776
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	17,815,322		$	13,639,602		$	5,821,164
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings	$	12,910,196		$	8,216,503		$	6,499,165
Income taxes		850,000			1,498,363			1,540,000
SUMMARY OF BUSINESS ACQUISITION
Fair value of tangible assets acquired	$	42,657,925		$	—		$	—
Fair value of core deposit intangible acquired		103,781			—			—
Fair value of liabilities assumed		(38,408,610	)		—			—
Stock issued for the purchase of acquired company’s common stock		(3,662,750	)		—			—
Cash paid in the acquisition		(3,887,110	)		—			—
Deferred tax asset		889,361			—			—
Goodwill recognized	$	(2,307,403	)	$	—		$	—

See accompanying notes to consolidated financial statements.

2007 Annual Report   •   25

Notes to Consolidated Financial Statements

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
	A summary of the significant accounting and reporting policies applied in the presentation of the accompanying financial statements follows:

     Nature of Operations and Basis of Presentation

Middlefield Banc Corp. (the “Company”) is an Ohio corporation organized to become the holding company of The Middlefield Banking Company (“MBC”). MBC is a state-chartered bank located in Ohio. On April 19, 2007, Middlefield Banc Corp. acquired Emerald Bank (“EB”), an Ohio-chartered commercial bank headquartered in Dublin, Ohio. The Company and its subsidiaries derive substantially all of their income from banking and bank-related services, which includes interest earnings on residential real estate, commercial mortgage, commercial and consumer financings as well as interest earnings on investment securities and deposit services to its customers through nine locations. The Company is supervised by the Board of Governors of the Federal Reserve System, while the Banks are subject to regulation and supervision by the Federal Deposit Insurance Corporation and the Ohio Division of Financial Institutions.

The consolidated financial statements of the Company include its wholly owned subsidiaries, MBC and EB (the “Banks”). Significant intercompany items have been eliminated in preparing the consolidated financial statements.

The financial statements have been prepared in conformity with U.S. generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ significantly from those estimates.

     Investment Securities

Investment securities are classified at the time of purchase, based on management’s intention and ability, as securities held to maturity or securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are stated at cost adjusted for amortization of premium and accretion of discount, which are computed using a level yield method and recognized as adjustments of interest income. Certain other debt securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized holding gains and losses for available-for-sale securities are reported as a separate component of stockholders’ equity, net of tax, until realized. Realized security gains and losses are computed using the specific identification method. Interest and dividends on investment securities are recognized as income when earned.

Common stock of the Federal Home Loan Bank (“FHLB”) represents ownership in an institution that is wholly owned by other financial institutions. The is equity security is accounted for at cost and classified with other assets.

     Loans

Loans are reported at their principal amount net of the allowance for loan losses. Interest income is recognized as income when earned on the accrual method. The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of interest is doubtful. Interest received on nonaccrual loans is recorded as income or applied against principal according to management’s judgment as to the collectibility of such principal.

Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan’s yield. Management is amortizing these amounts over the contractual life of the related loans.

26    •    Middlefield Banc Corp.

     Allowance for Loan Losses

The allowance for loan losses represents the amount which management estimates is adequate to provide for probable loan losses inherent in its loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses which is charged to operations. The provision is based on management’s periodic evaluation of the adequacy of the allowance for loan losses, which encompasses the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to significant change in the near term.

A loan is considered impaired when it is probable the borrower will not repay the loan according to the original contractual terms of the loan agreement. Management has determined that first mortgage loans on one-to-four family properties and all consumer loans represent large groups of smaller-balance homogeneous loans that are to be collectively evaluated. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. A loan is not impaired during a period of delay in payment if the Company expects to collect all amounts due, including interest accrued, at the contractual interest rate for the period of delay. All loans identified as impaired are evaluated independently by management. The Company estimates credit losses on impaired loans based on the present value of expected cash flows or the fair value of the underlying collateral if the loan repayment is expected to come from the sale or operation of such collateral. Impaired loans, or portions thereof, are charged off when it is determined a realized loss has occurred. Until such time, an allowance for loan losses is maintained for estimated losses. Cash receipts on impaired loans are applied first to accrued interest receivable unless otherwise required by the loan terms, except when an impaired loan is also a nonaccrual loan, in which case the portion of the payment related to interest is recognized as income.

Mortgage loans secured by one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis, taking into consideration all circumstances concerning the loan, the creditworthiness and payment history of the borrower, the length of the payment delay, and the amount of shortfall in relation to the principal and interest owed.

     Premises and Equipment

Premises and equipment are stated at cost net of accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets, which range from 3 to 20 years for furniture, fixtures, and equipment and 3 to 40 years for buildings and leasehold improvements. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.

     Goodwill

Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards (“FAS”) No. 142, “Goodwill and Other Intangible Assets.” This statement, among other things, requires a two-step process for testing the impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Company’s reported net income because impairment losses, if any, could occur irregularly and in varying amounts. The Company performs an annual impairment analysis of goodwill based on the fair value of the reporting unit determined by estimating the expected present value of future cash flows.

2007 Annual Report   •    27

Notes to Consolidated Financial Statements

     Intangible Assets

Intangible assets include core deposit intangibles, which are a measure of the value of consumer demand and savings deposits acquired in business combinations accounted for as purchases. The core deposit intangibles are being amortized to expense over a 10 year life on a straight-line basis. The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense.

     Bank-Owned Life Insurance (BOLI)

Thee Company owns insurance on the lives of a certain group of key employees. The policies were purchased to help off set the increase in the costs of various fringe benefit plans including healthcare. The cash surrender value of these policies is included as an asset on the consolidated balance sheet and any increases in the cash surrender value are recorded as noninterest income on the consolidated statements of income. In the event of the death of an insured individual under these policies, the Company would receive a death benefit, which would be recorded as no interest income.

     Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

     Earnings Per Share

The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share are calculated utilizing net income as reported in the numerator and average shares outstanding in the denominator. The computation of diluted earnings per share differs in that the dilutive effects of any stock options, warrants, and convertible securities are adjusted in the denominator.

     Stock Options

In December 2004, the FASB issued FAS No. 123R, Share-Based Payment, which revised FAS 123, Accounting for Stock-Based Compensation, and superseded APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations. FAS 123R requires the grant-date fair value of all share-based payment awards that are expected to vest, including employee share options, to be recognized as employee compensation expense over the requisite service period. The Company adopted FAS 123R on January 1, 2006, and applied the modified prospective transition method. Under this transition method, the Company (1) did not restate any prior periods and (2) is recognizing compensation expense for all share-based payment awards that were outstanding, but not yet vested, as of January 1, 2006, based upon the same estimated grant-date fair values and service periods used to prepare the FAS 123 pro forma disclosures.

Prior to adopting FAS 123R, the Company accounted for share-based payment awards using the intrinsic value method of APB 25 and related interpretations. Under APB 25, the Company did not record compensation expense for employee share options, unless the awards were modified, because the share options were granted with exercise prices equal to or greater than the fair value of our stock on the date of grant. The following table illustrates the effect on reported net income and earnings per share applicable to common shareholders for the years ended December 31, 2005, had we accounted for our share-based compensation plans using the fair value method of FAS 123R:

28    •    Middlefield Banc Corp.

	2005
Net income as reported:	$	3,701,332
Less pro forma expense related to options		60,259
Pro forma net income	$	3,641,073
Basic net income per common share:
As reported	$	2.63
Pro forma		2.59
Diluted net income per common share:
As reported	$	2.59
Pro forma		2.55

During the year ended December 31, 2007, the Company recorded $26,435 of compensation cost related to unvested share-based compensation awards granted in 2006. As of December 31, 2007, there was approximately $15,039 of unrecognized compensation cost related to unvested share-based compensation awards granted. The at cost is expected to be recognized in 2008.

FAS 123R requires that the cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for stock-based awards (excess tax benefits) be classified as financing cash flows. Prior to the adoption of FAS 123R, such excess tax benefits were presented as operating cash flows. Accordingly, there have been excess tax benefits of $12,695 that have been classified as a financing cash inflow for the year ended December 31, 2007, in the Consolidated Statement of Cash Flows.

For purposes of computing pro forma results, the Company estimated the fair values of stock options using the Black-Scholes option-pricing model. The model requires the use of subjective assumptions that can materially affect fair value estimates. Therefore, the pro forma results are estimates of results of operations as if compensation expense had been recognized for the stock option plans. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. The fair value of each stock option granted was estimated using the following weighted-average assumptions:

	Expected Dividend						Expected Life
Grant Year	Yield		Risk-Free Interest Rate		Expected Volatility		(in years)
2005		2.35		4.49		18.05		9.94
2006		2.27		4.67		7.18		9.94
2007		2.53		3.70 — 4.80		4.09		9.94

The weighted-average fair value of each stock option granted for 2007, 2006, and 2005, was $3.35, $7.19, and $9.49, respectively. The total intrinsic value of options exercised during the years ended December 31, 2007, 2006, and 2005, was $2,717, $16,219, and $16,458, respectively.

     Cash Flow Information

The Company has defined cash and cash equivalents as those amounts included in the Consolidated Balance Sheet captions as “Cash and due from banks,” “Federal funds sold,” and “Interest-bearing deposits with other institutions” with original maturities of less than 90 days.

2007 Annual Report    •    29

Notes to Consolidated Financial Statements

     Advertising Costs

Advertising costs are expensed as the costs are incurred. Advertising expenses amounted to $316,112, $331,644, and $302,679, for 2007, 2006, and 2005, respectively.

     Reclassification of Comparative Amounts

Certain comparative amounts for prior years have been reclassified to conform to current-year presentations. Such reclassifications did not affect net income or retained earnings.

     Recent Accounting Pronouncements

In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations (“FAS 141(R)”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

In September 2006, the FASB issued FAS No. 157, Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115, which provides all entities with an option to report selected financial assets and liabilities at fair value. The objective of the FAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. FAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FAS No. 157, Fair Value Measurements. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial condition.

In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. FAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. FAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

30    •   Middlefield Banc Corp.

In September 2006, the FASB reached consensus on the guidance provided by Emerging Issues Task Force Issue 06-4 (“EITF 06-4”), Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. The guidance is applicable to endorsement split-dollar life insurance arrangements, whereby the employer owns and controls the insurance policy, that are associated with a postretirement benefit. EITF 06-4 requires that for a split-dollar life insurance arrangement within the scope of the Issue, an employer should recognize a liability for future benefits in accordance with FAS No. 106 (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The adoption of this EITF is not expected to have a material effect on the Company’s results of operations or financial condition.

In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 (“EITF 06-10”), Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements. EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The adoption of this EITF is not expected to have a material effect on the Company’s results of operations or financial condition.

In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11 (“EITF 06-11”), Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 applies to share-based payment arrangements with dividend protection features that entitle employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend equivalents on equity-classified nonvested share units, or (c) payments equal to the dividends paid on the underlying shares while an equity-classified share option is outstanding, when those dividends or dividend equivalents are charged to retained earnings under FAS No. 123R, Share-Based Payment, and result in an income tax deduction for the employer. A consensus was reached that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the EITF will have on the Company’s results of operations.

2. MERGERS AND ACQUISITIONS

On November 15, 2006, Middlefield Banc Corp. entered into an Agreement and Plan of Merger for the acquisition of Emerald Bank, an Ohio-chartered savings bank headquartered in Dublin, Ohio. Middlefield Banc Corp. organized an interim bank subsidiary under Ohio commercial bank law to carry out the merger with Emerald Bank. The Agreement and Plan of Merger was amended on January 3, 2007 to make the new interim bank subsidiary, known as EB Interim Bank, a party to the agreement. At the effective time of the merger Emerald Bank merged into the new interim subsidiary, which is the surviving corporation and which operates under the name Emerald Bank as a wholly owned commercial bank subsidiary of Middlefield Banc Corp. The purchase price for Emerald Bank totaled $7,326,890 with one half of the merger consideration payable in cash and the other half in shares of Middlefield Banc Corp. common stock. The merger was approved by both bank regulators and Emerald Bank stockholders. The transaction was completed on April 19, 2007. Emerald Bank operates as a separate banking subsidiary of Middlefield Banc Corp. under the Emerald Bank name, employing a commercial bank charter.

2007 Annual Report   •   31

Notes to Consolidated Financial Statements

The following unaudited pro forma condensed combined financial information presents the results of operations of the Company had the merger taken place at January 1, 2006.

	Twelve Months Ended December 31,
	2007		2006
Interest income	$	25,712,096	$	21,374,586
Interest expense		14,041,702		9,686,623
Net interest income		11,670,394		11,687,963
Provision for loan losses		475,493		232,654
Net interest income after provisions for loan losses		11,194,901		11,455,309
Noninterest income		2,659,299		2,444,991
Noninterest expense		10,385,875		9,311,751
Income before income taxes		3,468,325		4,588,549
Provisions for income taxes		639,923		1,471,943
Net income including restructuring charges		2,828,402		3,116,606
Restructuring charges of $418,848, net of tax benefit of $142,408		276,440		—
Net income excluding restructuring charges	$	3,104,842	$	3,116,606
Net loss per share including restructuring charges	$	1.82	$	2.09
Basic	$	1.79	$	2.05
Diluted
Net income per share excluding restructuring charges
Basic	$	2.00	$	2.09
Diluted	$	1.97	$	2.05

Merger and restructuring charges are recorded in unaudited pro forma condensed combined financial information, and include incremental costs to integrate Emerald Bank with the Company’s operations. These charges represent costs associated with these one-time activities and do not represent ongoing costs of the fully integrated combined organization. These one-time charges, as shown in the table below, were expensed as incurred at Emerald Bank prior to the acquisition.

	Twelve Months Ended December 31,
	2007
Compensation and benefits	$	40,092
Professional fees		221,389
Accleleration of contracts		157,367
	$	418,848

On August 1, 2007, MBC completed its acquisition of certain deposit liabilities attributable to a third-party financial institution’s branch office located in Middlefield, Ohio. The acquisition included management personnel and retail deposits of approximately $21 million. MBC recorded goodwill and core deposit intangible of approximately $2.1 million.

32   •   Middlefield Banc Corp.

3.	EARNINGS PER SHARE
	There are no convertible securities that would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income will be used as the numerator. The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.

	2007			2006			2005
Weighted-average common shares outstanding		1,666,265			1,586,463			1,571,778
Average treasury stock shares		(110,667	)		(92,809	)		(89,333	)
Weighted-average common shares and common stock equivalents used to calculate basic earnings per share		1,555,598			1,493,654			1,482,445
Additional common stock equivalents (stock options) used to calculate diluted earnings per share		21,649			22,999			22,225
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share		1,577,247			1,516,653			1,504,670

	Options to purchase 25,897 shares of common stock at prices ranging from $36.73 to $40.24 were outstanding during the year ended December 31, 2007 but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike price being greater than the average market price as of December 31, 2007. For the year ended December 31, 2006, there were no anti-dilutive options outstanding.
4.	STOCK DIVIDEND
	The Board of Directors approved a 5 percent stock dividend to stockholders of record as of December 1, 2007, payable December 15, 2007. As a result of the dividend, 73,547 additional shares of the Company’s common stock were issued, common stock was increased by $2,857,301, and retained earnings decreased by $2,873,346.
	The Board of Directors approved a 5 percent stock dividend to stockholders of record as of December 1, 2006, payable December 15, 2006. As a result of the dividend, 67,284 additional shares of the Company’s common stock were issued, common stock was increased by $2,842,749, and retained earnings decreased by $2,859,600.
	The Board of Directors approved a 5 percent stock dividend to stockholders of record as of December 1, 2005, payable December 14, 2005. As a result of the dividend, 63,549 additional shares of the Company’s common stock were issued, common stock was increased by $2,557,847, and retained earnings decreased by $2,572,949.
	Fractional shares were paid in cash. All average shares outstanding and all per share amounts included in the financial statements are based on the increased number of shares after giving retroactive effects to the stock dividend.

2007 Annual Report   •   33

Notes to Consolidated Financial Statements

5.	INVESTMENT SECURITIES AVAILABLE FOR SALE
	The amortized cost and fair values of securities available for sale are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
2007	Cost		Gains		Losses			Value
U.S. government agency securities	$	7,872,500	$	55,058	$	(422	)	$	7,927,136
Obligations of states and political subdivisions:
Taxable		749,234		—		(6,845	)		742,389
Tax-exempt		47,262,680		188,253		(522,389	)		46,928,544
Mortgage-backed securities		29,219,323		161,252		(334,940	)		29,045,635
Total debt securities		85,103,737	$	404,563	$	(864,596	)	$	84,643,704
Equity securities		944,283		396,477		(16,700	)		1,324,060
Total	$	86,048,020	$	801,040	$	(881,296	)	$	85,967,764

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
2006	Cost		Gains		Losses			Value
U.S. government agency securities	$	7,253,348	$	1,911	$	(110,073	)	$	7,145,186
Obligations of states and political subdivisions:
Taxable		748,877		—		(22,205	)		726,672
Tax-exempt		38,181,724		139,789		(353,231	)		37,968,282
Mortgage-backed securities		16,959,278		377		(490,850	)		16,468,805
Total debt securities		63,143,227	$	142,077	$	(976,359	)	$	62,308,945
Equity securities		694,283		48,207		(3,300	)		739,190
Total	$	63,837,510	$	190,284	$	(979,659	)	$	63,048,135

The amortized cost and fair value of debt securities at December 31, 2007, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	Cost		Value
Due in one year or less	$	4,299,248	$	4,302,375
Due after one year through five years		10,281,031		10,303,416
Due after five years through ten years		14,313,463		14,356,532
Due after ten years		56,209,995		55,681,381
Total	$	85,103,737	$	84,643,704

Investment securities with approximate carrying values of $23,974,806 and $21,121,334 at December 31, 2007 and 2006, respectively, were pledged to secure deposits and other purposes as required by law.

Proceeds from sales of investment securities available for sale and gross losses realized were $658,976 and $5,868, respectively, during 2006. There were no sales of investment securities available for sale during 2007 and 2005.

34   •   Middlefield Banc Corp.

6. INVESTMENT SECURITIES HELD TO MATURITY

The amortized cost and fair values of investment securities held to maturity are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
2006	Cost		Gains		Losses		Value
Obligations of states and political subdivisions:	$	125,853	$	8,453	$	—	$	134,306
Total	$	125,853	$	8,453		—	$	134,306

Proceeds from the sale of investment securities held to maturity and gross gains realized were $102,942 and $7,942, respectively, during 2007. The Company transferred investment securities held to maturity with a carrying amount of $19,899 and fair value of $20,641 to investment securities available for sale during 2007. The Company no longer maintains a held to maturity portfolio.

7. UNREALIZED LOSSES ON SECURITIES

The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2007 and 2006.

	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
2007	Value		Losses			Value		Losses			Value		Losses
U.S. government agency securities	$	—	$	—		$	498,930	$	(422	)	$	498,930	$	(422	)
Obligations of states and political subdivisions		12,102,406		(223,753	)		19,818,047		(305,481	)		31,920,453		(529,234	)
Mortgage-backed securities		4,753,699		(42,609	)		12,503,364		(292,331	)		17,257,063		(334,940	)
Equity securities		—		—			29,250		(16,700	)		29,250		(16,700	)
Total	$	16,856,105	$	(266,362	)	$	32,849,591	$	(614,934	)	$	49,705,696	$	(881,296	)

	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
2006	Value		Losses			Value		Losses			Value		Losses
U.S. government agency securities	$	495,470	$	(2,518	)	$	5,995,855	$	(107,555	)	$	6,491,325	$	110,073	)
Obligations of states and political subdivisions		12,725,091		(149,101	)		12,310,231		(226,335	)		25,035,322		(375,436	)
Mortgage-backed securities		486,318		(11,214	)		15,927,958		(479,636	)		16,414,276		(490,850	)
Equity securities		42,650		(3,300	)		—		—			42,650		(3,300	)
Total	$	13,749,529	$	(166,133	)	$	34,234,044	$	(813,526	)	$	47,983,573	$	(979,659	)

The policy of the Company is to recognize an other-than-temporary impairment on equity securities where the fair value has been significantly below cost for three consecutive quarters. For fixed maturity investments with unrealized losses due to interest rates where the Company has the positive intent and ability to hold the investment for a period of time sufficient to allow a market recovery, declines in value below cost are not assumed to be other than temporary. There are 147 securities that are considered temporarily impaired at December 31, 2007. The Company reviews its position quarterly and has asserted that at December 31, 2007, the declines outlined in the above table represent temporary declines and the Company does have the intent and ability either to hold those securities to maturity or to allow a market recovery.

^{2007 Annual Report}   •   35

    Notes to Consolidated Financial Statements

The Company has concluded that any impairment of its investment securities portfolio is not other than temporary but is the result of interest rate changes that are not expected to result in the noncollection of principal and interest during the period.

8. LOANS

Major classifications of loans are summarized as follows:

	2007		2006
Commercial and industrial	$	67,009,564	$	68,496,089
Real estate — construction		6,704,054		2,457,928
Real estate — mortgage:
Residential		193,514,047		162,916,830
Commercial		36,818,070		9,948,568
Consumer installment		5,400,187		5,371,119
		309,445,922		249,190,534
Less allowance for loan losses		3,299,276		2,848,887
Net loans	$	306,146,646	$	246,341,647

The Company’s primary business activity is with customers located within its local trade area, eastern Geauga County, and contiguous counties to the north, east, and south. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio at December 31, 2007 and 2006, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.

Nonperforming loans consist of commercial and consumer loans which are on a nonaccrual basis and loans contractually past due 90 days or more but are not on nonaccrual status because they are well secured or in the process of collection.

Information regarding nonperforming loans at December 31 is as follows:

	2007		2006
90 days or more past due and accruing interest	$	1,917,480	$	208,778
Nonaccrual loans		3,744,451		1,180,248
Total nonperforming loans	$	5,661,931	$	1,389,026

Information regarding impaired loans at December 31 is as follows:

	2007		2006
Impaired loans with a related allowance for loan loss	$	2,481,272	$	289,754
Impaired loans without a related allowance for loan loss		—		—
Related allowance for loan loss		348,006		71,214
Average recorded investment in impaired loans		1,117,297		231,376
Interest income recognized		126,305		3,177

36   •   Middlefield Banc Corp.

9. ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for the years ended December 31 are as follows:

	2007		2006
Balance, January 1	$	2,848,887	$	2,841,098
Add:
Additions from acquisitions		436,063		—
Provisions charged to operations		429,391		60,000
Recoveries		13,839		28,663
Less loans charged off		428,904		80,874
Balance, December 31	$	3,299,276	$	2,848,887

10. PREMISES AND EQUIPMENT

Major classifications of premises and equipment are summarized as follows:

	2007		2006
Land and land improvements	$	1,537,930	$	1,537,930
Building and leasehold improvements		7,620,924		7,149,204
Furniture, fixtures, and equipment		3,801,814		3,335,681
		12,960,668		12,022,815
Less accumulated depreciation and amortization		5,915,983		5,280,350
Total	$	7,044,685	$	6,742,465

Depreciation and amortization charged to operations was $504,058 in 2007, $468,148 in 2006, and $448,386 in 2005.

11. GOODWILL AND INTANGIBLE ASSETS

Goodwill totaled $4,371,206 at December 31, 2007 and $123,175 at December 31, 2006. The Company recorded goodwill totaling $2,339,403 in connection with the acquisition of Emerald Bank. During 2007, the Company recorded goodwill totaling $2,031,803 in connection with the acquisition of a third-party financial institution’s branch office.

The Company recorded core deposit intangibles of $103,781 and $182,100 in connection with the acquisitions of Emerald Bank and a third-party financial institution’s branch office, respectively.

2007 Annual Report • 37

Notes to Consolidated Financial Statements

Core deposit intangible assets are amortized on a straight-line basis over their estimated lives of 10 years. Amortization expense totaled $11,913 in 2007. The estimated aggregate future amortization expense for core deposit intangible assets as of December 31, 2007 is as follows:

2008	$	28,588
2009		28,588
2010		28,588
2011		28,588
2012		28,588
Thereafter		131,028
	$	273,968

12.	OTHER ASSETS
	The components of other assets are as follows:

	2007		2006
FHLB stock	$	1,731,000	$	1,507,300
Accrued interest on investment securities		475,043		346,099
Accrued interest on loans		1,065,391		764,656
Deferred tax asset, net		1,398,408		847,456
Other		1,104,210		492,573
Total	$	5,774,052	$	3,958,084

13.	DEPOSITS
	Time deposits at December 31, 2007, mature $138,146,533, $49,097,203, $6,501,675, $3,675,906, and $5,002,531, during 2008, 2009, 2010, 2011, and 2012, respectively.
	The aggregate amount of time certificates of deposit with a minimum denomination of $100,000 and individual retirement accounts with a minimum denomination of $250,000 was $38,357,201 and $2,395,334, respectively, at December 31, 2007. Time certificates of deposit in excess of $100,000 and individual retirement accounts in excess of $250,000 are not federally insured.
	Maturities on time deposits of $100,000 or more at December 31, 2007, are as follows:

Within three months	$	8,431,158
Beyond three but within six months		8,615,730
Beyond six but within twelve months		15,291,877
Beyond one year		18,677,293
Total	$	51,016,058

38   •   Middlefield Banc Corp.

14.	SHORT-TERM BORROWINGS
	The outstanding balances and related information of short-term borrowings, which includes securities sold under agreements to repurchase and federal funds purchased, are summarized as follows:

	2007			2006
Balance at year-end	$	1,510,607		$	1,609,738
Average balance outstanding		2,383,902			3,281,340
Maximum month-end balance		5,768,057			8,245,406
Weighted-average rate at year-end		2.96	%		4.35	%
Weighted-average rate during the year		3.89	%		5.10	%

Average balances outstanding during the year represent daily average balances, and average interest rates represent interest expense divided by the related average balance.

The Company maintains a $4,000,000 line of credit at an adjustable rate, currently 7.0 percent, from Lorain National Bank. At December 31, 2007 and December 31, 2006, there were no outstanding balances of this line.

15.	OTHER BORROWINGS
	Other borrowings consist of advances from the FHLB as follows:

					Weighted-
	Maturity range				average			Stated interest rate range
Description	from		to		interest rate			from			to			2007		2006
Fixed rate		06/27/06		11/17/10		5.10	%		4.70	%		5.38	%	$	5,250,000	$	7,000,000
Fixed rate amortizing		06/01/09		06/01/25		4.13			2.70			5.51			8,897,319		12,864,738
Convertible		09/04/08		10/09/12		4.26			4.14			6.45			10,000,000		8,000,000
Junior subordinated debt		12/21/37		12/21/37		6.58			6.58			6.58			8,248,000		8,248,000
														$	32,395,319	$	36,112,738

The scheduled maturities of advances outstanding are as follows:

	Year Ending December 31,
	2007
			Weighted-
	Amount		Average Rate
2008	$	11,839,778		5.06	%
2009		4,186,199		4.56
2010		3,842,373		5.40
2011		802,624		3.70
2012		2,555,243		4.04
Beyond 2012		9,169,102		6.31
	$	32,395,319		5.28	%

2007 Annual Report   •   39

Notes to Consolidated Financial Statements

The Bank entered into a ten-year “Convertible Select” fixed commitment advance arrangement with the FHLB. Rates may be reset at the FHLB’s discretion on a quarterly basis based on the three-month LIBOR rate. At each rate change the Bank may exercise a put option and satisfy the obligation without penalty.

Advances from the FHLB maturing July 1, 2007, June 1, 2009, February 1, 2012, June 4, 2012, February 2, 2013, February 26, 2014, July 28, 2014, September 13, 2014, June 1, 2015, June 4, 2017, February 1, 2018, February 26, 2019, February 1, 2023, and June 1, 2025, require monthly principal and interest payments and an annual 20 percent paydown of outstanding principal. Monthly principal and interest payments are adjusted after each 20 percent paydown. Under terms of a blanket agreement, collateral for the FHLB borrowings are secured by certain qualifying assets of the Bank, which consist principally of first mortgage loans. Under this credit arrangement, the Bank has a remaining borrowing capacity of approximately $184 million at December 31, 2007.

In December 2006, the Company formed a special purpose entity (“Entity”) to issue $8,000,000 of floating rate, obligated mandatorily redeemable securities and $248,000 in common securities as part of a pooled offering. The rate is fixed through January 2012 at 6.58 percent and floats quarterly thereafter, equal to LIBOR plus 1.67 percent. The Entity may redeem them, in whole or in part, at face value after January 30, 2012. The Company borrowed the proceeds of the issuance from the Entity in December 2006 in the form of an $8,248,000 note payable, which is included in the liabilities section of the Company’s Consolidated Balance Sheet. Debt issue costs of $248,000 have been capitalized and are being amortized through the first call date.

16. OTHER LIABILITIES

The components of other liabilities are as follows:

	2007		2006
Accrued interest payable	$	1,509,575	$	888,855
Other		978,171		726,246
Total	$	2,487,746	$	1,615,101

17. INCOME TAXES

The provision for federal income taxes consists of:

	2007		2006			2005
Current payable	$	698,915	$	1,530,001		$	1,500,495
Deferred		97,308		(58,058	)		(85,339	)
Total provision	$	796,223	$	1,471,943		$	1,415,156

40   •   Middlefield Banc Corp.

The tax effects of deductible and taxable temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:

	2007		2006
Deferred tax assets:
Allowance for loan losses	$	1,008,069	$	899,689
Net unrealized loss on securities		27,287		268,386
Supplemental retirement plan		123,339		93,045
Origination costs		25,115		—
Net operating losses of subsidiary		606,806		—
Gross deferred tax assets		1,790,616		1,261,120
Deferred tax liabilities:
Deferred origination fees, net		55,637		106,328
Premises and equipment		113,170		116,635
Net unrealized gain on securities		—		—
Other		223,400		190,701
Gross deferred tax liabilities		392,207		413,664
Net deferred tax assets	$	1,398,409	$	847,456

No valuation allowance was established at December 31, 2007 and 2006, in view of the Company’s ability to carryback to taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company’s earnings potential.

The reconciliation between the federal statutory rate and the Company’s effective consolidated income tax rate is as follows:

	2007						2006						2005
				% of						% of						% of
				Pre-tax						Pre-tax						Pre-tax
	Amount			Income			Amount			Income			Amount			Income
Provision at statutory rate	$	1,418,332			34.0	%	$	1,821,105			34.0	%	$	1,739,606			34.0	%
Tax-free income		(702,124	)		(16.8	)		(437,874	)		(8.2	)		(295,146	)		5.8
Nondeductible interest expense		102,830			2.5			54,673			1.0			38,639			0.8
Other		(22,816	)		(0.6	)		34,039			0.6			(67,923	)		(1.4	)
Actual tax expense and effective rate		796,222			19.1	%	$	1,471,943			27.5	%	$	1,415,176			27.6	%

The Company adopted the provisions of FIN No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109,” effective January 1, 2007. FIN No. 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. FIN No. 48 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. The adoption of FIN No. 48 did not have a significant impact on the Company’s financial statements.

2007 Annual Report   •   41

    Notes to Consolidated Financial Statements

18. EMPLOYEE BENEFITS

      Retirement Plan

The Banks maintain section 401(k) employee savings and investment plans for all full-time employees and officers of the Banks with more than one year of service. The Banks’ contributions to the plans are based on 50 percent matching of voluntary contributions up to 6 percent of compensation. An eligible employee can contribute up to 15 percent of salary. Employee contributions are vested at all times, and MBC contributions are fully vested after six years beginning at the second year in 20 percent increments. EB contributions are vested at 25 percent for less than a year of employment, 50 percent after one year, 75 percent after two years and fully vested after three years. Contributions for 2007, 2006, and 2005 to these plans amounted to $79,959, $71,516, and $62,755, respectively.

      Supplemental Retirement Plan

MBC maintains a Directors’ Retirement Plan to provide postretirement payments over a ten-year period to members of the Board of Directors who have completed five or more years of service. The plan requires payment of 25 percent of the final average annual board fees paid to a director in the three years preceding the director’s retirement.

The following table illustrates the components of the net periodic pension cost for the Directors’ Retirement Plan for the years ended:

	Directors’ Retirement Plan
	2007		2006		2005
Components of net periodic pension costs
Service cost	$	11,991	$	9,510	$	12,756
Interest cost		12,189		9,791		9,948
Net periodic pension cost	$	24,180	$	19,301	$	22,704

      Executive Deferred Compensation Plan

During 2006, MBC implemented an Executive Deferred Compensation Plan (the “Plan”) to provide post-retirement payments to members of senior management. The Plan agreements are noncontributory, defined contribution arrangements that provide supplemental retirement income benefits to three officers, with contributions made solely by MBC. During 2007, MBC contributed $49,932 to the Plan. There were no contributions made to the Plan during 2006.

      Stock Option and Restricted Stock Plan

The Company maintains a stock option and restricted stock plan (“the Plan”) for granting incentive stock options, nonqualified stock options, and restricted stock for key officers and employees and nonemployee directors of the Company. A total of 153,932 shares of authorized and unissued or issued common stock are reserved for issuance under the Plan, which expires ten years from the date of stockholder ratification. The per share exercise price of an option granted will not be less than the fair value of a share of common stock on the date the option is granted. No option shall become exercisable earlier than one year from the date the Plan was approved by the stockholders.

42   •   Middlefield Banc Corp.

The following table presents share data related to the outstanding options:

				Weighted-					Weighted-
				average					average
				Exercise					Exercise
	2007			Price		2006			Price
Outstanding, January 1		77,287		$	26.23		81,921		$	25.51
Granted		14,840			37.27		3,675			38.33
Exercised		(565	)		25.10		(2,689	)		24.05
Forfeited		(3,351	)		22.11		(5,620	)		26.43
Outstanding, December 31		88,211		$	28.34		77,287			26.23
Exercisable at year-end		83,724			27.86		73,612			25.52

The following table summarizes the characteristics of stock options at December 31, 2007:

					Outstanding				Exercisable
					Contractual		Average				Average
	Exercise				Average		Exercise				Exercise
Grant Date	Price		Shares		Life		Price		Shares		Price
June 14, 1999	$	23.70		3,736		1.45	$	23.70		3,736	$	23.70
November 23, 1999		23.12		2,934		1.90		23.12		2,934		23.12
December 11, 2000		17.90		10,941		2.95		17.90		10,941		17.90
December 9, 2002		22.33		9,806		4.94		22.33		9,806		22.33
December 8, 2003		24.29		20,917		5.94		24.29		20,917		24.29
May 12, 2004		27.36		907		6.33		27.36		907		27.36
December 13, 2004		30.45		13,073		6.95		30.45		13,073		30.45
December 14, 2005		36.73		8,595		7.95		36.73		8,595		36.73
December 10, 2006		40.24		3,675		8.95		40.24		3,675		40.24
April 19, 2007		37.33		9,140		9.31		37.33		9,140		37.73
May 16, 2007		37.48		1,337		9.41		37.48		—		37.48
December 10, 2007		37.00		3,150		9.95		37.00		—		37.00
				88,211						83,724

For the years ended December 31, 2007, 2006, and 2005, the Company granted 130 shares, 90 shares, and 80 shares, respectively, of common stock under the restricted stock plan. The Company recognizes compensation expense in the amount of fair value of the common stock at the grant date and as an addition to stockholders’ equity.

2007 Annual Report   •   43

Notes to Consolidated Financial Statements

19. COMMITMENTS

In the normal course of business, there are various outstanding commitments and certain contingent liabilities which are not reflected in the accompanying consolidated financial statements. These commitments and contingent liabilities represent financial instruments with off-balance sheet risk. The contract or notional amounts of those instruments reflect the extent of involvement in particular types of financial instruments which were composed of the following:

	2007		2006
Commitments to extend credit	$	49,375,176	$	46,092,201
Standby letters of credit		466,647		121,598
Total	$	49,841,823	$	46,213,799

These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheet. The Company’s exposure to credit loss, in the event of nonperformance by the other parties to the financial instruments, is represented by the contractual amounts as disclosed. The Company minimizes its exposure to credit loss under these commitments by subjecting them to credit approval and review procedures and collateral requirements as deemed necessary. Commitments generally have fixed expiration dates within one year of their origination.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Performance letters of credit represent conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance-related contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized over the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.

20. REGULATORY RESTRICTIONS

          Loans

Federal law prevents the Company from borrowing from the Banks unless the loans are secured by specific obligations. Further, such secured loans are limited in amount of 10 percent of the Banks’ common stock and capital surplus.

          Dividends

MBC and EB are subject to dividend restrictions that generally limit the amount of dividends that can be paid by an Ohio state-chartered bank. Under the Ohio Banking Code, cash dividends may not exceed net profits as defined for that year combined with retained net profits for the two preceding years less any required transfers to surplus. Under this formula, for MBC, the amount available for payment of dividends for 2008 approximates $4,475,000 plus 2008 profits retained up to the date of the dividend declaration. For EB, the amount available for payment of dividends for 2008 approximates $33,000 plus 2008 profits retained up to the date of the dividend declaration.

44   •   Middlefield Banc Corp.

21. REGULATORY CAPITAL

Federal regulations require the Company and the Banks to maintain minimum amounts of capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average total assets.

In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established five capital categories ranging from “well capitalized” to “critically undercapitalized.” Should any institution fail to meet the requirements to be considered “adequately capitalized,” it would become subject to a series of increasingly restrictive regulatory actions.

As of December 31, 2007 and 2006, the FDIC categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, Total risk-based, Tier 1 risk-based, and Tier 1 Leverage capital ratios must be at least 10 percent, 6 percent, and 5 percent, respectively.

The Company’s and its subsidiaries’ actual capital ratios are presented in the following table that shows that all regulatory capital requirements were met as of December 31, 2007.

	Middlefield Banc Corp.					The Middlefield Banking Co.					Emerald Bank
	December 31,					December 31,					December 31,
	2007					2007					2007
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Actual	$	42,664,943		14.56	%	$	32,028,171		12.67	%	$	7,777,400		19.50	%
For Capital Adequacy Purposes		23,441,926		8.00			20,230,160		8.00			3,190,160		8.00
To Be Well Capitalized		29,302,408		10.00			25,287,700		10.00			3,987,700		10.00
Tier I Capital (to Risk-Weighted Assets)
Actual	$	39,194,767		13.38	%	$	29,205,547		11.55	%	$	7,300,748		18.31	%
For Capital Adequacy Purposes		11,720,963		4.00			10,115,080		4.00			1,595,080		4.00
To Be Well Capitalized		17,581,445		6.00			15,172,620		6.00			2,392,620		6.00
Tier I Capital (to Average Assets)
Actual	$	39,194,767		9.23	%	$	29,205,547		7.82	%	$	7,300,748		14.38	%
For Capital Adequacy Purposes		16,990,099		4.00			14,946,917		4.00			2,030,504		4.00
To Be Well Capitalized		21,237,623		5.00			18,683,646		5.00			2,538,130		5.00

2007 Annual Report   •   45

Notes to Consolidated Financial Statements

The Company’s and MBC’s actual capital ratios are presented in the following table that shows that all regulatory capital requirements were met as of December 31, 2006.

	Middlefield Banc Corp.					The Middlefield Banking Co.
	December 31,					December 31,
	2006					2006
	Amount		Ratio			Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Actual	$	41,978,838		18.05	%	$	32,220,571		13.88	%
For Capital Adequacy Purposes		18,605,783		8.00			18,568,960		8.00
To Be Well Capitalized		23,257,229		10.00			23,211,200		10.00
Tier I Capital (to Risk-Weighted Assets)
Actual	$	39,109,743		16.82	%	$	29,371,684		12.65	%
For Capital Adequacy Purposes		9,302,892		4.00			9,284,480		4.00
To Be Well Capitalized		13,954,337		6.00			13,926,720		6.00
Tier I Capital (to Average Assets)
Actual	$	39,109,743		11.82	%	$	29,371,684		8.89	%
For Capital Adequacy Purposes		13,236,186		4.00			13,221,051		4.00
To Be Well Capitalized		16,545,233		5.00			16,526,314		5.00

22. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS

The estimated fair value of the Company’s financial instruments at December 31 are as follows:

	2007				2006
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	17,815,322	$	17,815,322	$	13,639,602	$	13,639,602
Investment securities:
Available for sale		85,967,764		85,967,764		63,048,135		63,048,135
Held to maturity		—		—		125,853		134,306
Net loans		306,146,646		307,323,642		246,341,647		242,583,242
Bank-owned life insurance		7,153,381		7,153,381		6,872,743		6,872,743
Federal Home Loan Bank stock		1,731,000		1,731,000		1,507,300		1,507,300
Accrued interest receivable		1,540,434		1,540,434		1,110,755		1,110,755
Financial liabilities:
Deposits	$	362,918,000	$	364,271,994	$	271,050,193	$	270,101,193
Short-term borrowings		1,510,607		1,510,607		1,609,738		1,609,738
Other borrowings		32,395,319		32,262,319		36,112,738		36,139,369
Accrued interest payable		1,509,575		1,509,575		888,855		888,855

46   •   Middlefield Banc Corp.

Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. Since many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.

As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.

The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:

Cash and Cash Equivalents, Federal Funds Sold, Interest-Bearing Deposits in Other Institutions, Federal Home Loan Bank Stock, Accrued Interest Receivable, Accrued Interest Payable, and Short-Term Borrowings

The fair value is equal to the current carrying value.

          Bank-Owned Life Insurance

The fair value is equal to the cash surrender value of the life insurance policies.

          Investment Securities

The fair value of investment securities available for sale and held to maturity is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities.

          Loans, Deposits, and Other Borrowings

The fair value of loans, certificates of deposit, and other borrowings is estimated by discounting the future cash flows using a simulation model which estimates future cash flows and constructs discount rates that consider reinvestment opportunities, operating expenses, noninterest income, credit quality, and prepayment risk. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year-end.

2007 Annual Report   •   47

     Notes to Consolidated Financial Statements

          Commitments to Extend Credit

These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments and letters of credit are presented in Note 17.

23. PARENT COMPANY

Following are condensed financial statements for the Company.

	December 31,
CONDENSED BALANCE SHEET	2007		2006
ASSETS
Cash and due from banks	$	1,199,416	$	8,265,187
Interest-bearing deposits in other institutions		110,387		546,454
Investment securities available for sale		1,324,060		739,190
Other assets		420,175		371,177
Investment in subsidiary bank		40,452,190		28,821,058
TOTAL ASSETS	$	43,506,228	$	38,743,066
LIABILITIES
Trust Preferred Securities	$	8,248,000	$	8,248,000
Other liabilities		296,844		31,132
STOCKHOLDERS’ EQUITY		34,961,384		30,463,934
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	43,506,228	$	38,743,066

48   •   Middlefield Banc Corp.

	Year Ended December 31,
CONDENSED STATEMENT OF INCOME	2007			2006			2005
INCOME
Dividends from subsidiary banks	$	2,018,050		$	1,277,306		$	1,999,052
Interest income		154,199			19,931			12,017
Other		6,965			—			—
TOTAL INCOME		2,179,214			1,297,237			2,011,069
EXPENSES
Interest expensed		535,280			18,387			54,107
Other		269,861			180,651			163,275
TOTAL INCOME		805,141			199,038			217,382
Income before income tax benefit		1,374,073			1,098,199			1,793,687
Income tax benefit		(218,952	)		(60,644	)		(69,844	)
Income before equity in undistributed net income of subsidiaries		1,593,025			1,158,843			1,863,531
Equity in undistributed net income of subsidiaries		1,782,318			2,725,404			1,837,801
NET INCOME	$	3,375,343		$	3,884,247		$	3,701,332

	Year Ended December 31,
CONDENSED STATEMENT OF CASH FLOWS	2007			2006			2005
OPERATING ACTIVITIES
Net income	$	3,375,343		$	3,884,247		$	3,701,332
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of Middlefield Banking Company		(1,775,975	)		(2,725,404	)		(1,837,801	)
Equity in undistributed net income of Emerald Bank		(32,780	)		—			—
Compensation expense on stock options		26,435			—			—
Other		102,856			15,865			—
Net cash provided by operating activities		1,695,879			1,174,708			1,863,531
INVESTING ACTIVITIES
Decrease in interest-bearing deposits in other institutions		—			—			614,506
Deferred acquisition costs		—			(123,175	)		—
Investment in unconsolidated subsidiary		—			(248,000	)		—
Purchase of investment securities		(250,000	)		(250,020	)		(45,944	)
Net assets of Emerald Bank acquired		(5,912,621	)		—			—
Net cash provided by (used for)		(6,162,621	)		(621,195	)		568,562
FINANCING ACTIVITIES
Net increase in short term borrowing		—			—			(1,200,000	)
Issuance of trust-preferred securities		—			8,248,000			—
Purchase of treasury stock		(2,174,419	)		(238,534	)		—
Exercise of stock options		14,182			62,115			71,386
Common stock issued		221,360			305,711			285,669
Proceeds from dividend reinvestment plan		360,838			320,347			245,506
Tax effect of stock options		12,695			—			—
Cash dividends		(1,469,752	)		(1,315,418	)		(1,188,146	)
Net cash provided by (used for) financing activities		(3,035,096	)		7,382,221			(1,785,585	)
Increase (decrease) in cash		(7,501,838	)		7,935,734			646,508
CASH AT BEGINNING OF YEAR		8,811,641			875,907			229,399
CASH AT END OF YEAR	$	1,309,803		$	8,811,641		$	875,907

2007 Annual Report   •   49

Notes to Consolidated Financial Statements

24. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2007		2007		2007		2007
Total interest income	$	5,391,747	$	6,235,712	$	6,573,178	$	6,671,297
Total interest expense		2,779,298		3,359,372		3,666,111		3,726,138
Net interest income		2,612,449		2,876,340		2,907,067		2,945,159
Provision for loan losses		45,000		69,391		60,000		255,000
Net interest income after provision for loan losses		2,567,449		2,806,949		2,847,067		2,690,159
Total noninterest income		621,628		648,243		653,810		708,911
Total noninterest expense		2,273,702		2,320,833		2,416,933		2,361,182
Income before income taxes		915,375		1,134,359		1,083,944		1,037,888
Income taxes		163,000		235,128		223,000		175,095
Net income	$	752,375	$	899,231	$	860,944	$	862,793
Per share data:
Net income
Basic	$	0.51	$	0.57	$	0.54	$	0.55
Diluted		0.49		0.56		0.54		0.55
Average shares outstanding
Basic		1,497,417		1,578,583		1,585,225		1,561,771
Diluted		1,519,911		1,600,045		1,604,693		1,582,872

	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2006		2006		2006		2006
Total interest income	$	4,560,636	$	4,790,313	$	4,976,078	$	5,167,523
Total interest expense		1,874,659		2,037,549		2,217,481		2,437,753
Net interest income		2,685,977		2,752,764		2,758,597		2,729,770
Provision for loan losses		75,000		75,000		90,000		(180,000	)
Net interest income after provision for loan losses		2,610,977		2,677,764		2,668,597		2,909,770
Total noninterest income		550,326		594,655		643,602		638,872
Total noninterest expense		2,035,731		1,898,032		2,042,405		1,962,205
Income before income taxes		1,125,572		1,374,387		1,269,794		1,586,437
Income taxes		308,000		386,587		339,000		438,356
Net income	$	817,572	$	987,800	$	930,794	$	1,148,081
Per share data:
Net income
Basic	$	0.55	$	0.67		0.62		0.77
Diluted		0.55		0.65		0.61		0.76
Average shares outstanding
Basic		1,485,579		1,484,640		1,490,251		1,496,935
Diluted		1,509,247		1,509,173		1,514,875		1,519,289

50   •   Middlefield Banc Corp.

Board of Directors and Stockholders
Middlefield Banc Corp.

We have audited the accompanying consolidated balance sheet of Middlefield Banc Corp. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Middlefield Banc Corp. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ending December 31, 2007, in conformity with U.S. generally accepted accounting principles.

We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, included in the accompanying Management’s Report on Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.

S.R. Snodgrass,
A.C. Wexford, PA
March 14, 2008

2007 Annual Report   •   51

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

Overview

The consolidated review and analysis of Middlefield Banc Corp. (“Company”) is intended to assist the reader in evaluating the performance of the Company for the years ended December 31, 2007, 2006, and 2005. This information should be read in conjunction with the consolidated financial statements and accompanying notes to the financial statements.

The Company is an Ohio corporation organized to become the holding company of The Middlefield Banking Company (“MBC”). MBC is a state-chartered bank located in Ohio. On April 19, 2007, Middlefield Banc Corp. acquired Emerald Bank (“EB”), an Ohio-chartered savings bank headquartered in Dublin, Ohio. The Company and its subsidiaries derive substantially all of their income from banking and bank-related services, which includes interest earnings on residential real estate, commercial mortgage, commercial and consumer financings as well as interest earnings on investment securities and deposit services to its customers through nine locations. The Company is supervised by the Board of Governors of the Federal Reserve System, while the Banks are subject to regulation and supervision by the Federal Deposit Insurance Corporation and the Ohio Division of Financial Institutions. MBC and EB are members of the Federal Home Loan Bank (FHLB) of Cincinnati, which is one of the twelve regional banks comprising the FHLB System.

This Management’s Discussion and Analysis section of the Annual Report contains certain forward-looking statements. Forward-looking statements are based upon a variety of estimates and assumptions. The estimates and assumptions involve judgments about a number of things, including future economic, competitive, and financial market conditions and future business decisions. These matters are inherently subject to significant business, economic, and competitive uncertainties, all of which are difficult to predict and many of which are beyond the Company’s control. Although the Company believes its estimates and assumptions are reasonable, actual results could vary materially from those shown. Inclusion of forward-looking information does not constitute a representation by the Company or any other person that the indicated results will be achieved. Investors are cautioned not to place undue reliance on forward-looking information.

These forward-looking statements may involve significant risks and uncertainties. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results in these forward-looking statements.

Significant Financial Events in 2007

On November 15, 2006, Middlefield Banc Corp. entered into an Agreement and Plan of Merger for the acquisition of Emerald Bank, an Ohio-chartered savings bank headquartered in Dublin, Ohio. Middlefield Banc Corp. organized an interim bank subsidiary under Ohio commercial bank law to carry out the merger with Emerald Bank. The Agreement and Plan of Merger was amended on January 3, 2007 to make the new interim bank subsidiary, known as EB Interim Bank, a party to the agreement. At the effective time of the merger Emerald Bank merged into the new interim subsidiary, which is the surviving corporation and which operates under the name Emerald Bank as a wholly owned commercial bank subsidiary of Middlefield Banc Corp. The purchase price for Emerald Bank totaled $7,326,890 with one half of the merger consideration payable in cash and the other half in shares of Middlefield Banc Corp. common stock. The merger was approved by both bank regulators and Emerald Bank stockholders. The transaction was completed on April 19, 2007. Emerald Bank operates as a separate banking subsidiary of Middlefield Banc Corp. under the Emerald Bank name, employing a commercial bank charter.

On August 1, 2007, MBC completed its acquisition of certain deposit liabilities attributable to a third-party financial institution’s branch office located in Middlefield, Ohio. The acquisition included management personnel and retail deposits of approximately $21 million. MBC recorded goodwill and core deposit intangible of approximately $2.1 million.

52   •   Middlefield Banc Corp.

MBC’s board of directors declared a 5% share dividend for shareholders of record on December 1, 2007, and a quarterly cash dividend of $0.245 per common share. On December 14, 2007, shareholders of record received additional stock shares equal to 5% of their holdings. Payment of the fourth quarter cash dividend in the amount of $0.245 per share was on the total holdings including the share dividend. All share and related price and dividend amounts discussed herein have been adjusted to reflect this stock dividend where applicable.

Critical Accounting Policies

Allowance for loan losses

Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio.

Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business environment, which is affected by changing economic conditions and various external factors and which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Company’s methodology of assessing the adequacy of the reserve for loan losses, refer to Note 1 of “Notes to Consolidated Financial Statements” commencing on the previous pages of this Annual Report.

The allowance for loan loss balance as of December 31, 2007 totaled $3.3 million representing a $450,000 increase from the end of 2006. Asset quality is a high-priority in our overall business plan as it relates to long-term asset growth projections. During 2007, net charge-offs increased by $363,000 compared to 2006. Two key ratios to monitor asset quality performance are net charge-offs/average loans and the allowance for loan losses/non-performing loans. At year-end 2007, these ratios were .15% and 58.3% respectively compared to .02% and 205% in 2006.

Changes in Financial Condition

General. The Company’s total assets increased $93.4 million or 27.4% to $434.3 million at December 31, 2007 from $340.9 million at December 31, 2006. This increase was composed of a net increase in securities of $22.8 million, net loans receivable of $59.8 million and cash and cash equivalents of $4.2 million. The acquisition of Emerald Bank represented $53.8 million or 57.6% of the asset growth for the twelve months of 2007.

The increase in the Company’s total assets reflects a corresponding increase in total liabilities of $88.9 million or 28.6% to $399.3 million at December 31, 2007 from $310.4 million at December 31, 2006. The Company also experienced an increase in total stockholders’ equity of $4.5 million or 14.8% to $35.0 million at December 31, 2007 from $30.5 million at December 31, 2006.

The increase in total liabilities was primarily due to deposit growth for the year. Total deposits increased $91.9 million or 33.9% to $362.9 million at December 31, 2007 from $271.1 million as of December 31, 2006. Bank and branch acquisitions represented 64.5% of the growth for a total of $59.3 million. The increase was partially offset by a $3.7 million decline in other borrowing. The net increase in total stockholders’ equity can be attributed to an increase in common stock and net income offset by an increase in treasury stock of $2.2 million.

2007 Annual Report   •   53

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

Cash on hand, Interest-earning deposits and Federal funds sold. Cash on hand, interest-earning deposits, and federal funds sold represent cash equivalents which increased a combined $4.2 million or 30.6% to $17.8 million at December 31, 2007 from $13.6 million at December 31, 2006. Deposits from customers into savings and checking accounts, loan and security repayments, and proceeds from borrowed funds typically increase these accounts. Decreases result from customer withdrawals, new loan originations, security purchases, and repayments of borrowed funds. The net increase in 2007 can be attributed principally to increases in deposits.

Securities. The Company’s loan and securities portfolios represent its two largest balance sheet asset classifications. The Company’s securities portfolio increased $22.8 million or 36.1% to $86.0 million at December 31, 2007 from $63.2 million at December 31, 2006. During 2007, the Company recorded purchases of available for sale securities of $33.0 million, consisting of municipal bonds and mortgage-backed securities. Partially off setting the purchases were $10.6 million of maturities and repayments that principally relate to mortgage-backed securities. The Company’s deposit growth was the primary source of funding for the securities portfolio.

Our objective in managing the securities portfolio is to preserve and enhance corporate liquidity through investment in short and intermediate term securities which are readily marketable and of the highest credit quality. In general, investment in securities is limited to those funds the Company feels it has in excess of funds used to satisfy loan demand and operating considerations.

Mortgage-backed securities are created by the pooling of mortgages and issuance of a security. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages. Investments in mortgage-backed securities involve a risk that actual principal prepayments will be greater than estimated prepayments over the life of the security. Prepayment estimates for mortgage-backed securities are performed at purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the mortgage-backed securities at issue and current mortgage interest rates and to determine the yield and estimated maturity of the mortgage-backed security portfolio. Prepayments that are faster than anticipated may shorten the life of the security and may result in faster amortization of any premiums paid and thereby reduce the net yield on such securities. During periods of declining mortgage interest rates, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security.

Loans receivable. The loans receivable category consists primarily of single-family mortgage loans used to purchase or refinance personal residences located within the Company’s market area and commercial real estate loans used to finance properties that are used in the borrowers businesses or to finance investor-owned rental properties, and to a lesser extent commercial and consumer loans. Net loans receivable increased $59.8 million or 24.3% to $306.1 million at December 31, 2007 from $246.3 million at December 31, 2006. The Emerald Bank acquisition represented $47.8 million or 79.9% of the loan growth for the year with the remaining growth coming from the companies’ branch system. Included in this growth were increases in most loan types including residential, commercial and construction real estate of $30.6, $26.9, and $4.2 million respectively.

The product mix in the loan portfolio includes commercial loans comprising 21.7%, construction loans 1.7%, residential real estate loans 62.5%, commercial real estate loans 11.9% and consumer loans 1.7% at December 31, 2007 compared with 28.5%, 65.4%, 4.0% and 2.2%, respectively, at December 31, 2006.

Loans contributed 84.7% of total interest income in 2007 and 87.7% in 2006. The loan portfolio yield of 7.31% in 2007 was 46 basis points greater than the average yield for total interest earning assets. Management recognizes that while the loan portfolio holds some of the Company’s highest yielding assets, it is inherently the most risky portfolio. Accordingly, management attempts to balance credit risk versus return with conservative credit standards. Management has developed and

54   •   Middlefield Banc Corp.

maintains comprehensive underwriting guidelines and a loan review function that monitors credits during and after the approval process. To minimize risks associated with changes in the borrower’s future repayment capacity, the Company generally requires scheduled periodic principal and interest payments on all types of loans and normally requires collateral.

FHLB stock. FHLB stock increased $224,000 or 14.8% to $1.7 million at December 31, 2007 from $1.5 million at December 31, 2006, primarily as a result of the purchase of Emerald Bank and the increased asset size of Middlefield Bank that is used to calculate the minimum stock requirement.

Bank-owned life insurance. Bank-owned life insurance (BOLI) is universal life insurance, purchased by the Company, on the lives of the Company’s officers. The beneficial aspects of these universal life insurance policies are tax-free earnings and a tax-free death benefit, which are realized by the Company as the owner of the policies. BOLI increased by $281,000 to $7.2 million as of December 31, 2007 from $6.9 million at the end of 2006 as a result of the earnings of the underlying insurance policies.

Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which represented 91.5% of the Company’s total funding sources at December 31, 2007. The deposit base consists of demand deposits, savings and money market accounts and time deposits. Total deposits increased $91.9 million or 33.9% to $362.9 million at December 31, 2007 from $271.1 million at December 31, 2006.

Deposit growth in 2007 was centered in certificates of deposit with a 35.5% or $53.1 million increase. The Company also experienced growth in savings, money market, and both interest bearing and noninterest bearing demand deposit accounts. Although most of the deposit increase was due to the EB and branch acquisitions, the Company did experience over $32 million of organic deposit growth.

Borrowed funds. The Company utilizes short and long-term borrowings as another source of funding used for asset growth and liquidity needs. These borrowings primarily include FHLB advances, junior subordinated debt, and repurchase agreement borrowings. Borrowed funds declined $3.8 million or 10.1% to $33.9 million at December 31, 2007 from $37.7 million at December 31, 2006. FHLB advances decreased $3.7 million with short-tem borrowing declining $99,000. The decline in borrowed funds for the year was due to deposit growth outpacing the growth in the loan portfolio, giving management the opportunity to pay down debt.

Stockholders’ equity. Stockholders’ equity increased by $4.5 million or 14.8% to $35.0 million at December 31, 2007 from $30.5 million at December 31, 2006. The net increase in total stockholders’ equity can be attributed to net income of $3.4 million along with $3.7 million of stock issued due to the purchase of EB. This increase was partially offset by cash dividends of $1.4 million and the purchase of $2.2 million in treasury stock. The Company remains committed to utilization of the stock repurchase plan, having repurchased approximately 57,000 shares during 2007.

During 2007, we maintained our annual cash dividend and paid $0.94 per share. Total cash dividends paid were $1.4 million in 2007 compared to $1.3 million in 2006. Equity strategies for 2007 include three initiatives: increase earnings to support the current cash dividends; evaluate the current features of our Dividend Reinvestment Plan to determine its impact on the goals and objectives for future capital planning; and continue to remain active with our Stock Repurchase Program.

2007 Annual Report   •   55

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

Changes in Results of Operations

2007 Results Compared to 2006 Results

General. The Company posted net income of $3.4 million, compared to $3.9 million for the year ended December 31, 2006. On a per share basis, 2007 earnings were $2.14 per diluted share, representing a decrease from the $2.57 per diluted share for the year ended December 31, 2006. The return on average equity for the year ended December 31, 2007 was 10.06% and its return on average assets was 0.85%. The $509,000 or 13.1% decline in net income between 2007 and 2006 can primarily be attributed to an increase in total noninterest expense of $1.4 million resulting from a 54 basis point reduction of the net interest margin.

Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resultant average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average balances are calculated using monthly averages, and the average loan balances include non-accrual loans and exclude the allowance for loan losses, and interest income includes accretion of net deferred loan fees. Yields on tax-exempt securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis utilizing a federal tax rate of 34%.

56   •   Middlefield Banc Corp.

	For The Year Ended December 31,
	2007							2006							2005
	Average				Average			Average				Average			Average				Average
	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost
	(Dollars in thousands)							(Dollars in thousands)							(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	288,022	$	21,063		7.31	%	$	240,452	$	17,093		7.11	%	$	222,926	$	15,041		6.75	%
Investments securities		74,820		3,040		5.28	%		57,520		2,181		4.72	%		59,370		2,218		4.49	%
Interest-bearing deposits with other banks		13,829		770		5.57	%		4,503		221		4.91	%		2,698		120		4.45	%
Total interest-earning assets		376,671		24,873		6.85	%		302,475		19,495		6.62	%		284,994		17,379		6.25	%
Noninterest-earning assets		21,307							16,231							16,926
Total assets		397,979							318,706							301,920
Interest-bearing liabilities:
Interest-bearing demand deposits	$	15,541		359		2.31	%		11,280		133		1.18	%		9,371		75		0.80	%
Money market deposits		25,057		1,026		4.09	%		13,675		374		2.73	%		15,016		297		1.98	%
Savings deposits		68,882		1,695		2.46	%		57,831		910		1.57	%		69,680		1,047		1.50	%
Certificates of deposit		172,552		8,581		4.97	%		135,763		5,740		4.23	%		115,969		4,101		3.54	%
Borrowings		36,639		1,870		5.10	%		30,767		1,410		4.58	%		26,577		1,135		4.27	%
Total interest-bearing liabilities		318,671		13,531		4.25	%		249,316		8,567		3.44	%		236,613		6,655		2.81	%
Noninterest-bearing liabilities
Other liabilities		45,769							40,799							39,682
Stockholders’ equity		33,539							28,591							25,625
Total liabilities and stockholders’ equity	$	397,979						$	318,706						$	301,920
Net interest income			$	11,342						$	10,928						$	10,724
Interest rate spread (1)						2.60	%						3.19	%						3.44	%
Net yield on interest-earning assets (2)						3.25	%						3.79	%						3.92	%
Ratio of average interest- earning assets to average interest-bearing liabilities						118.20	%						121.32	%						120.45	%

(1)	Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(2)	Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.

2007 Annual Report   •   57

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

	2007 versus 2006							2006 versus 2005
	Increase (decrease) due to							Increase (decrease) due to
	Volume		Rate			Total		Volume			Rate			Total
	(Dollars in thousands)							(Dollars in thousands)
Interest income
Loans receivable	$	3,382	$	588		$	3,970	$	63		$	1,989		$	2,052
Investments securities		817		42			859		(4	)		(33	)		(37	)
Other interest-earning assets		458		91			549		8			93			101
Total interest-earning assets		4,656		722			5,378		67			2,049			2,116
Interest expense
Interest-bearing demand deposits		50		176			226		7			51			19
Money market deposits		311		341			652		(10	)		87			20
Savings deposits		174		611			785		(8	)		(129	)		17
Certificates of deposit		1,555		1,286			2,841		137			1,502			558
Other interest-bearing liabilities		269		191			460		13			262			272
Total interest-bearing liabilities		2,360		2,604			4,964		139			1,773			886
Change in net interest income	$	2,296	$	(1,882	)	$	414	$	(72	)	$	276		$	204

Net interest income, the principal source of the Company’s earnings, represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. For 2007, net interest income increased $414,000 or 3.8% from 2006.

Net interest income. Net interest income, which is the Company’s largest revenue source, is the difference between interest income on earning assets and interest expense paid on liabilities. Net interest income is affected by the changes in interest rates and the composition of interest-earning assets and liabilities. Net interest income increased by $415,000 in 2007 to $11.3 million compared to $10.9 million for 2006. This increase is the net result of a $5.4 million rise in interest income which was partially offset by a rise in interest expense of $5.0 million. Interest-earning assets averaged $376.7 million during 2007 representing a $74.2 million or 24.5% increase since year-end 2006. The Company’s average interest-bearing liabilities increased 27.8% from $249.3 million in 2006 to $318.7 million in 2007.

The Company finances its earning assets with a combination of interest-bearing and interest-free funds. The interest-bearing funds are composed of deposits, short-term borrowings and long-term debt. Interest paid for the use of these funds is the second factor in the net interest income equation. Interest-free funds, such as demand deposits and stockholders’ equity, require no interest expense and, therefore, contribute significantly to net interest income.

The profit margin, or spread, on invested funds is a key performance measure. The Corporation monitors two key performance indicators — net interest spread and net interest margin. The net interest spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin represents the overall profit margin: net interest income as a percentage of total interest-earning assets. This performance indicator gives effect to interest earned for all investable funds including the substantial volume of interest-free funds. For 2007 the net interest margin, measured on a fully taxable equivalent basis, decreased to 3.25%, compared to 3.79% in 2006.

Interest income. Interest income increased $5.4 million or 27.6% to $24.9 million for 2007, compared to $19.5 million for 2006. This increase in interest income can be attributed to the growth of interest earned on loans of $4.0 million. This change

58   •   Middlefield Banc Corp.

was primarily attributable to an increase in the average balance of loans outstanding of $47.6 million or 19.8% to $288.0 million for the year ended December 31, 2007 as compared to $240.59 million for the year ended December 31, 2006. In addition to growth, there was also an increase in the loan yield to 7.31% for 2007, compared to 7.11% for 2006.

Interest earned on securities increased $859,000 to $3.1 million for 2007, compared to $2.2 million for 2006. This increase was primarily attributable to the growth of the average balance of securities of $17.3 million to $74.8 million for the year ended December 31, 2007 as compared to $57.5 million for the year ended December 31, 2006.

Interest expense. Interest expense increased by $5.0 million or 57.9% to $13.5 million for 2007, compared with $8.6 million for 2006. This increase in interest expense can be attributed to both an increase in the average balance of interest-bearing liabilities along with an 81 basis point increase in the rate paid on these liabilities. For the year ended December 31, 2007, the average balance of interest-bearing liabilities grew by $69.4 million to $318.7 million as compared to $249.3 million for the year ended December 31, 2006. Interest incurred on deposits grew by $4.5 million for the year from $7.2 million in 2006 to $11.7 million for year-end 2007. This change was due mainly to the large deposit growth for the year along with the increase in rate. Interest incurred on FHLB advances, repurchase agreements, junior subordinated debt, and other borrowings increased $460,000 or 32.6% to $1.9 million for 2007, compared to $1.4 million for 2006. This increase was primarily attributable to an increase in the average balance of the junior subordinated debt which was borrowed late in the 4^th quarter of 2006.

Loan Loss Provision. The provision for loan losses is an operating expense recorded to maintain the related balance sheet allowance for loan losses at an amount considered adequate to cover probable losses incurred in the normal course of lending. The provision for loan losses was $429,000 in 2007 as compared to $60,000 in 2006. The loan loss provision is based upon management’s assessment of a variety of factors, including types and amounts of non-performing loans, historical loss experience, collectibility of collateral values and guaranties, pending legal action for collection of loans and related guaranties, and current economic conditions. The loan loss provision reflects management’s judgment of the current period cost-of-credit risk inherent in the loan portfolio. Although management believes the loan loss provision has been sufficient to maintain an adequate allowance for loan losses, actual loan losses could exceed the amounts that have been charged to operations.

Non-interest income. Non-interest income increased $204,000 or 8.45% to $2.6 million for 2007, compared to $2.4 million for 2006. This increase can be attributed to increases in fees and service charges of $155,000, earnings of bank owned life insurance of $41,000, and a gain realized on the sale of investment securities of $13,000. The improvement in fees and service charges was largely due to increased fees collected on overdraft checking accounts.

Non-interest expense. Non-interest expenses increased $1.4 million or 18.1% to $9.4 million for 2007, compared to $7.9 million for 2006. The growth can be attributed to increases in compensation and employee benefits and occupancy expense which increased $783,000 and $239,000, respectively. Factors that primarily led to the increase were costs associated with the operation of additional offices, increased staffing levels related to those offices, and associated higher levels of equipment depreciation. In addition to these items, the company recognized increased costs during the year to ensure compliance with the provisions of the Sarbanes-Oxley Act of 2002 and costs associated with the acquisition of Emerald Bank, and the assumption of the aforementioned branch deposits.

Provision for Income Taxes. The provision for income taxes declined $676,000 or 45.9% to $796,000 for 2007, compared to $1.5 million for 2006. This decrease was primarily the result of a decline in income before taxes of $1.2 million or 22.1% to $4.2 million for 2007, compared to $5.4 million for 2006. The Company’s federal rate in 2007 totaled 19.1% compared to 27.5% in 2006. The income tax provision was also effected by the growth of the tax free investment portfolio of $9.1 million which was a 23.8% increase over the balance at the end of 2006.

2007 Annual Report   •   59

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

2006 Results Compared to 2005 Results

General. The Company reported net income of $3.9 million and $3.7 million for 2006 and 2005, respectively. The $183,000 or 4.9% increase in net income between 2006 and 2005 can primarily be attributed to an increase in interest income of $2.1 million, and an increase in noninterest income of $308,000, which were partially offset by an increase in interest expense of $1.9 million and an increase in noninterest expense of $513,000. Basic earnings per share increased by $.11 a share or 4.2% to $2.74 at December 31, 2006 from $2.63 at December 31, 2005.

Net interest income. Net interest income, which is the Company’s largest revenue source, is the difference between interest income on earning assets and interest expense paid on liabilities. Net interest income is affected by the changes in interest rates and the composition of interest-earning assets and liabilities. Net interest income increased by $203,000 or 1.9% to $10.9 million for 2006, compared to $10.7 million for 2005. This increase in net interest income can be attributed to an increase in interest income of approximately $2.1 million, offset partially by an increase in interest expense of $1.9 million.

Interest income. Interest income increased $2.1 million or 12.2% to $19.5 million for 2006, compared to $17.4 million for 2005. This increase in interest income can be attributed to an increase in interest earned on loans receivable of $2.1 million.

Interest earned on loans receivable increased $2.1 million or 14.0% to $17.1 million for 2006, compared to $15.0 million for 2005. This increase was primarily attributable to an increase in the average balance of loans outstanding of $17.5 million or 7.9% to $240.5 million for the year ended December 31, 2006 as compared to $222.9 million for the year ended December 31, 2005. In addition to growth, there was also an increase in the loan yield to 7.11% for 2006, compared to 6.75% for 2005.

Interest earned on securities declined $37,000 to $2.2 million for 2006, compared to $2.2 million for 2005. This decrease was primarily attributable to a decline in the average balance of securities of $1.9 million to $57.5 million for the year ended December 31, 2006 as compared to $59.4 million for the year ended December 31, 2005.

Interest expense. Interest expense increased by $1.9 million or 28.7% to $8.6 million for 2006, compared to $6.7 million for 2005. This increase in interest expense can be attributed to both an increase in the average balance of interest-bearing liabilities along with 63 basis point increase in the rate paid on these liabilities. For the year ended December 31, 2006 the average balance of interest-bearing liabilities grew by $12.7 million to $249.3 million as compared to $236.6 million for the year ended December 31, 2005. Interest incurred on deposits grew by $1.6 million for the year from $5.5 million in 2005 to $7.2 million for year-end 2006. This change was due to a shift in deposit growth from savings accounts to higher cost certificates. Interest incurred on FHLB advances, repurchase agreements, junior subordinated debt, and other borrowings increased $276,000 or 24.3% to $1.4 million for 2006, compared to $1.1 million for 2005. This increase was primarily attributable to an increase in the average balance of FHLB advances and repurchase accounts.

Loan Loss Provision. The provision for loan losses is an operating expense recorded to maintain the related balance sheet allowance for loan losses at an amount considered adequate to cover probable losses incurred in the normal course of lending. The provision for loan losses was $60,000 in 2006 as compared to $302,000 in 2005. The loan loss provision is based upon management’s assessment of a variety of factors, including types and amounts of non-performing loans, historical loss experience, collectibility of collateral values and guaranties, pending legal action for collection of loans and related guaranties, and current economic conditions. The loan loss provision reflects management’s judgment of the current period cost-of-credit risk inherent in the loan portfolio. Although management believes the loan loss provision has been sufficient to maintain an adequate allowance for loan losses, actual loan losses could exceed the amounts that have been charged to operations.

60   •   Middlefield Banc Corp.

Noninterest income. Noninterest income increased $308,000 or 14.5% to $2.4 million for 2006, compared to $2.1 million for 2005. This increase can be attributed to increases in fees and service charges of $221,000, earning of bank owned life insurance of $31,000, and other income of $61,000. Partially offsetting these increases was a loss realized on the sale of investment securities of $6,000.

Noninterest expense. Noninterest expenses increased $514,000 or 6.9% to $7.9 million for 2006, compared to $7.4 million for 2005. The growth can be attributed to increases in other expenses, compensation and employee benefits and state franchise tax which increased $235,000, $107,000, and $75,000, respectively.

Compensation and employee benefits expense increased $107,000 or 3.0% to $3.7 million for 2006, compared to $3.6 million for 2005. This increase can be attributed to increases in payroll expenses and officer and director retirement of $117,000, and $24,000, respectively.

Internet expense increased $41,000 or 220% to $61,000 for 2006, compared to $19,000 for 2005. The increase to internet expense is a reflection of the Company’s commitment to continually improve technology in order to enhance service to its customer base. Exams and auditing increased $34,000 or 22.5% to $186,000 for 2006, compared to $152,000 for 2005. This increase was due to the additional cost of complying with Sarbanes-Oxley Act of 2002 also known as the Public Company Accounting Reform and Investor Protection Act of 2002.

Provision for Income Taxes. The provision for income taxes increased $57,000 or 4.0% to $1.5 million for 2006, compared to $1.4 million for 2005. This increase was primarily the result of an increase in income before income taxes of $240,000 or 4.7% to $5.4 million for 2006, compared to $5.1 million for 2005.

Asset and Liability Management

The primary objective of the Company’s asset and liability management function is to maximize the Company’s net interest income while simultaneously maintaining an acceptable level of interest rate risk given the Company’s operating environment, capital and liquidity requirements, performance objectives and overall business focus. The principal determinant of the exposure of the Company’s earnings to interest rate risk is the timing difference between the re-pricing or maturity of interest-earning assets and the repricing or maturity of its interest-bearing liabilities. The Company’s asset and liability management policies are designed to decrease interest rate sensitivity primarily by shortening the maturities of interest-earning assets while at the same time extending the maturities of interest-bearing liabilities. The Board of Directors of the Company continues to believe in strong asset/liability management in order to insulate the Company from material and prolonged increases in interest rates. As a result of this policy, the Company emphasizes a larger, more diversified portfolio of residential mortgage loans in the form of mortgage-backed securities. Mortgage-backed securities generally increase the quality of the Company’s assets by virtue of the insurance or guaranties that back them, are more liquid than individual mortgage loans, and may be used to collateralize borrowings or other obligations of the Company.

The Company’s Board of Directors has established an Asset and Liability Management Committee consisting of outside directors and senior management. This committee, which meets quarterly, generally monitors various asset and liability management policies and strategies, which were implemented by the Company over the past few years.

2007 Annual Report   •   61

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

Interest Rate Sensitivity Simulation Analysis

The Company utilizes income simulation modeling in measuring its interest rate risk and managing its interest rate sensitivity. The Asset and Liability Management Committee of the Company believes that simulation modeling enables the Company to more accurately evaluate and manage the possible effects on net interest income due to the exposure to changing market interest rates, the slope of the yield curve, and different loan and mortgage-backed security prepayment and deposit decay assumptions under various interest rate scenarios.

Earnings simulation modeling, assumptions about the timing, and variability of cash flows are critical in net portfolio equity valuation analysis. Particularly important are the assumptions driving mortgage prepayments and the assumptions about expected attrition of the core deposit portfolios. These assumptions are based on the Company’s historical experience and industry standards and are applied consistently across the different rate risk measures.

The Company has established the following guidelines for assessing interest rate risk:

Net interest income simulation. Given a 200 basis point parallel gradual increase or decrease in market interest rates, net interest income may not change by more than 10% for a one-year period.

Portfolio equity simulation. Portfolio equity is the net present value of the Company’s existing assets and liabilities. Given a 200 basis point immediate and permanent increase or decrease in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 20% of stockholders’ equity.

The following table presents the simulated impact of a 200 basis point upward or downward shift of market interest rates on net interest income, and the change in portfolio equity. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at December 31, 2007 remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over a one-year period from the December 31, 2007 levels for net interest income and portfolio equity. The impact of market rate movements was developed by simulating the effects of an immediate and permanent change in rates at December 31, 2007 for portfolio equity:

	Increase			Decrease
	+200 BP			-200 BP
Net interest income—increase(decrease)		1.90	%		(5.90	)%
Portfolio equity—increase(decrease)		(5.20	)%		(8.20	)%

Allowance for Loan Losses. The allowance for loan losses represents the amount management estimates are adequate to provide for probable losses inherent in the loan portfolio as of the balance sheet date. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. At December 31, 2007, the Company’s allowance for loan losses showed an increase of $450,000 for a balance of $3.3 million, compared to $2.9 million from December 31, 2006. The allowance now represents 1.07% of the gross loan portfolio as compared to 1.14% for the previous period. The allowance for loan losses is established through a provision for loan losses, which is charged to operations. The provision is based on management’s periodic evaluation of the adequacy of the allowance for loan losses, taking into account the overall risk characteristics of the various portfolio segments, the Company’s loan loss experience, the impact of economic conditions on borrowers, and other relevant factors. The estimates used to determine the adequacy of the allowance for loan losses, including the amounts and

62   •   Middlefield Banc Corp.

timing of future cash flows expected on impaired loans, are particularly susceptible to significant change in the near term. The total allowance for loan losses is a combination of a specific allowance for identified problem loans, a general allowance for homogeneous loan polls, and an unallocated allowance.

The specific allowance incorporates the results of measuring impaired loans as provided in Statement of Financial Accounting Standards (“FAS”) No. 114, “Accounting by Creditors for Impairment of a Loan,” and FAS No. 118, “Accounting by Creditors for Impairment of a Loan Income Recognition and Disclosures.” These accounting standards prescribe the measurement methods, income recognition, and disclosures for impaired loans. The formula allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management’s determination of the amounts necessary for concentrations and changes in mix and volume of the loan portfolio, and consideration of historical loss experience.

The unallocated allowance is determined based upon management’s evaluation of existing economic and business conditions affecting the key lending areas of the Company and other conditions, such as new loan products, credit quality trends, collateral values, specific industry conditions within portfolio segments that existed as of the balance sheet date, and the impact of those conditions on the collectibility of the loan portfolio. Management reviews these conditions quarterly. The unallocated allowance is subject to a higher degree of uncertainty because it considers risk factors that may not be reflected in the historical loss factors.

Although management believes that it uses the best information available to make such determinations and that the allowance for loan losses was adequate at December 31, 2007, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy and employment could result in increased levels of non-performing assets and charge-offs, increased loan loss provisions, and reductions in income. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review a company’s loan loss allowance. The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.

2007 Annual Report   •   63

Notes to Consolidated Financial Statements

The following table sets forth information concerning the Company’s allowance for loan losses at the dates and for the periods presented.

	For the Years Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Allowance balance at beginning of period	$	2,849		$	2,841		$	2,623
Loans charged off:
Commercial and industrial		(251	)		(8	)		(103	)
Real estate-construction		—			—			—
Real estate-mortgage:		—			—			—
Residential		(26	)		—			(15	)
Commercial		—			—			—
Consumer installment		(151	)		(72	)		(61	)
Total loans charged off		(428	)		(80	)		(179	)
Recoveries of loans previously charged off:
Commercial and industrial		—			—			64
Real estate-construction		—			—			—
Real estate-mortgage:		—			—			—
Residential		—			—			17
Commercial		—			—			—
Consumer installment		13			28			14
Total recoveries		13			28			95
Net loans charged off		(415	)		(52	)		(84	)
Provision for loan losses		429			60			302
Allowance balance at end of period	$	3,299		$	2,849		$	2,841
Loans outstanding:
Average	$	288,022		$	240,452		$	222,926
End of period		309,446			249,191			234,055
Ratio of allowance for loan losses to loans outstanding at end of period		1.07	%		1.14	%		1.21	%
Net charge offs to average loans		(0.14	)		(0.02	)		(0.04	)

64   •   Middlefield Banc Corp.

The following table illustrates the allocation of the Company’s allowance for probable loan losses for each category of loan for each reported period. The allocation of the allowance to each category is not necessarily indicative of future loss in a particular category and does not restrict our use of the allowance to absorb losses in other loan categories.

	At December 31,
	2007					2006					2005
			Percent of					Percent of					Percent of
			Loans in Each					Loans in Each					Loans in Each
			Category to					Category to					Category to
	Amount		Total Loans			Amount		Total Loans			Amount		Total Loans
	(Dollars In thousands)					(Dollars In thousands)					(Dollars In thousands)
Type of Loans:
Commercial and industrial	$	1,060		21.7	%	$	1,126		27.5	%	$	1,151		27.6	%
Real estate construction		99		2.2			25		1.0			50		1.2
Mortgage:
Residential		1,527		62.5			1,147		65.4			965		64.9
Commercial		512		11.9			158		4.0			297		3.5
Consumer installment		101		1.7			116		2.1			128		2.8
Unallocated		—		—			277		—			250		—
Total	$	3,299		100	%	$	2,849		100	%	$	2,841		100	%

Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of interest is doubtful. Payments received on non-accrual loans are recorded as income or applied against principal according to management’s judgment as to the collectibility of principal.

A loan is considered impaired when it is probable the borrower will not repay the loan according to the original contractual terms of the loan agreement. Management has determined that first mortgage loans on one-to-four family properties and all consumer loans represent large groups of smaller-balance homogeneous loans that are to be collectively evaluated. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. A loan is not impaired during a period of delay in payment if the Company expects to collect all amounts due, including interest accrued at the contractual interest rate for the period of delay. Management evaluates all loans identified as impaired individually. The Company estimates credit losses on impaired loans based on the present value of expected cash flows, or the fair value of the underlying collateral if loan repayment is expected to come from the sale or operation of the collateral. Impaired loans, or portions thereof, are charged off when it is determined a realized loss has occurred. Until that time, an allowance for loan losses is maintained for estimated losses.

Unless otherwise required by the loan terms, cash receipts on impaired loans are applied first to accrued interest receivable, except when an impaired loan is also a non-accrual loan, in which case the portion of the payment related to interest is recognized as income.

Nonperforming loans as a percentage of total loans at December 31, 2007 increased 1.83% from 0.56% for 2006. The Company had non-accrual loans of $3,744,000 and $1,180,000 at December 31, 2007 and 2006, respectively. Interest income recognized on non-accrual loans during all of the periods was insignificant. Management does not believe the non-accrual loans or any amounts classified as nonperforming had a significant effect on operations or liquidity in 2007. Furthermore, management is not aware of any trends or uncertainties related to any loans classified as doubtful or substandard that might have a material effect on earnings, liquidity, or capital resources. Management is not aware of any information pertaining to material credits that would cause it to doubt the ability of borrowers to comply with repayment terms.

2007 Annual Report   •   65

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

The following table summarizes nonperforming assets by category.

	At December 31,
	2007			2006			2005
Loans accounted for on a nonaccrual basis:
Commercial and industrial	$	1,231		$	200		$	859
Real estate-construction		643			—			—
Real estate-mortgage:
Residential		1,825			952			607
Commercial		33			—			—
Consumer installment		12			28			21
Total nonaccrual loans		3,744			1,180			1,487
Accruing loans which are contractually past due 90 days or more:
Commercial and industrial		574			90			248
Real estate-construction		—			—			—
Real estate-mortgage:
Residential		1,333			—			70
Commercial		—			110			—
Consumer installment		11			9			9
Total accruing loans which are contractually past due 90 days or more:		1,918			209			327
Total non-performing loans		5,662			1,389			1,814
Real estate owned		—			—			—
Other non-performing assets		—			—			—
Total non-performing assets	$	5,662		$	1,389		$	1,814
Total non-performing loans to total loans		1.83	%		0.56	%		0.78	%
Total non-performing loans to total assets		1.30	%		0.41	%		0.58	%
Total non-performing assets to total assets		1.30	%		0.41	%		0.58	%

(1) Represents accruing loans delinquent greater than 90 days that are considered by management to be well secured and that are in the process of collection.

Liquidity and Capital Resources

Liquidity. Liquidity management for the Company is measured and monitored on both a short and long-term basis, allowing management to better understand and react to emerging balance sheet trends. After assessing actual and projected cash flow needs, management seeks to obtain funding at the most economical cost to the Company. Both short and long-term liquidity needs are addressed by maturities and sales of investments securities, loan repayments and maturities, and liquidating money market investments such as federal funds sold. The use of these resources, in conjunction with access to credit, provides the core ingredients for satisfying depositor, borrower, and creditor needs.

The Company’s liquid assets consist of cash and cash equivalents, which include investments in very short-term investments (i.e. federal funds sold), and investment securities classified as available for sale. The level of these assets is dependent on the Company’s operating, investing, and financing activities during any given period. At December 31, 2007, cash and cash equivalents totaled $17.8 million or 4.1% of total assets while investment securities classified as available for sale totaled $86.0 million or 19.8% of total assets. Management believes that the liquidity needs of the Company are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, FHLB advances, junior subordinated debt, and the portion of the investment and loan portfolios that mature within one year. These sources of funds will enable the Company to meet cash obligations and off-balance sheet commitments as they come due.

66   •   Middlefield Banc Corp.

Operating activities provided net cash of $4.3 million, $4.5 million, and $4.0 million for 2007, 2006, and 2005, respectively, generated principally from net income of $3.4 million, $3.9 million, and $3.7 million in each of these respective periods.

Investing activities consist primarily of loan originations and repayments and investment purchases and maturities. These cash usages primarily consisted of loan originations of $21.0 million, as well as investment purchases of $33.0 million. Partially offsetting the usage of investment activities is $10.6 million of proceeds from investment security maturities and repayments. For the same period ended 2006, investing activities used $21.9 million in funds, principally for the net origination of loans and the purchase of investment securities of $15.1 million and $16.9 million, respectively. During the same period ended 2005, cash usages primarily consisted of loan originations of $18.4 million, as well as investment purchases of $13.3 million.

Financing activities consist of the solicitation and repayment of customer deposits, borrowings and repayments, treasury stock activity, and the payment of dividends. During 2007, net cash provided by financing activities totaled $47.7 million, principally derived from an increase in deposit accounts in general, and certificates specifically. Also contributing to this influx of cash was proceeds from deposit acquisition of $19.3 million. During 2006, net cash provided by financing activities totaled $25.2 million, principally derived from an increase in deposit accounts. During the same period ended 2005, net cash provided by financing activities was $16.7 million, principally derived from an increase in deposit accounts.

Liquidity may be adversely affected by unexpected deposit outflows, excessive interest rates paid by competitors, and similar matters. Management monitors projected liquidity needs and determines the level desirable, based in part on the Company’s commitment to make loans, as well as management’s assessment of the Company’s ability to generate funds. The Company anticipates that it will have sufficient liquidity to satisfy estimated short-term and long-term funding needs.

Capital Resources. The Company’s primary source of capital has been retained earnings. Historically, the Company has generated net retained income to support normal growth and expansion. Management has developed a capital planning policy to not only ensure compliance with regulations, but also to ensure capital adequacy for future expansion.

The Company and its subsidiaries are subject to federal regulations imposing minimum capital requirements. Management monitors both the Company’s and Banks’ Total risk-based, Tier I risk-based and Tier I leverage capital ratios to assess compliance with regulatory guidelines. At December 31, 2007, both the Company and its subsidiaries exceeded the minimum risk-based and leverage capital ratio requirements. The Company’s Total risk-based, Tier I risk-based and Tier I leverage ratios were 14.56%, 13.38%, and 9.23% at December 31, 2007. MBC’s Total risk-based, Tier I risk-based and Tier I leverage ratios were 12.67%, 11.55%, and 7.82%, and EB’s were 19.50%, 18.31%, and 14.38%, respectively, at December 31, 2007.

2007 Annual Report   •   67

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

Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

The Company had approximately 1,017 stockholders of record as of February 5, 2008. There is no established market for the Company’s common stock. The stock is traded very infrequently. Bid prices are quoted from time to time on the National Quotation Bureau’s “pink sheets” under the symbol “MBCN.” The following table shows the high and low bid prices of and cash dividends paid on the Company’s common stock in 2007 and 2006, adjusted for stock splits and stock dividends. This information does not reflect retail mark-up, markdown or commissions, and does not necessarily represent actual transactions.

					Cash
	High		Low		Dividends
	Bid		Bid		per share
2007
First Quarter	$	39.760	$	36.430	$	0.229
Second Quarter	$	38.100	$	36.330	$	0.229
Third Quarter	$	37.380	$	36.190	$	0.233
Fourth Quarter	$	38.810	$	36.000	$	0.245
2006
First Quarter	$	38.095	$	37.189	$	0.213
Second Quarter	$	37.642	$	37.642	$	0.213
Third Quarter	$	36.869	$	37.869	$	0.218
Fourth Quarter	$	40.238	$	40.238	$	0.229

Comparative Performance Graph. The graph below compares the cumulative total shareholder return on the Company’s common stock to the cumulative total return of the Nasdaq Composite Index and the SNL $100M-500M OTC-BB and Pink Banks index for which bid prices or trades are reported in the “pink sheets” of the National Quotation Bureau, LLC, a static paper-quotation medium printed weekly and distributed to broker/dealers, or on the OTC Bulletin Board, an electronic, screen-based market maintained by the National Association of Securities Dealers, Inc.’s subsidiary, NASD Regulation, Inc. The following comparison covers the period from December 31, 2002 to December 31, 2007. The graph assumes that $100 was invested on December 31, 2002, and that all dividends were reinvested.

68   •   Middlefield Banc Corp.

COMPARISON OF THE CUMULATIVE TOTAL RETURN OF MIDDLEFIELD BANC CORP.,
THE SNL $100M — $500M OTC-BB AND PINK BANKS INDEX, AND THE NASDAQ — TOTAL US
FROM December 31, 2002, TO DECEMBER 31, 2007

Total Return Performance

	Period Ending
Index	12/31/02		12/31/03		12/31/04		12/31/05		12/31/06		12/31/07
Middlefield Banc Corp.		100.00		113.71		145.06		173.73		192.24		177.59
NASDAQ Composite		100.00		150.01		162.89		165.13		180.85		198.60
SNL Bank Pink $100M-$500M Index		100.00		135.83		164.17		182.32		199.57		178.22

2007 Annual Report   •   69

Shareholder Information

Corporate Headquarters

The Corporation’s headquarters is located at:

Middlefield Banc Corp.
15985 East High Street
P.O. Box 35
Middlefield, Ohio 44062
888.801.1666 • 440.632.1666
fax 440.632.1700

Form 10-K and 10-Q Availability

A copy of Middlefield Banc Corp.’s Annual Report on Form 10-K and Quarterly Reports on 10-Q filed with the Securities and Exchange Commission will be furnished to any shareholder, free of charge, upon written or e-mail request to:

Donald L. Stacy
Treasurer and CFO
Middlefield Banc Corp.
P.O. Box 35
Middlefield, Ohio 44062
or dstacy@middlefieldbank.com

Market Makers

The symbol for Middlefield Banc Corp. common stock is MBCN and the CUSIP is 596304204.

Sweney Cartwright & Co.
17 South High Street
Columbus, Ohio 43215
614.228.5391 • 800.334.7481

Stifel, Nicolaus & Co., Inc.
18 Columbia Turnpike
Florham, NJ 07932
800.342.2325

Howe Barnes Hoefer & Arnett, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606
312.655.3000

Notice of Annual Meeting

The Annual Meeting of Shareholders of Middlefield Banc Corp. will be held at 1:00 p.m. on Wednesday, May 14, 2008, at:

Sun Valley Banquet and Party Center
10000 Edwards Lane
Aurora, Ohio 44202

Transfer Agent and Registrar

American Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, NY 10038
877.366.6443

Independent Auditors

S.R. Snodgrass, A. C.
2100 Corporate Drive, Suite 400
Wexford, Pennsylvania 15090-7647
724.934.0344

Internet Information

Information on the company and its subsidiary banks is available on the Internet at www.middlefieldbank.com and www.emeraldbank.com.

Dividend Payment Dates

Subject to action by the Board of Directors, Middlefield Banc Corp. will pay dividends in March, June, September, and December.

70   •   Middlefield Banc Corp.

Shareholder Information

Dividend Reinvestment and Stock Purchase Plan

Shareholders may elect to reinvest their dividends in additional shares of Middlefield Banc Corp.’s common stock through the company’s Dividend Reinvestment Plan. To arrange automatic purchase of shares with quarterly dividend proceeds, please call 888.801.1666.

Direct Deposit of Dividends

The direct deposit program, which is offered at no charge, provides for automatic deposit of quarterly dividends directly to a checking or savings account with The Middlefield Banking Company or Emerald Bank. For information regarding this program, please call 888.801.1666.

Market for Middlefield’s Common Equity & Related Stockholder Matters

Middlefield had approximately 1,017 stockholders of record as of February 5, 2008. There is no established market for Middlefield common stock. The stock is traded very infrequently. Bid prices are quoted from time to time on the National Quotation Bureau’s “pink sheets” under the symbol “MBCN.” The following table shows the high and low bid prices of and cash dividends paid on Middlefield common stock in 2007 and 2006, adjusted for stock splits and stock dividends. This information does not reflect retail mark-up, markdown or commissions, and does not necessarily represent actual transactions.

					Cash
	High		Low		Dividends
	Bid		Bid		per share
2007
First Quarter	$	39.760	$	36.430	$	0.229
Second Quarter	$	38.100	$	36.330	$	0.229
Third Quarter	$	37.380	$	36.190	$	0.233
Fourth Quarter	$	38.810	$	36.000	$	0.245
2006
First Quarter	$	38.095	$	37.189	$	0.213
Second Quarter	$	37.642	$	37.642	$	0.213
Third Quarter	$	37.869	$	37.869	$	0.218
Fourth Quarter	$	40.238	$	40.238	$	0.229

2007 Annual Report   •   71

Main Office
15985 East High Street
440.632.1666

West Branch
15545 West High Street
440.632.1666

Garrettsville Branch
8058 State Street
330.527.2121

Mantua Branch
10519 Main Street
330.274.0881

Emerald Bank
6215 Perimeter Drive
Dublin, OH 43017
614.793.4631

Chardon Branch
348 Center Street
440.286.1222

Orwell Branch
30 South Maple Street
440.437.7200

Newbury Branch
11110 Kinsman Road
440.564.7000

Cortland Loan Production Office
130 Windsor Drive
330.637.3208

EX-21

Exhibit 21

Middlefield Banc Corp. Subsidiaries

1	The Middlefield Banking Company (“MBC”), an Ohio-chartered commercial bank that began operations in 1901. MBC engages in a general commercial banking business in northeastern Ohio. The principal executive office is located at 15985 East High Street, Middlefield, Ohio 44062-0035.
2	Emerald Bank (“EB”), an Ohio-chartered commercial bank headquartered in Dublin, Ohio. EB engages in a general commercial banking business in central Ohio. The principal executive office is located at 6215 Perimeter Drive, Dublin Ohio 43017.

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the previously filed Registration Statement (No. 333-65432) on Form S-8 and (No. 333-96579) on Form S-3D of Middlefield Banc Corp. of our report dated March 14, 2008 relating to our audits of the consolidated financial statements included in and incorporated by reference in the Annual Report on Form 10-K of Middlefield
Banc Corp. for the year ended December 31, 2007.

Wexford, PA

March 21, 2008

EX-31.1

Exhibit 31.1

Certification of Principal Executive Officer

I, Thomas G. Caldwell, certify that:

1. I have reviewed this Form 10-K for the year ended December 31, 2007 of Middlefield Banc Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: 3/21/08	/s/ Thomas G. Caldwell
	Thomas G. Caldwell.
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Principal Financial and Accounting Officer

I, Donald L. Stacy, certify that:

1. I have reviewed this Form 10-K for the year ended December 31, 2007 of Middlefield Banc Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: 3/21/08	/s/ Donald L. Stacy
	Donald L. Stacy
	Principal Financial and Accounting Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Middlefield Banc Corp. (the “Company”) on Form 10-K for the period ending December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Thomas G. Caldwell, President ,and Donald L. Stacy, Chief Financial Officer, certify, pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Thomas G. Caldwell	/s/ Donald L. Stacy
Thomas G. Caldwell	Donald L. Stacy
President and Chief Executive Officer	Principal Financial and Accounting Officer

March 21, 2008

A signed original of this written statement required by Section 906 has been provided to Middlefield Banc Corp. and will be retained by Middlefield Banc Corp. and furnished to the Securities and Exchange Commission or its staff upon request