ARADIGM CORP (Form: 10-Q, Received: 08/08/2008 14:34:28)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number 0-28402

Aradigm Corporation

(Exact name of registrant as specified in its charter)


California		94-3133088
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

3929 Point Eden Way
Hayward, CA 94545
(Address of principal executive offices including zip code)

(510) 265-9000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No 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 (Do not check if a smaller reporting company)		Smaller reporting company þ

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


(Class) Common		(Outstanding at July 31, 2008) 54,923,839

ARADIGM CORPORATION
TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		3
Condensed Balance Sheets at June 30, 2008 (unaudited) and December 31, 2007		3
Condensed Statements of Operations for the three and six months ended June 30, 2008 and 2007 (unaudited)		4
Condensed Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (unaudited)		5
Notes to Unaudited Condensed Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3. Quantitative and Qualitative Disclosure About Market Risk		24
Item 4. Controls and Procedures		24
PART II. OTHER INFORMATION
Item 1A. Risk Factors		25
Item 4. Submission of Matters to a Vote of Security Holders		35
Item 6. Exhibits		36
Signatures		37
EXHIBIT 3.1
EXHIBIT 10.29
EXHIBIT 10.30
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

p 2 of 38

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

ARADIGM CORPORATION

CONDENSED BALANCE SHEETS

(In thousands, except share data)


	June 30,			December 31,
	2008			2007
	(Unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	26,200		$	29,964
Short-term investments		1,231			10,546
Receivables		218			500
Restricted cash		232			152
Prepaid and other current assets		512			971

Total current assets		28,393			42,133
Property and equipment, net		5,219			3,223
Notes receivable from officers and employees		33			33
Restricted cash		79			153
Other assets		259			271

Total assets	$	33,983		$	45,813


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,347		$	1,658
Accrued clinical and cost of other studies		1,252			789
Accrued compensation		1,255			1,252
Deferred revenue		1,168			880
Facility lease exit obligation		384			376
Other accrued liabilities		491			584

Total current liabilities		5,897			5,539
Deferred rent		246			283
Facility lease exit obligation		1,181			1,373
Other non-current liabilities		169			248
Note payable and accrued interest to related party		8,265			8,071

Total liabilities		15,758			15,514

Commitments and contingencies
Shareholders’ equity:
Preferred stock, 2,950,000 shares authorized, none outstanding Common stock, no par value; authorized shares: 150,000,000 at June 30, 2008 and 100,000,000 at December 2007; issued and outstanding shares: 54,923,839 at June 30, 2008 and 54,772,705 at December 31, 2007		342,980			342,355
Accumulated other comprehensive income		1			10
Accumulated deficit		(324,756	)		(312,066	)

Total shareholders’ equity		18,225			30,299

Total liabilities and shareholders’ equity	$	33,983		$	45,813

See accompanying Notes to Condensed Financial Statements

p 3 of 38

ARADIGM CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Revenues:
Contract revenues from related parties	$	—		$	8		$	—		$	23
Contract revenues from unrelated parties		54			289			54			690

Total revenues		54			297		$	54			713

Operating expenses:
Research and development		5,364			3,841			9,693			7,248
General and administrative		1,825			2,628			3,374			4,615
Restructuring and lease exit activities		20			—			42			98

Total operating expenses		7,209			6,469			13,109			11,961

Loss from operations		(7,155	)		(6,172	)		(13,055	)		(11,248	)
Interest income		202			699			563			1,336
Interest expense		(100	)		(96	)		(198	)		(193	)
Other income, net		1			46			—			16

Net loss	$	(7,052	)	$	(5,523	)	$	(12,690	)	$	(10,089	)


Basic and diluted net loss per common share	$	(0.13	)	$	(0.10	)	$	(0.23	)	$	(0.21	)


Shares used in computing basic and diluted net loss per common share		54,159			53,942			54,083			47,417

See accompanying Notes to Condensed Financial Statements

p 4 of 38

ARADIGM CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended
	June 30,
	2008			2007
Cash flows from operating activities:
Net loss	$	(12,690	)	$	(10,089	)
Adjustments to reconcile net loss to cash used in operating activities:
Amortization and accretion of investments		(6	)		(5	)
Depreciation and amortization		375			393
Stock-based compensation		482			689
Loss on retirement and sale of property and equipment		—			11
Changes in operating assets and liabilities:
Receivables		282			598
Prepaid and other current assets		459			420
Restricted cash		(6	)		—
Other assets		12			162
Accounts payable		(267	)		(549	)
Accrued compensation		3			156
Other accrued liabilities		83			43
Deferred rent		(37	)		(84	)
Deferred revenue		288			—
Facility lease exit obligation		(184	)		—

Net cash used in operating activities		(11,206	)		(8,255	)

Cash flows from investing activities:
Capital expenditures		(2,013	)		(817	)
Purchases of available-for-sale investments		(1,235	)		(8,289	)
Proceeds from sales and maturities of available-for-sale investments		10,547			496

Net cash provided by (used in) investing activities		7,299			(8,610	)

Cash flows from financing activities:
Proceeds from public offering of common stock, net		—			33,178
Proceeds from issuance of common stock, net		143			56
Payments to officers and employees on notes receivable		—			(1	)

Net cash provided by financing activities		143			33,233

Net increase (decrease) in cash and cash equivalents		(3,764	)		16,368
Cash and cash equivalents at beginning of period		29,964			27,013

Cash and cash equivalents at end of period	$	26,200		$	43,381

Supplemental disclosure of non-cash financing activities:
Conversion of convertible preferred stock to common stock	$	—		$	23,669

Supplemental disclosure of non-cash investing activities:
Purchase of property and equipment in trade accounts payable	$	828		$	—

See accompanying Notes to Condensed Financial Statements

p 5 of 38

ARADIGM CORPORATION

NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS

June 30, 2008

1. Organization and Basis of Presentation

Organization

Aradigm Corporation (the “Company”, “we”, and/or “our”) is a California corporation focused on the development and commercialization of drugs delivered by inhalation for the treatment of severe respiratory diseases by pulmonologists. The Company’s principal activities to date have included research and development, securing operating facilities, expanding commercial production capabilities, recruiting management and technical personnel and obtaining financing. The Company does not anticipate receiving any revenue from the sale of products in the near term. The Company’s ability to continue its development and commercialization activities is dependent upon the ability of management to obtain additional financing as required. Management believes that cash, cash equivalents and short-term investments as of June 30, 2008 are sufficient to enable the Company to meet its obligations through at least the first quarter of 2009. Management plans to continue to obtain funds through collaborative arrangements, equity issuances and debt arrangements. If we are unable to complete a debt or equity offering or otherwise obtain sufficient financing when and if needed, we may be required to reduce, defer, or discontinue one or more of our product development programs, or we may not be able to continue as a going concern entity. The Company operates as a single operating segment.

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. In the opinion of management, the financial statements reflect all adjustments, which are only of a normal recurring nature, necessary for a fair presentation. The accompanying unaudited condensed financial statements should be read in conjunction with the financial statements and notes thereto included with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission (“SEC”). The results of the Company’s operations for the interim periods presented are not necessarily indicative of operating results for the full fiscal year or any future interim period.

The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

Reclassifications

The Company reclassified restructuring activity expenses incurred during 2007 from the general and administrative expense line item to the restructuring and lease exit activities line item in the accompanying unaudited condensed statements of operations to conform to the presentation for the current periods.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates include useful lives for property and equipment and related depreciation calculations, estimated amortization period for payments received from product development and license agreements as they relate to the revenue recognition, assumptions for valuing options and warrants and income taxes. Actual results could differ from these estimates.

Revenue Recognition

Contract revenues consist of revenues from grants, collaboration agreements and feasibility studies. The Company recognizes revenue under the provisions of the SEC Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”) and Emerging Issues

p 6 of 38

Task Force (“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). Revenue for arrangements not having multiple deliverables, as outlined in EITF 00-21, is recognized once costs are incurred and collectability is reasonably assured. Under some agreements the Company’s collaborators have the right to withhold reimbursement of costs incurred until the work performed under the agreement is mutually agreed upon. For these agreements, revenue is recognized upon acceptance of the work and confirmation of the amount to be paid by the collaborator. Deferred revenue represents the portion of all refundable and nonrefundable research payments received that have not been earned. In accordance with contract terms, milestone payments from collaborative research agreements are considered reimbursements for costs incurred under the agreements and, accordingly, are recognized as revenue either upon completion of the milestone effort, when payments are contingent upon completion of the effort, or are based on actual efforts expended over the remaining term of the agreement when payments precede the required efforts. Costs of contract revenues are approximate to or are greater than such revenues, and are included in research and development expenses. Refundable development and license fee payments are deferred until specific performance criteria are achieved. Refundable development and license fee payments are generally not refundable once specific performance criteria are achieved and accepted.

Collaborative license and development agreements that require the Company to provide multiple deliverables, such as a license, research and product steering committee services and other performance obligations, are accounted for in accordance with EITF 00-21. Under EITF 00-21, delivered items are evaluated to determine whether such items have value to the Company’s collaborators on a stand-alone basis and whether objective reliable evidence of fair value of the undelivered items exists. Deliverables that meet these criteria are considered a separate unit of accounting. Deliverables that do not meet these criteria are combined and accounted for as a single unit of accounting. The appropriate revenue recognition criteria are identified and applied to each separate unit of accounting.

Accounting for Costs Associated with Exit or Disposal Activities

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”) , the Company recognizes a liability for the cost associated with an exit or disposal activity that is measured initially at its fair value in the period in which the liability is incurred, except for liabilities for one-time termination benefits that are incurred over time. According to SFAS 146, costs to terminate an operating lease or other contracts are (a) costs to terminate the contract before the end of its term or (b) costs that will continue to be incurred under the contract for its remaining term without economic benefit to the entity. In periods subsequent to initial measurement, changes to the liability are measured using the credit-adjusted risk-free rate that was used to measure the liability initially.

Research and Development

Research and development expenses consist of costs incurred for company-sponsored, collaborative and contracted research and development activities. These costs include direct and research-related overhead expenses. Research and development expenses under collaborative and government grants approximate the revenue recognized under such agreements. The Company expenses research and development costs as such costs are incurred.

Income Taxes

The Company uses the asset and liability method to account for income taxes as required by SFAS No. 109, Accounting for Income Taxes . Under this method, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes as well as net operating loss and tax credit carryforwards. Valuation allowances are established to reduce deferred tax assets to amounts more likely than not to be realized. The Company currently maintains a full valuation allowance.

Stock-Based Compensation Expense

The Company measures stock-based compensation at the grant date based on the award’s fair value and recognizes the expense ratably over the requisite vesting period, net of estimated forfeitures, for all stock-based awards granted after January 1, 2006 and all stock based awards granted prior to, but not vested as of, January 1, 2006.

The Company has elected to calculate an awards’ fair value based on the Black-Scholes option-pricing model. The Black-Scholes model requires various assumptions, including expected option life and volatility. If any of the assumptions used in the Black-Scholes model or the estimated forfeiture rate change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

p 7 of 38

Recently Issued Accounting Pronouncements

In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 157-2 Effective Date of FASB Statement No. 157 (“FSP FAS 157-2”), which defers the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for items within the scope of FSP FAS 157-2. Management does not expect that the adoption of FSP FAS 157-2 will have a material impact on the Company’s financial position and results of operations.

In November 2007, the EITF issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property (“EITF 07-1”) . Companies may enter into arrangements with other companies to jointly develop, manufacture, distribute, and market a product. Often the activities associated with these arrangements are conducted by the collaborators without the creation of a separate legal entity (that is, the arrangement is operated as a “virtual joint venture”). The arrangements generally provide that the collaborators will share, based on contractually defined calculations, the profits or losses from the associated activities. Periodically, the collaborators share financial information related to product revenues generated (if any) and costs incurred that may trigger a sharing payment for the combined profits or losses. The consensus requires collaborators in such an arrangement to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. EITF 07-1 is effective for collaborative arrangements in place at the beginning of the annual period beginning after December 15, 2008. Management does not expect that the adoption of EITF 07-1 will have a material impact on the Company’s financial position and results of operations.

3. Stock-Based Compensation

The following table shows the effect of SFAS 123R, Share Based Payment on stock-based compensation expense included in the statement of operations for the three and six month periods ended June 30, 2008 and 2007 (in thousands, except per share amounts):


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2008			2007		2008		2007
Research and development expense	$	162		$	161	$	361	$	254
General and administrative expense		112			218		121		435

Total stock-based compensation expense under SFAS 123R	$	274		$	379	$	482	$	689


Total stock-based compensation without the adoption of SFAS 123R	$	(12	)	$	13	$	65	$	70


Impact on basic and diluted net loss per common share	$	(0.01	)	$	—	$	—	$	(0.01	)

Following are the components of total stock-based compensation expense recognized for the three and six month periods ended June 30, 2008 and 2007 (in thousands, except per share amounts):


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2008			2007		2008		2007
Employee stock option plans and employee stock purchase plan (“ESPP”)	$	230		$	348	$	326	$	583
Restricted stock awards to employees		56			18		91		36

Total stock-based compensation expense under SFAS 123R		286			366		417		619
Stock options and restricted stock awarded to consultants		(12	)		13		65		70

Total stock-based compensation	$	274		$	379	$	482	$	689

No stock-based employee compensation cost was capitalized for the three or six month periods ended June 30, 2008 or 2007. Because the Company incurred net losses during each of those periods, there was no recognized tax benefit associated with stock-based compensation expense.

As of June 30, 2008, there was $1.6 million of total unrecognized compensation costs, net of forfeitures, related to non-vested stock options, stock purchases and restricted stock awards to employees, which is expected to be recognized over a weighted average period of 2.5 years.

p 8 of 38

Valuation Assumptions

The fair value of options was estimated at the date of grant using the Black-Scholes option pricing model. The weighted-average assumptions used for the three and six months ended June 30, 2008 and 2007 and the resulting estimates of weighted-average fair value per share of options granted and shares purchased during these periods were as follows:


	Three Months Ended June 30,						Six Months ended June 30,
	2008			2007			2008			2007
*Employee Stock Options*
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Volatility factor		70.2	%		78.2	%		70.3	%		81.2	%
Risk-free interest rate		2.5	%		5.0	%		2.6	%		4.9	%
Expected life (years)		2.5			4.0			2.5			4.0
Weighted-average fair value of options granted during the periods	$	0.38		$	0.80		$	0.45		$	0.80

*ESPP*

Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Volatility factor		59.9	%		82.8	%		59.9	%		82.8	%
Risk-free interest rate		1.6	%		4.8	%		1.6	%		4.8	%
Expected life (years)		0.8			1.3			0.8			1.3
Weighted-average fair value of employee stock purchases during the periods	$	0.39		$	0.60		$	0.39		$	0.60

Stock Option Activity

A summary of the status of the Company’s stock option plans at June 30, 2008 and changes during the six months then ended is presented in the table below :


						Weighted-
				Weighted-		average
	Number			average		remaining		Aggregate
	of			exercise		contractual		intrinsic
	shares			price		life in years		value
Options outstanding at December 31, 2007		3,493,154		$	5.37		8.34	$	167,000
Options granted		280,000			1.32
Options exercised		(3,750	)		1.15
Options cancelled		(105,125	)		11.81

Options outstanding at June 30, 2008		3,664,279			4.88		7.88		—

Options exercisable at June 30, 2008		2,036.012		$	7.49		7.04		—

4. Net Loss Per Share

The Company computes basic net loss per share using the weighted-average number of shares of common stock outstanding less the weighted-average number of shares subject to repurchase. The effects of including the incremental shares associated with options, warrants and unvested restricted stock were antidilutive, and therefore were not included in diluted weighted average common shares outstanding for the three or six month periods ended June 30, 2008 and 2007.

The following securities were excluded from the calculation of diluted loss per share for the three and six months ended June 30, 2008 and 2007, respectively, as their effect would be anti-dilutive (in thousands):


	June 30,
	2008		2007
Outstanding stock options		3,664		3,053
Unvested restricted stock		761		55
Warrants to purchase common stock		421		836
Performance bonus stock award		100		100

p 9 of 38

5. Comprehensive Loss

Comprehensive loss includes net loss and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in shareholders’ equity that are excluded from net loss. Comprehensive loss and its components were as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Net loss	$	(7,052	)	$	(5,523	)	$	(12,690	)	$	(10,089	)
Other comprehensive loss:
Change in unrealized gain (loss) on available-for-sale securities		(15	)		(7	)		(9	)		(4	)

Comprehensive loss	$	(7,067	)	$	(5,530	)	$	(12,699	)	$	(10,093	)

6. Cash, Cash Equivalents and Short-Term Investments

The following summarizes the fair value of the Company’s cash, cash equivalents and short-term investments (in thousands):


	June 30,		December 31,
	2008		2007
Cash and cash equivalents:
Cash and money market fund	$	1,323	$	1,345
Commercial paper		1,799		28,619
US government agency notes		23,078		—

	$	26,200	$	29,964


Short-term investments:
Corporate and US government agency notes	$	1,231	$	10,546

The Company considers all highly liquid investments with a maturity of three months or less at the purchase date to be cash equivalents. All short-term investments at June 30, 2008 mature in less than one year. The Company places its cash, cash equivalents and short term investments in money market funds, commercial paper and corporate and government notes.

Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 applies to all fair value measurements not otherwise specified in an existing standard, clarifies how to measure fair value and expands fair value disclosures. SFAS No. 157 does not significantly change the Company’s previous practice with regard to asset valuation. All of the Company’s fair market value measurements utilize quoted prices in active markets for all its short-term investments, and as such, are valued at the “Level 1” fair value hierarchy as defined in SFAS 157.

7. Related Parties

CyDex

On August 31, 2007, the Company and CyDex Pharmaceuticals, Inc. (“CyDex”) entered into a Collaboration Agreement (the “CyDex Agreement”), which contemplates that the parties will collaborate on the development and commercialization of products that utilize our AERx® pulmonary delivery technology and CyDex’s solubilization and stabilization technologies to deliver combinations of inhaled corticosteroids, anticholinergics and beta-2 agonists for the treatment of asthma and chronic obstructive pulmonary diseases (COPD). John Siebert, a member of our Board of Directors, is the Chief Executive Officer of CyDex.

Under the terms of the CyDex Agreement, the parties will share in the revenue from sales and licensing of such products to a third party for further development and commercialization. Details of each collaboration project will be determined by a joint steering committee consisting of members appointed by each of the parties. Costs of each collaboration project will be borne 60% by the Company and 40% by CyDex. Revenues from each collaboration project will be shared in the same ratio. The CyDex Agreement commenced on August 31, 2007, and unless terminated earlier, will extend for a minimum period of two years. Either party may terminate the Agreement upon advance notice to the other party, and the non-terminating party will retain an option to continue the development and commercialization of any terminated product, subject to payment of a royalty to the terminating party. The Company has not recognized any revenue under the agreement since inception. The Company incurred expenses under the agreement of $51,000 during the second quarter of 2008, $95,000 during the first half of 2008 and none in the first half of 2007.

p 10 of 38

Novo Nordisk

In May 2008, the Second Amended and Restated License Agreement between Novo Nordisk and Aradigm (the “July 3, 2006 License Agreement”) was terminated, ending a business collaboration between the two companies to develop a pulmonary delivery system for administering insulin by inhalation using the AERx insulin Diabetes Management System (iDMS). There are various consequences for the Company as a result of the termination by Novo Nordisk of the July 3, 2006 License Agreement, including the following:

All rights to the inhaled insulin program . Novo Nordisk must enable the Company to continue to pursue commercialization of inhaled insulin. In order to do this, Novo Nordisk must:

	•		Supply the Company with insulin for use in continuing development of inhaled insulin.

	•		Identify in writing the patent claims that describe the insulin formulation used by Novo Nordisk in its development of inhaled insulin so that the Company can make such formulation (and permitted alternatives).

	•		Provide the Company full access to the data generated in the development of inhaled insulin, including data from all the clinical trials, as well as relevant sections of applicable regulating filings.

Intellectual Property transfer . If Novo Nordisk informs the Company that Novo Nordisk does not wish to maintain certain patents and patent applications related to inhaled insulin, then these patents and patent applications will be assigned to the Company. Otherwise, Novo Nordisk must maintain the patents.

Transfer of technology . Novo Nordisk transferred the AERx iDMS technology documentation to the Company. The technology transfer also included certain AERx iDMS-related development and production equipment at its fair market value.

Prior to the Company’s follow-on public offering completed on January 30, 2007, Novo Nordisk and its affiliate, Novo Nordisk Pharmaceuticals, Inc., were considered related parties. At December 31, 2006, Novo Nordisk beneficially owned 1,573,674 shares of the Company’s common stock, representing 10.6% of the Company’s total outstanding common stock (9.8% on an as-converted basis). As a result of the Company’s public offering on January 30, 2007, Novo Nordisk’s ownership was reduced to approximately 3.0% of the Company’s stock on an as-converted basis, and as of June 30, 2008 and December 31, 2007, Novo Nordisk owned less than 1% of the Company’s common stock.

Pursuant to the July 3, 2006 License Agreement, Novo Nordisk loaned the Company a principal amount of $7.5 million under a Promissory Note and Security Agreement (“Promissory Note”). The Promissory Note bears interest accruing at 5% per annum and the principal, along with the accrued interest, is payable in three equal payments of $3.5 million at July 2, 2012, July 1, 2013 and June 30, 2014. The balance outstanding under the Promissory Note, including accrued interest, was $8.3 million and $8.1 million as of June 30, 2008 and December 31, 2007, respectively. The Promissory Note does contain a number of covenants that include restrictions in the event of changes to corporate structure, change in control and certain asset transactions. The Promissory Note was also secured by a pledge of the net royalty stream payable to the Company by Novo Nordisk pursuant to the July 3, 2006 License Agreement. The termination of the July 3, 2006 License Agreement does not accelerate any of the payment provisions under the Promissory Note.

8. Revenue and Deferred Revenue:

Payments from and amounts billed to collaborators, revenue recognized and deferred revenue were as follows (thousands):


Deferred revenue — December 31, 2007	$	880
Amounts billed or received for collaborator funded programs — three months ended March 31, 2008		50

Deferred revenue — March 31, 2008		930
Amounts billed or received for collaborator funded programs — three months ended June 30, 2008		292
Revenues recognized for collaborator funded programs — three months ended June 30, 2008		(54	)

Deferred revenue — June 30, 2008		1,168
Less: non-current portion of deferred revenue		—

Current portion of deferred revenue	$	1,168

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The Company receives payments from collaborator-funded programs that are generally early-stage feasibility programs. These programs may not necessarily develop into long-term development agreements with the collaborators.

9. Property Tax Assessment

In March 2008 the Company received assessments of $508,000 from the Alameda County Tax Collector for personal property taxes for the period July 2004 through June 2007, for which the Company recorded an expense of $194,000 in the second quarter of 2008. Of the $508,000 total assessment, $194,000 relates to property owned and used by the Company during the assessment periods, and $314,000 relates to property the Company sold to Novo Nordisk as part of a January 26, 2005 restructuring agreement (the “January 26, 2005 Agreement”) and owned by Novo Nordisk during the tax assessment period. Under the terms of the January 26, 2005 Agreement, Novo Nordisk is responsible for tax assessments on property it owned during the assessment period, and therefore the Company believes the likelihood that the Company will ultimately bear the cost of the related $314,000 assessment is remote. Accordingly, no accrual was recorded for this portion of the assessment. Management has notified the Alameda County Tax Collector of its intention to file an appeal to dispute portions of the total assessment, and believes there is at least a reasonable possibility that the Company’s $194,000 liability will be reduced upon appeal. However, at this time management cannot estimate the amount that the Company will appeal or the ultimate outcome of the appeal. Accordingly, management’s current best estimate of the Company’s ultimate liability for the property tax assessment is $194,000.

10. Sublease Agreement and Lease Exit Liability:

On July 18, 2007, the Company entered into a sublease agreement with Mendel Biotechnology, Inc. (“Mendel”) to lease approximately 48,000 square feet of the Company’s 72,000 square foot facility in Hayward, CA. During the year ended December 31, 2007, the Company recorded a $2.1 million lease exit liability and related expense for the expected loss on the sublease, in accordance with SFAS 146, because the monthly payments the Company expects to receive under the sublease are less than the amounts that the Company will owe the lessor for the subleased space. The fair value of the lease exit liability was determined using a credit-adjusted risk-free rate to discount the estimated future net cash flows, which consisted of the minimum lease payments to the lessor for the sublease space and payments the Company will receive under the sublease. The sublease loss and ongoing accretion expense required to record the lease exit liability at its fair value using the interest method have been recorded as part of restructuring and lease exit activities in the accompanying condensed statements of operations. The lease exit liability activity from inception in July 2007 through June 30, 2008 is as follows (in thousands):


Loss on sublease to Mendel in July 2007	$	2,063
Accretion of imputed interest expense		39
Lease payments		(353	)

Balance at December 31, 2007		1,749
Accretion of imputed interest expense		22
Lease payments		(117	)

Balance at March 31, 2008		1,654

Accretion of imputed interest expense		20
Lease payments		(109	)

Balance at June 30, 2008	$	1,565

At June 30, 2008, $384,000 of the $1.6 million lease exit liability is classified in current liabilities, and the remaining $1.2 million is classified in non-current liabilities. At December 31, 2007, $376,000 of the $1.7 million lease exit liability was classified in current liabilities, and the remaining $1.4 million was classified in non-current liabilities.

11. 2006 Restructuring

During 2006, the Company announced the implementation of a strategic restructuring of its business operations to focus resources on advancing the current product pipeline and developing products focused on respiratory disease, leveraging the Company’s core expertise and intellectual property. The Company accounted for the restructuring activity in accordance with SFAS 146. The restructuring included a reduction in force, the majority of which were research personnel. The Company recorded the final remaining charge of $98,000 from the 2006 restructuring during the second quarter of 2007. The Company also paid the severance-related expenses in full by the end of 2007. These charges are included in the restructuring and lease exit activities expense line item in the accompanying condensed statements of operations.

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12. Tekmira License Agreement

In February 2008, the Company signed an amendment to its license agreement from December 2004 with Tekmira Pharmaceuticals Corporation (“Tekmira”), formerly known as Inex Pharmaceuticals Corporation. Under the amended agreement, Tekmira granted the Company a license to certain technology relating to the delivery of liposomal ciprofloxacin. The Company paid Tekmira $250,000 upon execution of the amendment. Should the Company utilize the technology licensed from Tekmira, the Company may be required to make milestone payments of up to $4.75 million in the aggregate for each disease indication, up to a maximum of two indications, pursued by the Company for liposomal ciprofloxacin. Should the Company commercialize products incorporating the licensed technology, Tekmira will have the right to royalty payments.

13. Feasibility Study

In March 2008, the Company entered into an agreement with a third party to conduct a feasibility study. The purpose of the study is to evaluate in the laboratory the delivery of certain compounds using the AERx system. The agreement has an initial one year term with potential successive one year renewals. The Company will be fully reimbursed for costs it incurs under the agreement. The Company billed and recorded as deferred revenue $50,000 upon execution of the agreement in the first quarter of 2008, and $50,000 in the second quarter of 2008. The Company recognized revenue of $54,000 related to the agreement in the second quarter of 2008, and the remaining $46,000 is classified as deferred revenue at June 30, 2008.

14. Manufacturing and Supply Agreement

On August 8, 2007, the Company entered into a Manufacturing and Supply Agreement (the “Enzon Agreement”) with Enzon Pharmaceuticals, Inc. (“Enzon”) related to its ARD-3100 and ARD-3150 programs, inhaled formulations of liposomal ciprofloxacin for the treatment and control of respiratory infections common to patients with cystic fibrosis and bronchiectasis. Under the Enzon Agreement, Enzon will manufacture and supply the Company with ciprofloxacin formulations and other products that may be identified by management. For manufacturing the initial products, the Company will pay Enzon costs and fees totaling $3.3 million in addition to costs and fees for stability studies or other services that may be agreed by both parties. The agreement commenced on August 8, 2007, and extends for a period of five years, unless terminated earlier by either party. The Company incurred research and development expenses of $988,000 and $1.1 million under the Enzon Agreement for the second quarter and first six months of 2008, respectively.

15. Shareholders’ Equity

On January 30, 2007, the Company received $33.9 million from the closing of its public offering of 37,950,000 shares of common stock in an underwritten public offering with net proceeds, after underwriting discount and expenses, of approximately $33.2 million. This public offering triggered the automatic conversion of all outstanding shares of Series A convertible preferred stock to common stock and eliminated the Series A liquidation preference of $41.9 million, equal to the original issue price plus all accrued and unpaid dividends (as adjusted for any stock dividends, combinations, splits, recapitalizations and other similar events). Following the offering, the 1,544,626 shares of Series A convertible preferred stock were converted to 1,235,699 shares of common stock, and no liquidation preference or other preferential rights remained.

On December 21, 2007, the Company filed a shelf registration statement on Form S-3 (No. 333-148263) covering the sale of $60 million of common stock. The registration statement became effective on January 25, 2008.

On April 1, 2008, the Company issued 147,384 shares of common stock pursuant to the ESPP at an average price of $0.94 per share.

On May 15, 2008, the shareholders approved an amendment to Aradigm’s Amended and Restated Articles of Incorporation to increase the authorized number of shares of common stock from 100,000,000 to 150,000,000 shares. The shareholders also approved an amendment to the 2005 Equity Incentive Plan to increase the aggregate number of shares of common stock authorized for issuance under such plan by 2,700,000 shares, and an amendment to the ESPP to increase the aggregate number of shares of common stock authorized for issuance under such plan by 1,000,000 shares. As of June 30, 2008, the Company had 4,360,786 shares of common stock available for future issuance under the 2005 Equity Incentive Plan.

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

The discussion below contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Our future results, performance or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements as a result of certain factors, including, but not limited to, those discussed in this section as well as in the section entitled “Risk Factors” and elsewhere in our filings with the Securities and Exchange Commission.

Our business is subject to significant risks including, but not limited to, our ability to obtain additional financing, our ability to implement our new product development strategy, the success of product development efforts, our dependence on collaborators for certain programs, obtaining and enforcing patents important to our business, clearing the lengthy and expensive regulatory approval process and possible competition from other products. Even if product candidates appear promising at various stages of development, they may not reach the market or may not be commercially successful for a number of reasons. Such reasons include, but are not limited to, the possibilities that the potential products may be found to be ineffective during clinical trials, may fail to receive necessary regulatory approvals, may be difficult to manufacture on a large scale, are uneconomical to market, may be precluded from commercialization by proprietary rights of third parties or may not gain acceptance from health care professionals and patients.

Investors are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to update these forward-looking statements in light of events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

Overview

We are an emerging specialty pharmaceutical company focused on the development and commercialization of drugs delivered by inhalation for the treatment of severe respiratory diseases by pulmonologists. Over the last decade, we have invested a large amount of capital to develop drug delivery technologies, particularly the development of a significant amount of expertise in pulmonary drug delivery. We have also invested considerable effort into the generation of a large volume of laboratory and clinical data demonstrating the performance of our AERx pulmonary drug delivery platform. We have not been profitable since inception and expect to incur additional operating losses over at least the next several years as we expand product development efforts, preclinical testing and clinical trial activities, and possible sales and marketing efforts, and as we secure production capabilities from outside contract manufacturers. To date, we have not had any significant product sales and do not anticipate receiving any revenues from the sale of products in the near term. As of June 30, 2008, we had an accumulated deficit of $324.8 million. Historically, we have funded our operations primarily through public offerings and private placements of our capital stock, proceeds from equipment lease financings, license fees and milestone payments from collaborators, proceeds from the January 2005 restructuring transaction with Novo Nordisk, borrowings from Novo Nordisk, sale of Intraject related assets and interest earned on investments. On January 30, 2007, we closed the sale of 37,950,000 shares of common stock in an underwritten public offering with net proceeds, after underwriting discount and expenses, of approximately $33.2 million (See Note 15 of the notes to the condensed financial statements).

Recently our business has focused on opportunities for product development for treatment of severe respiratory disease that we could develop and commercialize in the United States without a partner. In selecting our proprietary development programs, we primarily seek drugs approved by the United States Food and Drug Administration (“FDA”) that can be reformulated for both existing and new indications in respiratory disease. Our intent is to use our pulmonary delivery methods and formulations to improve their safety, efficacy and convenience of administration to patients. We believe that this strategy will allow us to reduce cost, development time and risk of failure, when compared to the discovery and development of new chemical entities. We intend to commercialize our respiratory product candidates with our own focused sales and marketing force addressing pulmonary specialty doctors in the United States, where we believe that a proprietary sales force will enhance the return to our shareholders. Where our products can benefit a broader population of patients in the United States or in other countries, we may enter into co-development, co-promotion or other marketing arrangements with collaborators, thereby reducing costs and increasing revenues through license fees, milestone payments and royalties. Our lead development candidate in Phase 2 clinical trials is a proprietary liposomal formulation of the antibiotic ciprofloxacin that is delivered by inhalation for the treatment of infections associated with the severe respiratory diseases cystic fibrosis and bronchiectasis. The same formulation could be potentially used also for the prevention and treatment of inhaled anthrax.

Historically, our development activities consisted primarily of collaborations and product development agreements with third parties. The most notable collaboration was with Novo Nordisk on the AERx iDMS for the treatment of Type I and Type II diabetes. This program began in 1998 and included nine Phase 3 clinical trials in Type I and Type II diabetes patients. On April 30, 2008, Novo

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Nordisk announced that following recent reports of lung cancer in Type II diabetes patients treated with Exubera*, an inhaled insulin product from Pfizer, the likelihood of achieving a positive benefit/risk ratio for future pulmonary diabetes projects had become more uncertain, and as a result, Novo Nordisk had decided to stop all research and development activities in the field. In May 2008, the July 3, 2006 License Agreement between us and Novo Nordisk was terminated.

Our current partnerships include a collaboration with Lung Rx, Inc., a wholly owned subsidiary of United Therapeutics Corporation (“Lung Rx”), with whom we are developing inhalation treatments for pulmonary arterial hypertension. We also have a collaboration with Cydex Corporation for inhalation treatments of asthma and chronic obstructive pulmonary disease. We have a proprietary program for smoking cessation treatment for which we are currently seeking a partner.

Product Candidates

Product candidates in development include both our own proprietary products and products under development with collaborators. They consist of approved drugs combined with our inhalation delivery and/or formulation technologies. The following table shows the disease indication and stage of development for each product candidate in our portfolio.


Product Candidate	Indication	Stage of Development
Proprietary Programs Under Development
ARD-3100 (Liposomal ciprofloxacin)	Cystic Fibrosis	Phase 2
ARD-3150 (Liposomal ciprofloxacin)	Bronchiectasis	Phase 2
ARD-1100 (Liposomal ciprofloxacin)	Inhalation Anthrax	Preclinical
ARD-1600 (Nicotine)	Tobacco Smoking Cessation	Phase 1 Completed

Collaborative Programs Under Development
ARD-1550 (Inhaled treprostinil) (1)	Pulmonary Arterial Hypertension	Bridging study
ARD-1500 (Inhaled liposomal treprostinil)	Pulmonary Arterial Hypertension	Preclinical
ARD-1700 (combination products) (2)	Asthma, COPD	Preclinical


(1)		A bridging clinical study began in April 2008 to compare delivery with the AERx Essence® system against the nebulizer used in the completed Phase 3 TRIUMPH ( TR eprostinil Sodium I nhalation U sed in the M anagement of P ulmonary Arterial H ypertension) study with our partner Lung Rx.

(2)		The Asthma and COPD program is being conducted pursuant to the Collaboration Agreement with CyDex.

In addition to these programs, we are continually evaluating opportunities for product development where we can apply our expertise and intellectual property to produce better therapies and where we believe the investment could provide significant value to our shareholders. We periodically conduct feasibility studies with other parties in an effort to identify formulations and combinations that may be suitable candidates for additional development.

Proprietary Programs Under Development:

Liposomal Ciprofloxacin

This product candidate is currently in Phase 2 programs for respiratory infections associated with cystic fibrosis and bronchiectasis. Ciprofloxacin has been approved by the FDA as an anti-infective agent and is widely used for the treatment of a variety of bacterial infections. Today ciprofloxacin is delivered by oral or intravenous administration. We believe that delivering this potent antibiotic directly to the lung may improve its safety and efficacy in the treatment of pulmonary infections. We believe that our novel sustained release formulation of ciprofloxacin may be able to maintain therapeutic concentrations of the antibiotic within infected lung tissues, while reducing systemic exposure and the resulting side effects seen with currently marketed ciprofloxacin products. To achieve this sustained release, we employ liposomes, which are lipid-based nanoparticles dispersed in water that encapsulate the drug during storage and release the drug slowly upon contact with fluid covering the airways and the lung. In an animal experiment, ciprofloxacin delivered to the lung of mice appeared to be rapidly absorbed into the bloodstream, with no drug detectable four hours after administration. In contrast, the liposomal formulation of ciprofloxacin produced significantly higher levels of ciprofloxacin in the lung at all time points and was still detectable at 12 hours. We also believe that for certain respiratory disease indications it may be possible that a liposomal formulation enables better interaction of the drug with the disease target, leading to improved effectiveness over other

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therapies. We have at present three target indications that share much of the laboratory and production development efforts, as well as a common safety data base.

ARD-3100 and ARD 3150 — Liposomal Ciprofloxacin for the Treatment of Infections in Cystic Fibrosis and Non-CF Bronchiectasis Patients

We have two proprietary liposomal ciprofloxacin programs for the treatment and control of respiratory infections associated with chronic diseases — one common to patients with cystic fibrosis, or CF, and the other for infections associated with non-cystic fibrosis bronchiectasis.

CF is a genetic disease that causes thick, sticky mucus to form in the lungs, pancreas and other organs. In the lungs, the mucus tends to block the airways, causing lung damage and making these patients highly susceptible to lung infections. According to the Cystic Fibrosis Foundation, CF affects roughly 30,000 children and adults in the United States and roughly 70,000 children and adults worldwide. According to the American Lung Association, the direct medical care costs for an individual with CF are currently estimated to be in excess of $40,000 per year.

The inhalation route affords direct administration of the drug to the infected part of the lung, maximizing the dose to the affected site and minimizing the wasteful exposure to the rest of the body where it could cause side effects. Therefore, treatment of CF-related lung infections by direct administration of antibiotics to the lung may improve both the safety and efficacy of treatment compared to systemic administration by other routes, as well as improving patient convenience as compared to injections. Oral and injectable forms of ciprofloxacin are approved for the treatment of Pseudomonas aeruginosa, a lung infection to which CF patients are vulnerable. Currently, there is only one inhalation antibiotic approved for the treatment of this infection, which is administered twice a day. We believe that local lung delivery via inhalation of ciprofloxacin in a sustained release formulation could provide a convenient, effective and safe treatment of the debilitating and often life-threatening lung infections that afflict patients with CF. In particular, an important consideration in the development of new treatments for this disease is the reduction of the burden of therapy for patients, their relatives and healthcare providers. Our goal is to develop a convenient, once-a-day inhalation product in order to reduce the amount of time and effort associated with administration of the therapy.

Our liposomal ciprofloxacin CF program represents the first program in which we intend to retain full ownership and development rights for the United States. We believe we have the preclinical development, clinical and regulatory expertise to advance this product through development in the most efficient manner. We intend to commercialize this program in the United States on our own.

We are also developing inhaled liposomal ciprofloxacin for pulmonary infections associated with non-CF bronchiectasis — a chronic pulmonary disease with symptoms similar to cystic fibrosis affecting over 100,000 patients in the United States. This is an orphan drug disease with an unmet medical need; there is currently no approved drug treatment in the USA for this indication.

Development

We have received orphan drug designations from the FDA for this product for the management of CF, and for the treatment of respiratory infections associated with non-CF bronchiectasis. As a designated orphan drug, liposomal ciprofloxacin is eligible for tax credits based upon its clinical development costs, as well as assistance from the FDA to coordinate study design. The designation also provides the opportunity to obtain market exclusivity for seven years from the date of New Drug Application, or NDA, approval.

We initiated preclinical studies for liposomal ciprofloxacin in 2006 and we also continued to work on new innovative formulations for this product with the view to maximize the safety, efficacy and convenience to patients. In October 2007, we completed a Phase 1 clinical trial in 20 healthy volunteers in Australia. This was a safety, tolerability and pharmacokinetic study that included single dose escalation followed by dosing for one week. Administration of the liposomal formulation by inhalation was well tolerated and no serious adverse reactions were reported. The pharmacokinetic profile obtained by measurement of blood levels of ciprofloxacin following the inhalation of the liposomal formulation was consistent with the profile from sustained release of ciprofloxacin; the blood levels of ciprofloxacin were much lower than those that would be observed following administration of therapeutic doses of ciprofloxacin by injection or via the gastrointestinal tract. We believe that this is a desirable pharmacokinetic profile likely to result in reduction of the incidence and severity of systemic side effects of ciprofloxacin and to be less likely to lead to evolution of resistant micro-organisms.

In June 2008, we completed a multi-center 14-day treatment Phase 2a trial in Australia and New Zealand in 21 CF patients to investigate safety, efficacy and pharmacokinetics, with the primary efficacy endpoint being the reduction in the density of the

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pathogenic microorganism Pseudomonas aeruginosa. The primary efficacy endpoint in this Phase 2a study was the change from baseline in the sputum Pseudomonas Aeruginosa colony forming units (CFU), an objective measure of the reduction in pulmonary bacterial load. Data analysis in 21 patients who completed the study demonstrated that the Pseudomonas CFU decreased by a mean 1.43 log over the 14-day treatment period (p<0.0001). Evaluation one week after study treatment was discontinued showed that the Pseudomonas bacterial density in the lung was still reduced from the baseline without additional antibiotic use. Pulmonary function testing as measured by the forced expiratory volume in one second (FEV1) showed a significant mean increase of 6.86% from baseline after 14 days of treatment (p=0.04). The study drug was well tolerated, and there were no serious adverse events reported during the trial.

Following the trial we intend to finalize development plans and budgets for this program in conjunction with discussions with the FDA. In order to expedite anticipated time to market and increase patient acceptance, we have elected to deliver our initial formulation of ciprofloxacin via nebulizer, as most CF patients already own a nebulizer and are familiar with this method of drug delivery. We intend to examine the potential for delivery of ciprofloxacin via our AERx delivery system as well, as it could provide additional convenience for the patient in the form of a small portable device with a faster administration time than a nebulizer.

In June 2008, we initiated a multicenter Phase 2 clinical trial of our inhaled liposomal ciprofloxacin in adult patients with non-CF bronchiectasis. Following an antibiotic washout period, we intend to enroll 36 patients to receive daily inhaled liposomal ciprofloxacin for a period of 28 consecutive days. The primary efficacy endpoint will be treatment of respiratory infection measured as the change in the density of Pseudomonas Aeruginosa bacterial colony forming units (CFU) in the sputum over the treatment period. Secondary endpoints will include pulmonary function measurements and respiratory symptoms. The study is being conducted in leading bronchiectasis centers in the United Kingdom.

ARD-1100 — Liposomal Ciprofloxacin for the Treatment of Inhalation Anthrax

The third of our liposomal ciprofloxacin programs is for the prevention and treatment of pulmonary anthrax infections. Anthrax spores are naturally occurring in soil throughout the world. Anthrax infections are most commonly acquired through skin contact with infected animals and animal products or, less frequently, by inhalation or ingestion of spores. With inhalation anthrax, once symptoms appear, fatality rates are high even with the initiation of antibiotic and supportive therapy. Further, a portion of the anthrax spores, once inhaled, may remain dormant in the lung for several months and germinate. Anthrax has been identified by the Centers for Disease Control as a likely potential agent of bioterrorism. In the fall of 2001, when anthrax-contaminated mail was deliberately sent through the United States Postal Service to government officials and members of the media, five people died and many more became sick. These attacks highlighted the concern that inhalation anthrax as a bioterror agent represents a real and current threat.

Ciprofloxacin has been approved by the FDA for use orally and via injection for the treatment of inhalation anthrax (post-exposure) since 2000. Our ARD-1100 research and development program has been funded by Defence Research and Development Canada, or DRDC, a division of the Canadian Department of National Defence. We believe that our product candidate may potentially be able to deliver a long-acting formulation of ciprofloxacin directly into the lung and could have fewer side effects and be more effective to prevent and treat inhalation anthrax than currently available therapies.

Development

We began our research into liposomal ciprofloxacin under a technology demonstration program funded by the DRDC as part of their interest in developing products to counter bioterrorism. The DRDC had already demonstrated the feasibility of inhaled liposomal ciprofloxacin for post-exposure prophylaxis of Francisella tularensis, a potential bioterrorism agent similar to anthrax. Mice were exposed to a lethal dose of F. tularensis and then 24 hours later were exposed via inhalation to a single dose of free ciprofloxacin, liposomal ciprofloxacin or saline. All the mice in the control group and the free ciprofloxacin group were dead within 11 days post-infection; in contrast, all the mice in the liposomal ciprofloxacin group were alive 14 days post-infection. The same results were obtained when the mice received the single inhaled treatment as late as 48 or 72 hours post-infection. The DRDC has funded our development efforts to date and additional development of this program is dependent on negotiating for and obtaining continued funding from DRDC or on identifying other collaborators or sources of funding. We plan to use our preclinical and clinical safety data from our CF program to supplement the data needed to have this product candidate considered for approval for use in treating inhalation anthrax and possibly other inhaled life-threatening bioterrorism infections.

We anticipate developing this drug for approval under FDA regulations relating to the approval of new drugs or biologics for potentially fatal diseases where human efficacy studies cannot be conducted ethically or practically. These regulations allow for a drug to be evaluated and approved by the FDA on the basis of demonstrated safety in humans combined with studies in animal models

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to show effectiveness. Our intention is to continue the development of this potential product for the treatment and prevention of anthrax only if we can obtain future funding for it from a partner, or secure a government contract for it.

Smoking Cessation Therapy

ARD-1600 (Nicotine) Tobacco Smoking Cessation Therapy

According to the National Center for Health Statistics (“NCHS”), 21% of the U.S. population age 18 and above currently smoke cigarettes. The World Health Organization estimates that 650 million people worldwide are smokers, which results in a health cost equivalent to $200 billion, $75 billion in the U.S. alone. Further, the NCHS indicates that nicotine dependence is the most common form of chemical dependence in this country. As a result, quitting tobacco use is difficult and often requires multiple attempts, as users often relapse because of withdrawal symptoms. Our goal is to develop an inhaled nicotine product that would address effectively the acute craving for cigarettes and, through gradual reduction of the peak nicotine levels, wean-off the patients from cigarette smoking and from the nicotine addiction.

Development

The initial laboratory work on this program was partly funded under grants from the National Institute of Health. We have recently completed the first human clinical trial delivering aqueous solutions of nicotine using the palm-size AERx Essence system. Our randomized, open-label, single-site Phase 1 trial evaluated arterial plasma pharmacokinetics and subjective acute cigarette craving when one of three nicotine doses was administered to 18 adult male smokers. Blood levels of nicotine rose much more rapidly following a single-breath inhalation compared to published data on other approved nicotine delivery systems. Cravings for cigarettes were measured on a scale from 0-10 before and after dosing for up to four hours. Prior to dosing, mean craving scores were 5.5, 5.5 and 5.0, respectively, for the three doses. At five minutes following inhalation of the nicotine solution through the AERx Essence device, craving scores were reduced to 1.3, 1.7 and 1.3, respectively, and did not return to pre-dose baseline during the four hours of monitoring. Nearly all subjects reported an acute reduction in craving or an absence of craving immediately following dosing. No serious adverse reactions were reported in the study.

We believe these results provide the foundation for further research with the AERx Essence device as a means toward smoking cessation. We are currently seeking collaborations with government and non-government organizations to further develop this product.

Collaborative Programs Under Development:

ARD-1550 and 1500 — Treprostinil for the Treatment of Pulmonary Arterial Hypertension

The ARD-1550 program is a collaboration with Lung Rx and is investigating an inhaled aqueous formulation of a prostacyclin analogue for administration using our AERx delivery system for the treatment of pulmonary arterial hypertension, or PAH. In April 2008, we initiated a bridging clinical trial in conjunction with our agreement with Lung Rx to evaluate lung distribution, pharmacokinetics and safety of inhaled treprostinil delivered by the AERx Essence system versus delivery with the Nebu-Tec OPTINEB(1)-ir nebulizer. Lung Rx used the latter device in the recently concluded Phase 3 TRIUMPH study of inhaled treprostinil in patients with PAH. PAH is a rare disease that results in the progressive narrowing of the arteries of the lungs, causing continuous high blood pressure in the pulmonary artery and eventually leading to heart failure. According to Datamonitor, in 2005 the more than 146,000 people worldwide affected by PAH purchased over $800 million of PAH-related medical treatments, and sales are expected to reach $2.0 billion per year by 2015.

Prostacyclin analogues are an important class of drugs used for the treatment of pulmonary arterial hypertension. However, the current methods of administration of these drugs are burdensome on patients. Treprostinil is marketed by United Therapeutics under the name Remodulin* and is administered by intravenous or subcutaneous infusion. Remodulin accounted for approximately $200 million of United Therapeutics Corporation’s revenue in 2007. We believe that the ARD-1550 product candidate could offer a non-invasive, more direct and patient-friendly approach compared to currently available treatments. Actelion Pharmaceuticals Ltd. markets in the United States another prostacyclin analogue, iloprost, under the name Ventavis* that is administered six to nine times per day using a nebulizer, with each treatment lasting four to ten minutes. We believe administration of treprostinil by inhalation using our convenient palm-sized AERx delivery system may be able to deliver an adequate dose for the treatment of PAH in a small number of

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breaths. Based on our previous work with United Therapeutics, we also believe that in the future our sustained release formulation (ARD-1500) may lead to a reduction in the number of daily administrations that are needed to be effective when compared to existing inhaled therapies.

Development

We have conducted two collaborative research projects on inhaled treprostinil using Aradigm’s AERx delivery system. The first project was with an aqueous formulation of treprostinil (ARD-1550). The second project involved development of a slow-acting liposomal formulation of treprostinil (ARD-1500), with the view to achieve once-a-day dosing. On August 30, 2007, we signed an Exclusive License, Development and Commercialization Agreement with Lung Rx pursuant to which we granted Lung Rx an exclusive license to develop and commercialize inhaled treprostinil using our AERx Essence technology for the treatment of PAH and other potential therapeutic indications. As a part of this collaboration, we began a bridging study for this product, ARD-1550, in April 2008 to compare an aqueous solution of treprostinil delivered by inhalation using the AERx Essence system to the nebulizer used in the United Therapeutics’ recently completed Phase 3 trial.

ARD-1300 — Hydroxychloroquine for the Treatment of Asthma

The ARD-1300 program was investigating a novel aerosolized formulation of hydroxychloroquine, or HCQ, as a treatment for asthma under collaboration with APT, a privately held biotechnology company. Data from studies in which HCQ was orally administered to humans suggested that HCQ could be effective in the treatment of asthma. We and APT have hypothesized that targeted delivery of HCQ to the airways may enhance the effectiveness of the treatment of asthma relative to systemic delivery of HCQ while reducing side effects by decreasing exposure of the drug to other parts of the body.

Development

APT has funded all activities in the development of this program. The ARD-1300 program advanced into Phase 2 clinical trials following positive preclinical testing and Phase 1 clinical results. The results of the Phase 2a clinical study of inhaled HCQ as a treatment for patients with moderate-persistent asthma did not meet the pre-specified clinical efficacy endpoints. No serious adverse effects were noted or associated with the aerosolized HCQ or with the AERx system. APT is also studying the utility of nasally-administered HCQ for the treatment of allergic rhinitis. We have no current plans to continue with this collaboration.

ARD-1700 (combination products) and Other Potential Applications

We have demonstrated in human clinical trials to date effective deposition and, where required, systemic absorption of a wide variety of drugs, including small molecules, peptides and proteins, using our AERx delivery system. We intend to identify additional pharmaceutical product opportunities that could potentially utilize our proprietary delivery systems for the pulmonary delivery of various drug types, including proteins, peptides, oligonucleotides, gene products and small molecules. We have demonstrated in the past our ability to successfully enter into collaborative arrangements for our programs, and we believe additional opportunities for collaborative arrangements exist outside of our core respiratory disease focus, for some of which we have data as well as intellectual property positions. The following are descriptions of two potential opportunities:

• Cyclodextrin Combination Products for Asthma, Cystic Fibrosis and other Chronic Obstructive Pulmonary Disease (COPD) . Asthma is a common chronic disorder of the lungs characterized by airway inflammation, airway hyper-responsiveness or airway narrowing due to certain stimuli. Despite several treatment options, asthma remains a major medical problem associated with high morbidity and large economic costs to the society. According to the American Lung Association, asthma accounted for $14.7 billion in direct healthcare costs each year in the United States, of which the largest single expenditure, at $6.2 billion, was prescription drugs. Primary symptoms of asthma include coughing, wheezing, shortness of breath and tightness of the chest with symptoms varying in frequency and degree. According to Datamonitor, in 2005 asthma affected 41.5 million people in developed countries, with 9.5 million of those affected being children. The highest prevalence of asthma occurs in the United States and the United Kingdom. According to the American Lung Association, non-asthma COPD was the fourth leading cause of death in America, claiming the lives of 118,171 Americans in 2004. In 2005, an estimated 8.9 million Americans reported a physician diagnosis of chronic bronchitis, an obstructive disease of the lung. In August 2007, we and CyDex began to collaborate on the development and commercialization of products that utilize our AERx pulmonary delivery technology and CyDex’s solubilization and stabilization technologies to deliver inhaled corticosteroids, anticholinergics and beta-2 agonists for the treatment of asthma and COPD. The initial focus of the collaboration is on formulation development and market research.

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• Pain Management System . Based on our internal work and a currently dormant collaboration with GlaxoSmithKline, we have developed a significant body of preclinical and Phase 1 clinical data on the use of inhaled morphine and fentanyl, and Phase 2 clinical data on inhaled morphine, with our proprietary AERx delivery system for the treatment of breakthrough pain in cancer and postsurgical patients.

• Other Programs . We are currently examining our other previously conducted preclinical and clinical programs to identify molecules that may be suitable for further development consistent with our current business strategy to focus on the U.S. severe respiratory disease market and sell or license our non-strategic assets.

Critical Accounting Policies and Estimates

We consider certain accounting policies related to revenue recognition, stock-based compensation, impairment of long-lived assets, exit/disposal activities and income taxes to be critical accounting policies that require the use of significant judgments and estimates relating to matters that are inherently uncertain and may result in materially different results under different assumptions and conditions. The preparation of financial statements in conformity with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to the condensed financial statements. These estimates include useful lives for property and equipment and related depreciation calculations, estimated amortization periods for payments received from product development and license agreements as they relate to the revenue recognition and assumptions for valuing options, warrants and incomes taxes. Our actual results could differ from these estimates.

Revenue Recognition

Contract revenues consist of revenues from grants, collaboration agreements and feasibility studies. We recognize revenue under the provisions of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”) and Emerging Issues Task Force (“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). Revenue for arrangements not having multiple deliverables, as outlined in EITF 00-21, is recognized once costs are incurred and collectability is reasonably assured. Under some agreements our collaborators have the right to withhold reimbursement of costs incurred until the work performed under the agreement is mutually agreed upon. For these agreements, we recognize revenue upon acceptance of the work and confirmation of the amount to be paid by the collaborator. Deferred revenue represents the portion of all refundable and nonrefundable research payments received that have not been earned. In accordance with contract terms, milestone payments from collaborative research agreements are considered reimbursements for costs incurred under the agreements and, accordingly, are recognized as revenue either upon completion of the milestone effort, when payments are contingent upon completion of the effort, or are based on actual efforts expended over the remaining term of the agreement when payments precede the required efforts. Costs of contract revenues are approximate to or are greater than such revenues, and are included in research and development expenses. We defer refundable development and license fee payments until specific performance criteria are achieved. Refundable development and license fee payments are generally not refundable once specific performance criteria are achieved and accepted.

Collaborative license and development agreements that require us to provide multiple deliverables, such as a license, research and product steering committee services and other performance obligations, are accounted for in accordance with EITF 00-21. Under EITF 00-21, delivered items are evaluated to determine whether such items have value to our collaborators on a stand-alone basis and whether objective reliable evidence of fair value of the undelivered items exists. Deliverables that meet these criteria are considered a separate unit of accounting. Deliverables that do not meet these criteria are combined and accounted for as a single unit of accounting. The appropriate revenue recognition criteria are identified and applied to each separate unit of accounting.

Accounting for Costs Associated with Exit or Disposal Activities

In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), we recognize a liability for the cost associated with an exit or disposal activity that is measured initially at its fair value in the period in which the liability is incurred, except for a liability for one-time termination benefits that is incurred over time. According to SFAS 146, costs to terminate an operating lease or other contracts are (a) costs to terminate the contract before the end of its term or (b) costs that will continue to be incurred under the contract for its remaining term without economic benefit to the entity. In periods subsequent to initial measurement, changes to the liability are measured using the credit-adjusted risk-free rate that was used to measure the liability initially.

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Research and Development

Research and development expenses consist of costs incurred for company-sponsored, collaborative and contracted research and development activities. These costs include direct and research-related overhead expenses. Research and development expenses under collaborative and government grants approximate the revenue recognized under such agreements. We expense research and development costs as such costs are incurred.

Income Taxes

We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our current tax exposure under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.

We assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including our historical levels of income and losses, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we do not consider it more likely than not that we will recover our deferred tax assets, we will record a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. At June 30, 2008 and December 31, 2007, we believed that the amount of our deferred income taxes would not be ultimately recovered. Accordingly, we recorded a full valuation allowance for deferred tax assets. However, should there be a change in our ability to recover our deferred tax assets, we would recognize a benefit to our tax provision in the period in which we determine that it is more likely than not that we will recover our deferred tax assets.

Stock-Based Compensation Expense

We measure stock-based compensation at the grant date based on the award’s fair value and we recognize the expense ratably over the requisite vesting period, net of estimated forfeitures, for all stock-based awards granted after January 1, 2006 and all stock based awards granted prior to, but not vested as of, January 1, 2006.

We have elected to calculate an award’s fair value based on the Black-Scholes option-pricing model. The Black-Scholes model requires various assumptions, including expected option life and volatility. If any of the assumptions used in the Black-Scholes model or the estimated forfeiture rate change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

Results of Operations

Revenue


	Three Months Ended				Six Months Ended
	June 30,				June 30,				Increase (Decrease)
	2008		2007		2008		2007		Three Months					Six Months
	($’s in thousands)								($’s in thousands)
Revenues from related parties	$	—	$	8	$	—	$	23	$	(8	)	(100	)%	$	(23	)	(100	)%
Revenues from unrelated parties		54		289		54		690		(235	)	(81	)%		(636	)	(92	)%

Total revenues	$	54	$	297	$	54	$	713	$	(243	)	(82	)%	$	(659	)	(92	)%

We recorded no related party revenue in 2008, and recorded related party revenue from Novo Nordisk of $8,000 and $23,000 for the second quarter and first half of 2007, respectively. The reason for the decrease in 2008 was the conclusion of the restructuring agreement with Novo Nordisk. We recorded revenues from unrelated parties of $54,000 for each of the second quarter and first half of 2008, related to a feasibility study evaluating the delivery of certain compounds using the AERx system. We recorded collaborative revenues for the second quarter of 2007 of $254,000 related to ARD-1100, $19,000 from our transition agreement with Zogenix and $24,000 from our nozzle manufacture contract. We recorded collaborative revenues for the first half of 2007 of $567,000 related to ARD-1100, $103,000 from our transition agreement with Zogenix and $43,000 from our nozzle manufacture contract. The primary reason for the decrease in unrelated party revenue in 2008 compared to 2007 was our focus towards advancing our own product candidates.

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Research and Development Expenses


	Three Months Ended				Six Months Ended
	June 30,				June 30,				Increase (Decrease)
	2008		2007		2008		2007		Three Months					Six Months
			($’s in thousands)								($’s in thousands)
Collaborative	$	810	$	386	$	1,347	$	805	$	424		110	%	$	542	67	%
Self-initiated		4,554		3,455		8,346		6,443		1,099		32	%		1,903	30	%

Total research and development expenses	$	5,364	$	3,841	$	9,693	$	7,248	$	1,523		40	%	$	2,445	34	%

Research and development expenses represent proprietary research expenses and costs related to contract research revenue, including salaries, payments to contract manufacturers and contract research organizations, contractor and consultant fees, stock-based compensation expense and other support costs including facilities, depreciation and travel. The increase in collaborative program expenses in the second quarter and first half of 2008 compared to the same periods in 2007 was primarily due to activities related to the ARD-1550 bridging study and an AERx technology feasibility study with another third party. Research and development expense for self-initiated projects increased during the second quarter and first half of 2008 over the comparable periods in the prior year as a result of the focus on advancing our current product candidates, including primarily ARD-3100, and the AERx technology contract manufacturing capabilities. The increase in total research and development costs for both the second quarter and year-to-date periods in 2008 over 2007 was primarily attributable to higher costs for clinical supply manufacturing and clinical trial activities. Stock-based compensation expense included in research and development was $162,000 and $161,000 for the second quarter of 2008 and 2007, respectively and was $361,000 and $254,000 for the first half of 2008 and 2007, respectively. We expect that our research and development expenses will increase over the next few quarters as we continue the development of our lead candidates, ARD-3100 and ARD-3150, and continue to advance our collaborative programs.

General and Administrative Expenses


	Three Months Ended				Six Months Ended
	June 30,				June 30,				Increase (Decrease)
	2008		2007		2008		2007		Three Months					Six Months
			(in thousands)						($’s in thousands)
General and administrative expenses	$	1,825	$	2,628	$	3,374	$	4,615	$	(803	)	(31	)%	$	(1,241	)	(27	)%

General and administrative expenses are comprised of salaries, legal fees including patent related costs, insurance, marketing research, contractor and consultant fees, stock-based compensation expense and other support costs including facilities, depreciation and travel costs. General and administrative expenses for the second quarter and first half of 2008 decreased from the comparable periods in 2007, primarily due to a reduction in headcount, as well as a reduction in building rent stemming from the subleasing of a portion of our office space to Mendel Biotechnology, Inc. (“Mendel”) in July 2007. Stock-based compensation expense included in general and administrative expenses was $112,000 and $218,000, for the second quarter of 2008 and 2007, respectively, and $121,000 and $435,000 for the first half of 2008 and 2007 respectively. We expect that our general and administrative expenses will remain relatively constant over the next few quarters.

Restructuring and lease exit activities


	Three Months Ended				Six Months Ended
	June 30,				June 30,				Increase (Decrease)
	2008		2007		2008		2007		Three Months			Six Months
			(in thousands)							($’s in thousands)
Restructuring and lease exit activities expense	$	20	$	—	$	42	$	98	$	20	—	$	(56	)	(57	)%

Restructuring and lease exit activities expense in 2008 represented the accretion of interest associated with the exit obligation recorded upon the subleasing of the office space to Mendel. Restructuring and lease exit activities expense in the first half of 2007 consisted of severance-related costs relating to our 2006 restructuring efforts.

Interest income, interest expense and other income


	Three Months Ended						Six Months Ended
	June 30,						June 30,						Increase (Decrease)
	2008			2007			2008			2007			Three Months					Six Months
				(in thousands)									($’s in thousands)
Interest income	$	202		$	699		$	563		$	1,336		$	(497	)	(71	)%	$	(773	)	(58	)%
Interest expense		(100	)		(96	)		(198	)		(193	)		4		4	%		5		3	%
Other income (expense), net		1			46			—			16			(45	)	(98	)%		(16	)	(100	)%

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Interest income for the second quarter of 2008 decreased from the comparable period in 2007 due to lower average invested balances as well as lower average interest rates earned. Interest income for the first half of 2008 decreased compared to the first half of 2007 due to lower average interest rates and lower average invested balances. Interest expense primarily reflects interest on the $7.5 million promissory note issued to Novo Nordisk in July 2006 with an interest rate of 5%. Other income in the second quarter of 2007 primarily reflected gains on the sale of assets and realized gains on foreign exchange transactions. Other income in the first six months of 2007 primarily reflected gains on the sale of assets.

Liquidity and Capital Resources

As of June 30, 2008, we had cash, cash equivalents and short-term investments of $27.4 million, down from $40.5 million at December 31, 2007. The $13.1 million decrease primarily resulted from the use of cash and the proceeds from investment maturities to fund operations. Working capital was $22.5 million at June 30, 2008, down from $36.6 as of December 31, 2007. The decrease primarily was due to the lower balances of cash, cash equivalents and short-term investments.

Net cash used in operating activities in the first half of 2008 was $11.2 million and primarily resulted from our net loss of $12.7 million. Net cash provided by investing activities was $7.3 million in the first half 2008 and represented proceeds from the maturity of investments, net of purchases, of $9.3 million, partly offset by the use of $2.0 million to purchase property and equipment. Net cash provided by financing activities was $0.1 million in the first half of 2008 and consisted primarily of cash receipts from employee purchases through the Employee Stock Purchase Plan.

Net cash used in operating activities in the first half of 2007 was $8.3 million and primarily resulted from our net loss of $10.1 million. Net cash used in investing activities in the first half 2007 was $8.6 million and reflected primarily purchases of investments, net of maturities, of $7.8 million. Net cash provided by financing activities was $33.2 million in the first half of 2007 and consisted primarily of proceeds from our public offering of common stock in January 2007.

As of June 30, 2008, we had an accumulated deficit of $324.8 million and total shareholders’ equity of $18.2 million. We believe that our cash, cash equivalents and short-term investments as of June 30, 2008 will be sufficient to enable us meet our obligations through at least the first quarter of 2009. Our principal activities to date have included research and development, securing operating facilities, expanding commercial production capabilities, recruiting management and technical personnel and obtaining financing. We do not anticipate receiving any revenue from the sale of products in the near term. Our ability to continue our development and commercialization activities is dependent upon the ability of management to obtain additional financing as required. We plan to continue to obtain funds through collaborative arrangements, equity issuances and debt arrangements. If we are unable to complete a debt or equity offering or otherwise obtain sufficient financing when and if needed, we may be required to reduce, defer, or discontinue one or more of our product development programs, or we may not be able to continue as a going concern entity.

Off-Balance Sheet Financings and Liabilities

Other than contractual obligations incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries.

Contractual Obligations

Our non-cancelable contractual obligations and future minimum lease payments as of June 30, 2008 were as follows:


													2013 and
	Total			2008 (1)			2009-2010			2011-2012			later
							(In thousands)
Operating lease obligations	$	17,664		$	1,200		$	4,532		$	4,060		$	7,872
Promissory note (2)		10,543			—			—			3,514			7,029
Unconditional capital purchase obligations		862			862			—			—			—
Unconditional purchase obligations		3,016			3,016			—			—			—

Total contractual commitments		32,085			5,078			4,532			7,574			14,901

Less-sublease payments from Mendel (3)		(4,098	)		(440	)		(1,828	)		(1,830	)		—

Total contractual commitments, net (3)	$	27,987		$	4,638		$	2,704		$	5,744		$	14,901

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(1)		For the six months ending December 31, 2008.

(2)		Represents total principal and interest payments due on the Novo Nordisk promissory note through the 2014 maturity date. As of June 30, 2008, the balance outstanding on the note was $8.3 million. The note contains a number of covenants that include restrictions in the event of changes to corporate structure, change in control and certain asset transactions.

(3)		Included to demonstrate the effect of the sublease with Mendel entered into in July 2007. Mendel has the option to terminate the sublease early on September 1, 2012 for a termination fee of $225,000. In the event that the sublease is not terminated early in 2012, $4.0 million in additional payments will be received through August 2016.

Recently Issued Accounting Pronouncements

In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 157-2 Effective Date of FASB Statement No. 157 (“FSP FAS 157-2”), which defers the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for items within the scope of FSP FAS 157-2. We do not expect that the adoption of FSP FAS 157-2 will have a material impact on our financial position and results of operations.

In November 2007, the EITF issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property (“EITF 07-1”) . Companies may enter into arrangements with other companies to jointly develop, manufacture, distribute, and market a product. Often the activities associated with these arrangements are conducted by the collaborators without the creation of a separate legal entity (that is, the arrangement is operated as a “virtual joint venture”). The arrangements generally provide that the collaborators will share, based on contractually defined calculations, the profits or losses from the associated activities. Periodically, the collaborators share financial information related to product revenues generated (if any) and costs incurred that may trigger a sharing payment for the combined profits or losses. The consensus requires collaborators in such an arrangement to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. EITF 07-1 is effective for collaborative arrangements in place at the beginning of the annual period beginning after December 15, 2008. We do not expect that the adoption of EITF 07-1 will have a material impact on our financial position and results of operations.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Disclosures

In the normal course of business, our financial position is routinely subject to a variety of risks, including market risk associated with interest rate movement. We regularly assess these risks and have established policies and business practices to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas.

As of June 30, 2008, we had cash, cash equivalents and short-term investments of $27.4 million. The fair market value of our fixed rate short-term investments will decline if market interest rates increase. Because the maturities of our short-term investments are very short, we expect that if such decreases in fair value occur, they will be immaterial and, therefore, we believe our exposure to interest rate changes is immaterial. Declining interest rates over time would reduce our interest income from short-term investments.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on their evaluation as of the end of the period covered by this report, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)

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were effective as of the end of the period covered by this report to ensure that information that we are required to disclose in reports that management files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our chief executive officer and chief financial officer have concluded that these controls and procedures are effective at the “reasonable assurance” level. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during this most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1A. RISK FACTORS

In addition to the other information contained in this Form 10-Q , and risk factors set forth in our most recent SEC filings, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition, or results of operations could be materially adversely affected by any of these risks. Additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations.

The risk factors included herein include any material changes to and supersede the risk factors associated with our business previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. We have marked with an asterisk (*) those risk factors that reflect substantive changes from the risk factors included in our Annual Report Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2007.

Risks Related to Our Business

We are an early-stage company.

You must evaluate us in light of the uncertainties and complexities present in an early-stage company. All of our potential products are in an early stage of research or development. Our potential drug delivery products require extensive research, development and pre-clinical and clinical testing. Our potential products also may involve lengthy regulatory reviews before they can be sold. Because none of our product candidates has yet received approval by the FDA, we cannot assure you that our research and development efforts will be successful, any of our potential products will be proven safe and effective or regulatory clearance or approval to sell any of our potential products will be obtained. We cannot assure you that any of our potential products can be manufactured in commercial quantities or at an acceptable cost or marketed successfully. We may abandon the development of some or all of our product candidates at any time and without prior notice. We must incur substantial up-front expenses to develop and commercialize products and failure to achieve commercial feasibility, demonstrate safety, achieve clinical efficacy, obtain regulatory approval or successfully manufacture and market products will negatively impact our business.

We changed our product development strategy, and if we do not successfully implement this strategy our business and reputation will be damaged.

Since our inception in 1991, we have focused on developing drug delivery technologies to be partnered with other companies. In May 2006, we began transitioning our business focus from development of delivery technologies to the application of our pulmonary drug delivery technologies and expertise to development of novel drug products to treat or prevent respiratory diseases. As part of this transition we have implemented workforce reductions in an effort to reduce our expenses and improve our cash flows. We are in the early stages of implementing various aspects of our strategy, and we may not be successful in implementing our strategy. Even if we are able to implement the various aspects of our strategy, it may not be successful.

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We will need additional capital, and we may not be able to obtain it.

Our operations to date have consumed substantial amounts of cash and have generated no product revenues. While our refocused development strategy will reduce capital expenditures, we expect negative operating cash flows to continue for at least the foreseeable future. Even though we do not plan to engage in drug discovery, we will nevertheless need to commit substantial funds to develop our product candidates and we may not be able to obtain sufficient funds on acceptable terms or at all. Our future capital requirements will depend on many factors, including:

	•		our progress in the application of our delivery and formulation technologies, which may require further refinement of these technologies;

	•		the number of product development programs we pursue and the pace of each program;

	•		our progress with formulation development;

	•		the scope, rate of progress, results and costs of preclinical testing and clinical trials;

	•		the time and costs associated with seeking regulatory approvals;

	•		our ability to outsource the manufacture of our product candidates and the costs of doing so;

	•		the time and costs associated with establishing in-house resources to market and sell certain of our products;

	•		our ability to establish and maintain collaborative arrangements with others and the terms of those arrangements;

	•		the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims, and

	•		our need to acquire licenses, or other rights for our product candidates.

Since inception, we have financed our operations primarily through private placements and public offerings of our capital stock, proceeds from equipment lease financings, contract research funding and interest earned on investments. We believe that our cash, cash equivalents and short term investments at June 30, 2008 will be sufficient to fund operations at least through the end of the first quarter of 2009. We will need to obtain substantial additional funds before we would be able to bring any of our product candidates to market. Our estimates of future capital use are uncertain, and changing circumstances, including those related to implementation of our new development strategy or further changes to our development strategy, could cause us to consume capital significantly faster than currently expected, and our expected sources of funding may not be sufficient. If adequate funds are not available, we will be required to delay, reduce the scope of, or eliminate one or more of our product development programs and reduce personnel-related costs, or to obtain funds through arrangements with collaborators or other sources that may require us to relinquish rights to or sell certain of our technologies or products that we would not otherwise relinquish or sell. If we are able to obtain funds through the issuance of debt securities or borrowing, the terms may restrict our operations. If we are able to obtain funds through the issuance of equity securities, your interest will be diluted and our stock price may drop as a result.

We have a history of losses, we expect to incur losses for at least the foreseeable future, and we may never attain or maintain profitability.

We have never been profitable and have incurred significant losses in each year since our inception. As of June 30, 2008, we have an accumulated deficit of $324.8 million. We have not had any product sales and do not anticipate receiving any revenues from product sales for at least the next few years, if ever. While our recent shift in development strategy may result in reduced capital expenditures, we expect to continue to incur substantial losses over at least the next several years as we:

	•		expand drug product development efforts;

	•		conduct preclinical testing and clinical trials;

	•		pursue additional applications for our existing delivery technologies;

	•		outsource the commercial-scale production of our products; and

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•

establish a sales and marketing force to commercialize certain of our proprietary products if these products obtain regulatory approval.

To achieve and sustain profitability, we must, alone or with others, successfully develop, obtain regulatory approval for, manufacture, market and sell our products. We expect to incur substantial expenses in our efforts to develop and commercialize products and we may never generate sufficient product or contract research revenues to become profitable or to sustain profitability.

* Our dependence on collaborators may delay or terminate certain of our programs, and any such delay or termination would harm our business prospects and stock price.

Our commercialization strategy for certain of our product candidates depends on our ability to enter into agreements with collaborators to obtain assistance and funding for the development and potential commercialization of our product candidates. Collaborations may involve greater uncertainty for us, as we have less control over certain aspects of our collaborative programs than we do over our proprietary development and commercialization programs. We may determine that continuing a collaboration under the terms provided is not in our best interest, and we may terminate the collaboration. Our existing collaborators could delay or terminate their agreements, and our products subject to collaborative arrangements may never be successfully commercialized. For example, Novo Nordisk had control over and responsibility for development and commercialization of the AERx iDMS program. In January 2008, Novo Nordisk announced that it was terminating the AERx iDMS program and gave us a 120 day notice terminating the July 3, 2006 License Agreement between the companies. In May 2008, this termination became effective, ending our collaboration with Novo Nordisk for the AERx iDMS program. Identifying new collaborators for the further development and potential commercialization of the AERx iDMS program may take a significant amount of time and resources and ultimately may not be successful. If, due to delays or otherwise, we do not receive development funds or achieve milestones set forth in the agreements governing our collaborations, if we cannot timely find replacement collaborators, or if any of our collaborators breach or terminate their collaborative agreements or do not devote sufficient resources or priority to our programs, our business prospects and our stock price would suffer.

Further, our existing or future collaborators may pursue alternative technologies or develop alternative products either on their own or in collaboration with others, including our competitors, and the priorities or focus of our collaborators may shift such that our programs receive less attention or resources than we would like. Any such actions by our collaborators may adversely affect our business prospects and ability to earn revenues. In addition, we could have disputes with our existing or future collaborators regarding, for example, the interpretation of terms in our agreements. Any such disagreements could lead to delays in the development or commercialization of any potential products or could result in time-consuming and expensive litigation or arbitration, which may not be resolved in our favor.

Even with respect to certain other programs that we intend to commercialize ourselves, we may enter into agreements with collaborators to share in the burden of conducting clinical trials, manufacturing and marketing our product candidates or products. In addition, our ability to apply our proprietary technologies to develop proprietary drugs will depend on our ability to establish and maintain licensing arrangements or other collaborative arrangements with the holders of proprietary rights to such drugs. We may not be able to establish such arrangements on favorable terms or at all, and our existing or future collaborative arrangements may not be successful.

The results of later stage clinical trials of our product candidates may not be as favorable as earlier trials and that could result in additional costs and delay or prevent commercialization of our products.

Although we believe the limited and preliminary data we have regarding our potential products are encouraging, the results of initial preclinical testing and clinical trials do not necessarily predict the results that we will get from subsequent or more extensive preclinical testing and clinical trials. Clinical trials of our product candidates may not demonstrate that they are safe and effective to the extent necessary to obtain regulatory approvals. Many companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after receiving promising results in earlier trials. If we cannot adequately demonstrate through the clinical trial process that a therapeutic product we are developing is safe and effective, regulatory approval of that product would be delayed or prevented, which would impair our reputation, increase our costs and prevent us from earning revenues.

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If our clinical trials are delayed because of patient enrollment or other problems, we would incur additional costs and postpone the potential receipt of revenues.

Before we or our collaborators can file for regulatory approval for the commercial sale of our potential products, the FDA will require extensive preclinical safety testing and clinical trials to demonstrate their safety and efficacy. Completing clinical trials in a timely manner depends on, among other factors, the timely enrollment of patients. Our collaborators’ and our ability to recruit patients depends on a number of factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study and the existence of competing clinical trials. Delays in planned patient enrollment in our current or future clinical trials may result in increased costs, program delays, or both, and the loss of potential revenues.

We are subject to extensive regulation, including the requirement of approval before any of our product candidates can be marketed. We may not obtain regulatory approval for our product candidates on a timely basis, or at all.

We, our collaborators and our products are subject to extensive and rigorous regulation by the federal government, principally the FDA, and by state and local government agencies. Both before and after regulatory approval, the development, testing, manufacture, quality control, labeling, storage, approval, advertising, promotion, sale, distribution and export of our potential products are subject to regulation. Pharmaceutical products that are marketed abroad are also subject to regulation by foreign governments. Our products cannot be marketed in the United States without FDA approval. The process for obtaining FDA approval for drug products is generally lengthy, expensive and uncertain. To date, we have not sought or received approval from the FDA or any corresponding foreign authority for any of our product candidates.

Even though we intend to apply for approval of most of our products in the United States under Section 505(b)(2) of the United States Food, Drug and Cosmetic Act, which applies to reformulations of approved drugs and which may require smaller and shorter safety and efficacy testing than that for entirely new drugs, the approval process will still be costly, time-consuming and uncertain. We, or our collaborators, may not be able to obtain necessary regulatory approvals on a timely basis, if at all, for any of our potential products. Even if granted, regulatory approvals may include significant limitations on the uses for which products may be marketed. Failure to comply with applicable regulatory requirements can, among other things, result in warning letters, imposition of civil penalties or other monetary payments, delay in approving or refusal to approve a product candidate, suspension or withdrawal of regulatory approval, product recall or seizure, operating restrictions, interruption of clinical trials or manufacturing, injunctions and criminal prosecution.

Regulatory authorities may not approve our product candidates even if the product candidates meet safety and efficacy endpoints in clinical trials or the approvals may be too limited for us to earn sufficient revenues.

The FDA and other foreign regulatory agencies can delay approval of, or refuse to, approve our product candidates for a variety of reasons, including failure to meet safety and efficacy endpoints in our clinical trials. Our product candidates may not be approved even if they achieve their endpoints in clinical trials. Regulatory agencies, including the FDA, may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials. Even if a product candidate is approved, it may be approved for fewer or more limited indications than requested or the approval may be subject to the performance of significant post-marketing studies. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. Any limitation, condition or denial of approval would have an adverse affect on our business, reputation and results of operations.

Even if we are granted initial FDA approval for any of our product candidates, we may not be able to maintain such approval, which would reduce our revenues.

Even if we are granted initial regulatory approval for a product candidate, the FDA and similar foreign regulatory agencies can limit or withdraw product approvals for a variety of reasons, including failure to comply with regulatory requirements, changes in regulatory requirements, problems with manufacturing facilities or processes or the occurrence of unforeseen problems, such as the discovery of previously undiscovered side effects. If we are able to obtain any product approvals, they may be limited or withdrawn or we may be unable to remain in compliance with regulatory requirements. Both before and after approval we, our collaborators and our products are subject to a number of additional requirements. For example, certain changes to the approved product, such as adding new indications, certain manufacturing changes and additional labeling claims are subject to additional FDA review and approval. Advertising and other promotional material must comply with FDA requirements and established requirements applicable to drug samples. We, our collaborators and our manufacturers will be subject to continuing review and periodic inspections by the FDA and other authorities, where applicable, and must comply with ongoing requirements, including the FDA’s Good Manufacturing Practices, or GMP, requirements. Once the FDA approves a product, a manufacturer must provide certain updated safety and efficacy information, submit copies of promotional materials to the FDA and make certain other required reports. Product approvals may be withdrawn if regulatory requirements are not complied with or if problems concerning safety or efficacy of the

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product occur following approval. Any limitation or withdrawal of approval of any of our products could delay or prevent sales of our products, which would adversely affect our revenues. Further continuing regulatory requirements involve expensive ongoing monitoring and testing requirements.

* Because two of our key proprietary programs, the ARD-3100 and ARD-3150 liposomal ciprofloxacin programs, rely on the FDA’s granting of orphan drug designation for potential market exclusivity, the product may not be able to obtain market exclusivity and could be barred from the market for up to seven years.

The FDA has granted orphan drug designation for our proprietary liposomal ciprofloxacin for the management of cystic fibrosis and bronchiectasis. Orphan drug designation is intended to encourage research and development of new therapies for diseases that affect fewer than 200,000 patients in the United States. The designation provides the opportunity to obtain market exclusivity for seven years from the date of the FDA’s approval of a new drug application, or NDA. However, the market exclusivity is granted only to the first chemical entity to be approved by the FDA for a given indication. Therefore, if another inhaled ciprofloxacin product were to be approved by the FDA for a cystic fibrosis or bronchiectasis indication before our product, then we may be blocked from launching our product in the United States for seven years, unless we are able to demonstrate to the FDA clinical superiority of our product on the basis of safety or efficacy. For example, Bayer HealthCare and Nektar Therapeutics are developing an inhaled powder formulation of ciprofloxacin for the treatment of respiratory infections in cystic fibrosis. We may seek to develop additional products that incorporate drugs that have received orphan drug designations for specific indications. In each case, if our product is not the first to be approved by the FDA for a given indication, we will be unable to access the target market in the United States, which would adversely affect our ability to earn revenues.

We have limited manufacturing capacity and will have to depend on contract manufacturers and collaborators; if they do not perform as expected, our revenues and customer relations will suffer.

We have limited capacity to manufacture our requirements for the development and commercialization of our product candidates. We intend to use contract manufacturers to produce key components, assemblies and subassemblies in the clinical and commercial manufacturing of our products. We may not be able to enter into or maintain satisfactory contract manufacturing arrangements. Specifically, our agreement with an affiliate of Novo Nordisk to supply devices and dosage forms to us for use in the development of our products that incorporate our proprietary AERx technology expired on January 27, 2008. We may not be able to find a replacement contract manufacturer at satisfactory terms.

We may decide to invest in additional clinical manufacturing facilities in order to internally produce critical components of our product candidates and to handle critical aspects of the production process, such as assembly of the disposable unit-dose packets and filling of the unit-dose packets. If we decide to produce components of any of our product candidates in-house, rather than use contract manufacturers, it will be costly and we may not be able to do so in a timely or cost-effective manner or in compliance with regulatory requirements.

With respect to some of our product development programs targeted at large markets, either our collaborators or we will have to invest significant amounts to attempt to provide for the high-volume manufacturing required to take advantage of these product markets, and much of this spending may occur before a product is approved by the FDA for commercialization. Any such effort will entail many significant risks. For example, the design requirements of our products may make it too costly or otherwise infeasible for us to develop them at a commercial scale, or manufacturing and quality control problems may arise as we attempt to expand production. Failure to address these issues could delay or prevent late-stage clinical testing and commercialization of any products that may receive FDA approval.

Further, we, our contract manufacturers and our collaborators are required to comply with the FDA’s GMP requirements that relate to product testing, quality assurance, manufacturing and maintaining records and documentation. We, our contract manufacturers or our collaborators may not be able to comply with the applicable GMP and other FDA regulatory requirements for manufacturing, which could result in an enforcement or other action, prevent commercialization of our product candidates and impair our reputation and results of operations.

We rely on a small number of vendors and contract manufacturers to supply us with specialized equipment, tools and components; if they do not perform as we need them to, we will not be able to develop or commercialize products.

We rely on a small number of vendors and contract manufacturers to supply us and our collaborators with specialized equipment, tools and components for use in development and manufacturing processes. These vendors may not continue to supply such

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specialized equipment, tools and components, and we may not be able to find alternative sources for such specialized equipment and tools. Any inability to acquire or any delay in our ability to acquire necessary equipment, tools and components would increase our expenses and could delay or prevent our development of products.

In order to market our proprietary products, we are likely to establish our own sales, marketing and distribution capabilities. We have no experience in these areas, and if we have problems establishing these capabilities, the commercialization of our products would be impaired.

We intend to establish our own sales, marketing and distribution capabilities to market products to concentrated, easily addressable prescriber markets. We have no experience in these areas, and developing these capabilities will require significant expenditures on personnel and infrastructure. While we intend to market products that are aimed at a small patient population, we may not be able to create an effective sales force around even a niche market. In addition, some of our product development programs will require a large sales force to call on, educate and support physicians and patients. While we intend to enter into collaborations with one or more pharmaceutical companies to sell market and distribute such products, we may not be able to enter into any such arrangement on acceptable terms, if at all. Any collaborations we do enter into may not be effective in generating meaningful product royalties or other revenues for us.

If any products that we or our collaborators may develop do not attain adequate market acceptance by healthcare professionals and patients, our business prospects and results of operations will suffer.

Even if we or our collaborators successfully develop one or more products, such products may not be commercially acceptable to healthcare professionals and patients, who will have to choose our products over alternative products for the same disease indications, and many of these alternative products will be more established than ours. For our products to be commercially viable, we will need to demonstrate to healthcare professionals and patients that our products afford benefits to the patient that are cost-effective as compared to the benefits of alternative therapies. Our ability to demonstrate this depends on a variety of factors, including:


	•		the demonstration of efficacy and safety in clinical trials;

	•		the existence, prevalence and severity of any side effects;

	•		the potential or perceived advantages or disadvantages compared to alternative treatments;

	•		the timing of market entry relative to competitive treatments;

	•		the relative cost, convenience, product dependability and ease of administration;

	•		the strength of marketing and distribution support;

	•		the sufficiency of coverage and reimbursement of our product candidates by governmental and other third-party payors; and

	•		the product labeling or product insert required by the FDA or regulatory authorities in other countries.

Our product revenues will be adversely affected if, due to these or other factors, the products we or our collaborators are able to commercialize do not gain significant market acceptance.

We depend upon our proprietary technologies, and we may not be able to protect our potential competitive proprietary advantage.

Our business and competitive position is dependent upon our and our collaborators’ ability to protect our proprietary technologies related to various aspects of pulmonary drug delivery and drug formulation. While our intellectual property rights may not provide a significant commercial advantage for us, our patents and know-how are intended to provide protection for important aspects of our technology, including methods for aerosol generation, devices used to generate aerosols, breath control, compliance monitoring, certain pharmaceutical formulations, design of dosage forms and their manufacturing and testing methods. In addition, we are maintaining as non-patented trade secrets some of the key elements of our manufacturing technologies, for example, those associated with production of disposable unit-dose packets for our AERx delivery system.

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Our ability to compete effectively will also depend to a significant extent on our and our collaborators’ ability to obtain and enforce patents and maintain trade secret protection over our proprietary technologies. The coverage claimed in a patent application typically is significantly reduced before a patent is issued, either in the United States or abroad. Consequently, any of our pending or future patent applications may not result in the issuance of patents and any patents issued may be subjected to further proceedings limiting their scope and may in any event not contain claims broad enough to provide meaningful protection. Any patents that are issued to us or our collaborators may not provide significant proprietary protection or competitive advantage, and may be circumvented or invalidated. In addition, unpatented proprietary rights, including trade secrets and know-how, can be difficult to protect and may lose their value if they are independently developed by a third party or if their secrecy is lost. Further, because development and commercialization of pharmaceutical products can be subject to substantial delays, patents may expire early and provide only a short period of protection, if any, following commercialization of products .

In July 2006, we assigned 23 issued United States patents to Novo Nordisk along with corresponding non-United States counterparts and certain related pending applications. In August 2006, Novo Nordisk brought suit against Pfizer, Inc. claiming infringement of certain claims in one of the assigned United States patents. In December 2006, Novo Nordisk’s motion for a preliminary injunction in this case was denied. Subsequently, Novo Nordisk and Pfizer settled this litigation out of court. This and other patents assigned to Novo Nordisk may become the subject of future litigation. The patents assigned to Novo Nordisk encompass, in some instances, technology beyond inhaled insulin and, if all or any of these patents are invalidated, it could harm our ability to obtain market exclusivity with respect to other product candidates. If Novo Nordisk informs us that they do not wish to maintain the assigned patents, then these patents, and possibly related patent applications, will be assigned back to us. If the patents are assigned back to us, we would no longer be able to rely upon Novo Nordisk to defend or enforce our rights related to the patents. If we are required to defend an action based on these patents or seek to enforce our rights under these patents, we could incur substantial costs and the action could divert management’s attention, regardless of the lawsuit’s merit or outcome.

We may infringe on the intellectual property rights of others, and any litigation could force us to stop developing or selling potential products and could be costly, divert management attention and harm our business.

We must be able to develop products without infringing the proprietary rights of other parties. Because the markets in which we operate involve established competitors with significant patent portfolios, including patents relating to compositions of matter, methods of use and methods of drug delivery, it could be difficult for us to use our technologies or develop products without infringing the proprietary rights of others. We may not be able to design around the patented technologies or inventions of others and we may not be able to obtain licenses to use patented technologies on acceptable terms, or at all. If we cannot operate without infringing on the proprietary rights of others, we will not earn product revenues.

If we are required to defend ourselves in a lawsuit, we could incur substantial costs and the lawsuit could divert management’s attention, regardless of the lawsuit’s merit or outcome. These legal actions could seek damages and seek to enjoin testing, manufacturing and marketing of the accused product or process. In addition to potential liability for significant damages, we could be required to obtain a license to continue to manufacture or market the accused product or process and any license required under any such patent may not be made available to us on acceptable terms, if at all. If any of our collaboration partners terminate an agreement with us, we may face increased risk and/or costs associated with defense of intellectual property that was associated with the collaboration.

Periodically, we review publicly available information regarding the development efforts of others in order to determine whether these efforts may violate our proprietary rights. We may determine that litigation is necessary to enforce our proprietary rights against others. Such litigation could result in substantial expense, regardless of its outcome, and may not be resolved in our favor.

Furthermore, patents already issued to us or our pending patent applications may become subject to dispute, and any disputes could be resolved against us. For example, Eli Lilly and Company brought an action against us seeking to have one or more employees of Eli Lilly named as co-inventors on one of our patents. This case was determined in our favor in 2004, but we may face other similar claims in the future and we may lose or settle cases at significant loss to us. In addition, because patent applications in the United States are currently maintained in secrecy for a period of time prior to issuance, patent applications in certain other countries generally are not published until more than 18 months after they are first filed, and publication of discoveries in scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first creator of inventions covered by our pending patent applications or that we were the first to file patent applications on such inventions.

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We are in a highly competitive market, and our competitors have developed or may develop alternative therapies for our target indications, which would limit the revenue potential of any product we may develop.

We are in competition with pharmaceutical, biotechnology and drug delivery companies, hospitals, research organizations, individual scientists and nonprofit organizations engaged in the development of drugs and therapies for the disease indications we are targeting. Our competitors may succeed before we can, and many already have succeeded, in developing competing technologies for the same disease indications, obtaining FDA approval for products or gaining acceptance for the same markets that we are targeting. If we are not “first to market,” it may be more difficult for us and our collaborators to enter markets as second or subsequent competitors and become commercially successful. We are aware of a number of companies that are developing or have developed therapies to address indications we are targeting, including major pharmaceutical companies such as Bayer, Eli Lilly, Genentech, Gilead Sciences, Merck & Co., Novartis and Pfizer. Certain of these companies are addressing these target markets with pulmonary products that are similar to ours. These companies and many other potential competitors have greater research and development, manufacturing, marketing, sales, distribution, financial and managerial resources and experience than we have and many of these companies may have products and product candidates that are on the market or in a more advanced stage of development than our product candidates. Our ability to earn product revenues and our market share would be substantially harmed if any existing or potential competitors brought a product to market before we or our collaborators were able to, or if a competitor introduced at any time a product superior to or more cost-effective than ours.

If we do not continue to attract and retain key employees, our product development efforts will be delayed and impaired.

We depend on a small number of key management and technical personnel. Our success also depends on our ability to attract and retain additional highly qualified marketing, management, manufacturing, engineering and development personnel. There is a shortage of skilled personnel in our industry, we face intense competition in our recruiting activities, and we may not be able to attract or retain qualified personnel. Losing any of our key employees, particularly our President and Chief Executive Officer, Dr. Igor Gonda, who plays a central role in our strategy shift to a specialty pharmaceutical company, could impair our product development efforts and otherwise harm our business. Any of our employees may terminate their employment with us at will.

Acquisition of complementary businesses or technologies could result in operating difficulties and harm our results of operations.

While we have not identified any definitive targets, we may acquire products, businesses or technologies that we believe are complementary to our business strategy. The process of investigating, acquiring and integrating any business or technology into our business and operations is risky and we may not be able to accurately predict or derive the benefits of any such acquisition. The process of acquiring and integrating any business or technology may create operating difficulties and unexpected expenditures, such as:

	•		diversion of our management from the development and commercialization of our pipeline product candidates;

	•		difficulty in assimilating and efficiently using the acquired assets or personnel; and

	•		inability to retain key personnel.

In addition to the factors set forth above, we may encounter other unforeseen problems with acquisitions that we may not be able to overcome. Any future acquisitions may require us to issue shares of our stock or other securities that dilute the ownership interests of our other shareholders, expend cash, incur debt, assume liabilities, including contingent or unknown liabilities, or incur additional expenses related to write-offs or amortization of intangible assets, any of which could materially adversely affect our operating results.

If we market our products in other countries, we will be subject to different laws and we may not be able to adapt to those laws, which could increase our costs while reducing our revenues.

If we market any approved products in foreign countries, we will be subject to different laws, particularly with respect to intellectual property rights and regulatory approval. To maintain a proprietary market position in foreign countries, we may seek to protect some of our proprietary inventions through foreign counterpart patent applications. Statutory differences in patentable subject matter may limit the protection we can obtain on some of our inventions outside of the United States. The diversity of patent laws may make our expenses associated with the development and maintenance of intellectual property in foreign jurisdictions more expensive than we anticipate. We probably will not obtain the same patent protection in every market in which we may otherwise be able to potentially generate revenues. In addition, in order to market our products in foreign jurisdictions, we and our

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collaborators must obtain required regulatory approvals from foreign regulatory agencies and comply with extensive regulations regarding safety and quality. We may not be able to obtain regulatory approvals in such jurisdictions and we may have to incur significant costs in obtaining or maintaining any foreign regulatory approvals. If approvals to market our products are delayed, if we fail to receive these approvals, or if we lose previously received approvals, our business would be impaired as we could not earn revenues from sales in those countries.

We may be exposed to product liability claims, which would hurt our reputation, market position and operating results.

We face an inherent risk of product liability as a result of the clinical testing of our product candidates in humans and will face an even greater risk upon commercialization of any products. These claims may be made directly by consumers or by pharmaceutical companies or others selling such products. We may be held liable if any product we develop causes injury or is found otherwise unsuitable during product testing, manufacturing or sale. Regardless of merit or eventual outcome, liability claims would likely result in negative publicity, decreased demand for any products that we may develop, injury to our reputation and suspension or withdrawal of clinical trials. Any such claim will be very costly to defend and also may result in substantial monetary awards to clinical trial participants or customers, loss of revenues and the inability to commercialize products that we develop. Although we currently have product liability insurance, we may not be able to maintain such insurance or obtain additional insurance on acceptable terms, in amounts sufficient to protect our business, or at all. A successful claim brought against us in excess of our insurance coverage would have a material adverse effect on our results of operations.

If we cannot arrange for adequate third-party reimbursement for our products, our revenues will suffer.

In both domestic and foreign markets, sales of our potential products will depend in substantial part on the availability of adequate reimbursement from third-party payors such as government health administration authorities, private health insurers and other organizations. Third-party payors often challenge the price and cost-effectiveness of medical products and services. Significant uncertainty exists as to the adequate reimbursement status of newly approved health care products. Any products we are able to successfully develop may not be reimbursable by third-party payors. In addition, our products may not be considered cost-effective and adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize a profit. Legislation and regulations affecting the pricing of pharmaceuticals may change before our products are approved for marketing and any such changes could further limit reimbursement. If any products we develop do not receive adequate reimbursement, our revenues will be severely limited.

Our use of hazardous materials could subject us to liabilities, fines and sanctions.

Our laboratory and clinical testing sometimes involve use of hazardous and toxic materials. We are subject to federal, state and local laws and regulations governing how we use, manufacture, handle, store and dispose of these materials. Although we believe that our safety procedures for handling and disposing of such materials comply in all material respects with all federal, state and local regulations and standards, there is always the risk of accidental contamination or injury from these materials. In the event of an accident, we could be held liable for any damages that result and such liability could exceed our financial resources. Compliance with environmental and other laws may be expensive and current or future regulations may impair our development or commercialization efforts.

If we are unable to effectively implement or maintain a system of internal control over financial reporting, we may not be able to accurately or timely report our financial results and our stock price could be adversely affected.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal control over financial reporting in our annual report on Form 10-K for that fiscal year. Section 404 also currently requires our independent registered public accounting firm, beginning with our fiscal year ending December 31, 2009, to attest to, and report on our internal control over financial reporting. Our ability to comply with the annual internal control report requirements will depend on the effectiveness of our financial reporting and data systems and controls across our company. We expect these systems and controls to involve significant expenditures and to become increasingly complex as our business grows and to the extent that we make and integrate acquisitions. To effectively manage this complexity, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. Any failure to implement required new or improved controls, or difficulties encountered in the implementation or operation of these controls, could harm our operating results and cause us to fail to meet our financial reporting obligations, which could adversely affect our business and reduce our stock price .

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Risks Related to Our Common Stock

Our stock price is likely to remain volatile.

The market prices for securities of many companies in the drug delivery and pharmaceutical industries, including ours, have historically been highly volatile, and the market from time to time has experienced significant price and volume fluctuations unrelated to the operating performance of particular companies. Prices for our common stock may be influenced by many factors, including:

	•		investor perception of us;

	•		research analyst recommendations and our ability to meet or exceed quarterly performance expectations of analysts or investors;

	•		failure to maintain existing or establish new collaborative relationships;

	•		fluctuations in our operating results;

	•		market conditions relating to our segment of the industry or the securities markets in general;

	•		announcements of technological innovations or new commercial products by us or our competitors;

	•		publicity regarding actual or potential developments relating to products under development by us or our competitors;

	•		developments or disputes concerning patents or proprietary rights;

	•		delays in the development or approval of our product candidates;

	•		regulatory developments in both the United States and foreign countries;

	•		concern of the public or the medical community as to the safety or efficacy of our products, or products deemed to have similar safety risk factors or other similar characteristics to our products;

	•		period-to-period fluctuations in financial results;

	•		future sales or expected sales of substantial amounts of common stock by shareholders;

	•		our ability to raise financing; and

	•		economic and other external factors.

In the past, class action securities litigation has often been instituted against companies promptly following volatility in the market price of their securities. Any such litigation instigated against us would, regardless of its merit, result in substantial costs and a diversion of management’s attention and resources.

Our common stock was delisted from the Nasdaq Capital Market; this delisting may reduce the liquidity of our common stock and the price may decline.

On November 10, 2006, our common stock was delisted from the Nasdaq Capital Market due to non-compliance with Nasdaq’s continued listing standards. Our common stock is currently quoted on the OTC Bulletin Board. This delisting may reduce the liquidity of our common stock, may cause investors not to trade in our stock and may result in a lower stock price. In addition, investors may find it more difficult to obtain accurate quotations of the share price of our common stock.

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We have implemented certain anti-takeover provisions, which make it less likely that we would be acquired and that you would receive a premium price for your shares.

Certain provisions of our articles of incorporation and the California Corporations Code could discourage a party from acquiring, or make it more difficult for a party to acquire, control of our company without approval of our board of directors. These provisions could also limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain provisions allow our board of directors to authorize the issuance, without shareholder approval, of preferred stock with rights superior to those of the common stock. We are also subject to the provisions of Section 1203 of the California Corporations Code, which requires us to provide a fairness opinion to our shareholders in connection with their consideration of any proposed “interested party” reorganization transaction.

We have adopted a shareholder rights plan, commonly known as a “poison pill.” We have also adopted an Executive Officer Severance Plan and a Form of Change of Control Agreement, both of which may provide for the payment of benefits to our officers in connection with an acquisition. The provisions of our articles of incorporation, our poison pill, our severance plan and our change of control agreements, and provisions of the California Corporations Code may discourage, delay or prevent another party from acquiring us or reduce the price that a buyer is willing to pay for our common stock.

We have never paid dividends on our capital stock, and we do not anticipate paying cash dividends for at least the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We do not anticipate paying any cash dividends on our common stock for at least the foreseeable future. We currently intend to retain all available funds and future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be your sole source of potential gain for at least the foreseeable future.

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

At the Company’s Annual Meeting of Shareholders held on May 15, 2008, five matters were voted upon. A description of each matter and tabulation of the votes for each of the matters is as follows:

Five directors were elected to hold offices until the next annual meeting of shareholders and until their successors are elected:


Nominee	For		Withheld
Frank H. Barker		45,695,272		202,319
Igor Gonda		45,720,076		177,515
Timothy Lynch		45,687,166		210,425
John M. Siebert		45,707,556		190,035
Virgil D. Thompson		45,707,090		190,501

The shareholders approved an amendment to Aradigm’s 2005 Equity Incentive Plan to increase the aggregate number of shares of common stock authorized for issuance under such plan by 2,700,000 shares:


For	Against	Abstain
26,308,399	2,000,025	741,055

The shareholders approved an amendment to Aradigm’s Employee Stock Purchase Plan to increase the aggregate number of shares of common stock authorized for issuance under such plan by 1,000,000 shares:


For	Against	Abstain
26,538,276	1,930,262	580,941

The shareholders approved an amendment to Aradigm’s Amended and Restated Articles of Incorporation to increase the authorized number of shares of common stock from 100,000,000 to 150,000,000 shares:


For	Against	Abstain
37,505,000	6,729,712	1,662,879

The shareholders ratified the selection of Odenberg, Ullakko, Muranishi & Co. LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2008:

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For	Against	Abstain
45,704,721	103,882	88,988

Item 6. EXHIBITS


Exhibit
Number		Description
3.1		Amended and Restated Articles of Incorporation of the Company.
10.29 #		Development and License Agreement, dated June 2, 1998, by and between the Company and Novo Nordisk A/S.
10.30 *		First Amendment to Development and License Agreement, dated October 22, 2001, by and between the Company and Novo Nordisk A/S.
10.31 + (1)		2005 Equity Incentive Plan, as amended
10.32 + (1)		Employee Stock Purchase Plan, as amended
31.1		Certification by the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification by the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification by the Company’s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


#		The Commission has granted the Company’s request for an extension to the confidential treatment with respect to portions of this exhibit.

*		The Company has requested an extension to the confidential treatment with respect to portions of this exhibit

+		Represents a management contract or compensatory plan or arrangement.

(1)		Incorporated by reference to the Company’s definitive proxy statement filed on April 7, 2008.

Aradigm, AERx, AERx Essence, and AERx Strip are registered trademarks of Aradigm Corporation.

Other names and brands may be claimed as the property of others.

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SIGNATURES

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


		ARADIGM CORPORATION
		(Registrant)

		/s/ Igor Gonda Dr. Igor Gonda
		President and Chief Executive Officer

		/s/ Norman Halleen Norman Halleen
Dated: August 8, 2008		Interim Chief Financial Officer

p 37 of 38

INDEX TO EXHIBITS


Exhibit
Number		Description
3.1		Amended and Restated Articles of Incorporation of the Company.
10.29 #		Development and License Agreement, dated June 2, 1998, by and between the Company and Novo Nordisk A/S.
10.30 *		First Amendment to Development and License Agreement, dated October 22, 2001, by and between the Company and Novo Nordisk A/S.
10.31 +(1)		2005 Equity Incentive Plan, as amended
10.32 +(1)		Employee Stock Purchase Plan, as amended
31.1		Certification by the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification by the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification by the Company’s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


#		The Commission has granted the Company’s request for an extension to the confidential treatment with respect to portions of this exhibit.

*		The Company has requested an extension to the confidential treatment with respect to portions of this exhibit.

+		Represents a management contract or compensatory plan or arrangement.

(1)		Incorporated by reference to the Company’s definitive proxy statement filed on April 7, 2008.

p 38 of 38

Exhibit 3.1

A0679454

State of California
Secretary of State

I, DEBRA BOWEN, Secretary of State of the State of California, hereby certify:

That the attached transcript of 2 page(s) has been compared with the record on file in this office, of which it purports to be a copy, and that it is full, true and correct.


		IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the State of California this day of


		JUL – 9 2008



		DEBRA BOWEN
		Secretary of State

(Sec/State Form CE-107 (REV 1/2007)


		A0679454

		ENDORSED — FILED
		In the office of the Secretary of State
		of the State of California
		JUN 26 2008

CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED ARTICLES OF INCORPORATION OF
ARADIGM CORPORATION

The undersigned certify that:

1. They are the Chief Executive Officer and Chief Financial Officer, respectively, of Aradigm Corporation, a California corporation (the “Company”).

2. Article III of the Amended and Restated Articles of Incorporation (the “Articles of Incorporation”) of this corporation is amended to read in full as follows:

“This corporation is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock.” The total number of shares that the corporation is authorized to issue is One Hundred Fifty-Five Million (155,000,000) shares. One Hundred Fifty Million (150,000,000) shares shall be Common Stock. Five Million (5,000,000) shares shall be Preferred Stock.

The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized to determine and alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, and to Fix the number of shares of any such series of Preferred Stock and the designation of any such series of Preferred Stock. The Board of Directors within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issuance of shares of that series.”

3. The foregoing amendment of the Articles of Incorporation has been duly approved by the Board of Directors.

4. The foregoing amendment of the Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the California Corporations Code. The total number of shares of Common Stock of the Company outstanding and entitled to vote for the amendment was 54,776,455 shares. There were no outstanding shares of Preferred Stock The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding shares of Common Stock and more than 50% of the outstanding shares of Common Stock and Series’A Preferred Stock voting together.

We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge.

Date: June 25, 2008


		/s/ Igor Gonda

		Igor Gonda
		Chief Executive Officer

		/s/ Norman Halleen

		Norman Halleen
		Interim Chief Financial Officer

EXHIBIT 10.29

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

DEVELOPMENT AND LICENSE AGREEMENT

This Agreement is made this 2nd day of June, 1998 (“the Effective Date”) by and between


		ARADIGM CORPORATION
		26219 Eden Landing Road
		Hayward, California 94545

		(hereinafter referred to as ARADIGM)

and		NOVO NORDISK A/S
		Novo Alle
		DK-2880 Bagsvaerd
		Denmark

		(hereinafter referred to as NOVO NORDISK)


WHEREAS		ARADIGM is the owner of, and is beneficially entitled to, a number of patents and patent applications and Know-How related to the production and delivery of drugs, including proteins/peptides, via the pulmonary route using a breath controlled delivery device;

WHEREAS		NOVO NORDISK is the owner of, and is beneficially entitled to, a number of patents and patent applications and Know-How relating to the development and production of recombinant human insulin, as well as insulin analogues and other compounds useful in the control of blood glucose levels in humans;

WHEREAS		NOVO NORDISK and ARADIGM wish to enter into a Development and License Agreement to develop a system for pulmonary delivery of insulin (and potentially other compounds) and ARADIGM is willing to use its Patent Rights and Know-How in such a development programme;

WHEREAS		NOVO NORDISK and ARADIGM, in addition to the above mentioned development work, wish to enter into a licensing arrangement under which ARADIGM will grant to NOVO NORDISK an exclusive, world-wide license under ARADIGM’s Patent Rights and ARADIGM’s Know-How, to use, market, distribute, sell and sublicense products resulting from such development programme in the Field;

NOW, THEREFORE, it is hereby agreed as follows:

ARTICLE 1 - DEFINITIONS

In the present Agreement the following definitions shall prevail:

1.1 “Affiliates” of a party hereto shall mean an entity which controls, is controlled by or is under common control with such party (by majority ownership or otherwise). For the purposes hereof “control” shall mean the power to direct or cause the direction of the management and the policies of an entity, whether through the ownership of a majority of the outstanding voting securities or by contract or otherwise.

1.2 “ARADIGM” shall mean ARADIGM CORPORATION of 26219 Eden Landing Road, Hayward, California 94545, and any of its Affiliates.

1.3 “ARADIGM Know-How” shall mean all knowledge, information and expertise possessed by ARADIGM prior to or at any time during the term of this Agreement related to the development and production of the Device, Packaged Products, Formulated Compounds and Programme Compounds, whether or not covered by ARADIGM Patent Rights or any other industrial or intellectual property right of ARADIGM, including but not limited to technical data, experimental results, specifications, techniques, methods, processes and written materials.

1.4 “ARADIGM Patent Rights” shall mean any and all of ARADIGM’s patents and patent applications related to the Device, Packaged Products, Formulated Compounds and Programme Compounds, including those that relate to the development, production and use of same, possessed by ARADIGM at any time during the term of this Agreement. A current and complete list of such rights, entitled “ARADIGM Patents” and certified by an officer of ARADIGM, has been delivered to NOVO NORDISK. ARADIGM Patent Rights shall also include all continuations, continuations-in-part, divisionals or re-issues of such patents and patent applications and any patents issuing thereon or extensions thereof or any foreign counterparts thereof. Extensions of patents shall include: a) extensions under the U.S. Patent Term Restoration Act, b) extensions of patents under the Japanese Patent Law, c) Supplementary Protection Certificates for members of the European Patent Convention and other countries in the European Economic Area and d) similar extensions under any applicable law in the Territory.

1.5 “Development Costs” shall mean the fully burdened costs of conducting development activities (including the supply by ARADIGM of clinical trial quantities of Devices and Packaged Products) pursuant to the Development Programme, including the costs of labor (including all allocable benefits), materials, outside consultants and research and development and corporate and overhead amounts reasonably allocable to such development activities [ * ].


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

1.6 “Development Programme” shall mean the pharmaceutical development of the Packaged Products (including Formulated Compounds and the disposable unit dose packaging) and the Device, including the pre-clinical and clinical development programmes required for registration and approval of the Device and the Packaged Products in the Territory as provided for in this Agreement. The Development Programme shall initially consist of a development plan addressing the development of the Device and a Packaged Product containing the Initial Compound, but may be enlarged to include the development of Packaged Products containing one or more Other Compounds in accordance with Article 2.1.

1.7 “Device” shall mean any pulmonary delivery device, together with any accessories, used to administer any Formulated Compounds contained in a disposable unit dose package, developed in the course of the Development Programme based on the device technology described in the ARADIGM Patent Rights or utilizing ARADIGM Know-How.

1.8 “Diligent Efforts” shall mean no less than the efforts that the applicable party applies to development, manufacture or commercialization of its own compounds or products with similar regulatory requirements and market potential.

1.9 “Field” shall mean pulmonary administration of insulin, insulin analogs and any other compounds whose principal therapeutic effect is to control blood glucose levels in humans, including but not limited to glucagon-like peptide (“GLP”), GLP-1 and analogs of GLP.

1.10 “First Marketing” shall mean making available for sale the Device and a Packaged Product in commercial quantities in any country in the Territory.

1.11 “Formulated Compound” shall mean any formulation of any Programme Compound developed in the course of the Development Programme for use in a Packaged Product.

1.12 “Fully Burdened Costs” shall mean the cost of raw materials (excluding unless otherwise stated the Programme Compound), components, labour (production), quality control (labour, material and external analysis), third party royalties, freight, import duties, taxes and reasonably allocated facilities, depreciation of equipment and manufacturing overheads relating to the production of the specified item.

1.13 “Gross Profit” shall mean NOVO NORDISK’s Net Sales of Packaged Products and Devices in the Territory minus the Fully Burdened Costs of all Packaged Products and Devices (including finished goods, components and raw materials such as Initial Compound that become obsolete or outdated, whether due to inaccurate forecasting or any other reason) supplied to NOVO NORDISK or produced by NOVO NORDISK as contemplated by Article 4.7 [ * ] and Article 4.9(a) (secondary packaging), including for this purpose the Fully Burdened Costs of the applicable Programme Compound, other than product that is so produced or provided as samples (Article 4.9(f)).


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

1.14 “Initial Compound” shall mean recombinant human insulin.

1.15 “Minimum Product Profile” shall mean any and all of the essential minimum product specifications and other criteria for the Device and the Packaged Products, set forth in a separate document entitled “Minimum Product Profile” signed by the parties, which the parties have agreed must be met in the course of the Development Programme to provide justification for commercial launch and which may provide the basis for termination of this Agreement as set forth in Article 9.2.

1.16 “Net Sales” shall mean the invoiced gross revenue from sales of product made by NOVO NORDISK and/or its sublicensees when invoiced to any third party in an arm’s length transaction less: a) Trade, cash and/or quantity discounts or rebates, if any; b) Credits or allowances given for rejection or return of such products previously sold; c) Any tax or governmental charge other than income tax levied on the sale thereof or customs duties associated therewith; d) Freight, insurance and other similar expenses billed separately to the customer. Upon a request by NOVO NORDISK supported by suitable documentation reflecting actual operating experience, the parties will agree on a fixed percentage of Net Sales to represent item (d).

1.17 “NOVO NORDISK Know-How” shall mean knowledge, information and expertise possessed by NOVO NORDISK prior to or at any time during the term of this Agreement that relates to any Programme Compound or any Formulated Compound or that NOVO NORDISK otherwise contributes to the Development Programme, whether or not covered by NOVO NORDISK Patent Rights or other industrial or intellectual property right of NOVO NORDISK, including but not limited to technical data, experimental results, specifications, techniques, methods, processes and written materials.

1.18 “NOVO NORDISK” shall mean NOVO NORDISK A/S, Novo Allé, DK-2880 Bagsvaerd, Denmark, and any of its Affiliates.

1.19 “NOVO NORDISK Patent Rights” shall mean any and all of NOVO NORDISK’s patents and patent applications related to any Programme Compound or any Formulated Compound, including those that relate to the production, development and use of same, possessed by NOVO NORDISK at any time during the term of this Agreement. NOVO NORDISK Patent Rights shall also include all continuations, continuations-in-part, divisionals or re-issues of such patents and patent applications and any patents issuing thereon or extensions thereof or any foreign counterparts thereof. Extensions of patents shall include: a) extensions under the U.S. Patent Term Restoration Act, b) extensions under the Japanese Patent Law, c) Supplementary Protection Certificates for members of the European Patent Convention and other countries in the European Economic Area and d) similar extensions under any applicable law in the Territory.

1.20 “Other Compounds” shall mean compounds in the Field other than the Initial Compound.


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

1.21 “Packaged Products” shall mean the disposable unit dose packages developed in the course of the Development Programme containing Formulated Compounds, packaged for use with the Device for pulmonary delivery of such Formulated Compounds.

1.22 “Programme Compounds” shall mean the Initial Compound and any Other Compounds that are added to the Development Programme in accordance with Article 2.1.

1.23 “Regulatory Approval” shall mean the granting of a commercial marketing authorization for the Packaged Product for delivery of a Formulated Compound using the Device and for the Device.

1.24 “Regulatory Submission” shall mean the filing of an application for a commercial marketing authorization for a Packaged Product for delivery of a Formulated Compound using the Device and for the Device.

1.25 “Territory” shall include any and all countries of the world.

ARTICLE 2 - DEVELOPMENT ACTIVITIES AND RESPONSIBILITIES

2.1 NOVO NORDISK and ARADIGM shall jointly conduct the Development Programme, which shall initially consist of Diligent Efforts by the parties to carry out a development plan addressing development of the Device and a Packaged Product containing the Initial Compound for administration using the Device. The preliminary details of such development plan have been agreed upon by the parties and are set forth in a separate document entitled “Milestone Plan.” The details of this development plan shall be discussed and agreed on in good faith between the parties and embodied in a document signed by both parties, which shall thereafter be subject to further modification from time to time as approved by the Steering Committee. The product description for the Packaged Product and the Device, including the Minimum Product Profile as well as desired target profiles, shall be agreed by NOVO NORDISK and ARADIGM and shall be included in the document defining the Development Programme. It is understood between the parties that the specifications for the Packaged Product and the Device may require some changes during the course of the programme and that such changes will be made when and as approved by the Steering Committee. NOVO NORDISK shall specify within [ * ] after the initiation of a Phase III trial of the initial Packaged Product one or more Other Compounds for study by the Steering Committee as candidates for the second Packaged Product to be added to the Development Programme and may from time to time thereafter propose additional Other Compounds for the Development Programme. Upon agreement by the parties on a development plan to incorporate the preliminary details for the development of such Other Compounds and determination by the Steering Committee that such development is feasible and should be undertaken, such Other Compounds will be added to the Development Programme. Each time an Other Compound is added to the Development Programme in this manner, the parties will agree in good faith on the financial terms not otherwise specified herein for such development and commercialization, which will provide for a reasonable sharing of the


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

potential value of the Packaged Product containing such compound, as well as on such other modifications of the other terms hereof as may be reasonable under the circumstances.

2.2 A Steering Committee will be established, consisting of an equal number of people (at least three) from each party, whose responsibility will be to ensure the Development Programme is carried out to the satisfaction of both parties. The Steering Committee, [ * ] shall have responsibility for approval of and release of funds, approving budgets, approving any changes to the Development Programme, for approving reimbursement of costs for pharmaceutical development as described in Article 2.5, as well as plans for production capacity and budgets for capital expenditures associated therewith, and for the review and approval of product specifications as contemplated by Article 4.9(d). The Steering Committee will meet each quarter, during the first year of this Agreement, and then as mutually agreed between the parties. In the event the Steering Committee is unable to resolve any matter to the satisfaction of the Steering Committee, the matter will be referred to the senior managements of the two parties for resolution. While in general the parties intend to act by mutual agreement, with respect to issues concerning the design and implementation of clinical trials and approval of specifications as provided in Article 4.9(d), the senior management of NOVO NORDISK shall have the right to make the final decision.

2.3 ARADIGM agrees that it will use Diligent Efforts to develop, manufacture and supply, to the deadlines included in the Development Programme agreed between the parties, the Packaged Product and the Device consistent with Good Manufacturing Practice and any other relevant practices as required to obtain Regulatory Approval for the Device and the Packaged Product in all major markets in the Territory. ARADIGM shall use Diligent Efforts to obtain all the required Regulatory Approvals in the Territory required for NOVO NORDISK commercialization of the Device with the Packaged Products. However, in such cases where the Device Regulatory Submission is an integrated part of the Regulatory Submission, then ARADIGM shall only timely submit to NOVO NORDISK all the sections of the Regulatory Submission which are required for obtaining Regulatory Approval of the Device with the Packaged Products. For countries other than the United States, NOVO NORDISK shall provide reasonable non-monetary assistance in structuring such Device Regulatory Submission, provided NOVO NORDISK has the necessary experience to provide such assistance. The personnel of NOVO NORDISK having relevant expertise in technical areas affecting ARADIGM’s activities directed to product development, production process development and manufacturing scale-up and cost reduction, including those pertaining to the Device as well as the Packaged Product, shall participate or advise in the Development Programme in such manner as is approved by the Steering Committee.

2.4 The Development Costs necessary for activities after the Effective Date required to develop the Packaged Product and the Device as specified in the Development Programme referred to in Article 2.1 shall be allocated and paid as described below:


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


Pre-clinical, clinical and regulatory Development		[ * ]

Programme Compound and Formulated Compound		[ * ]

Packaged Product development work specific to Development Programme		[ * ]

Packaged Product supply for clinical development		[ * ]

Device development and Device regulatory work specific to Development Programme		[ * ]

Device supply for clinical development (subject to Article 4.6)		[ * ]

Production validation and process qualification specific to Development Programme		[ * ]

All other production process development		[ * ]

All other Device and Packaged Product Development		[ * ]

In addition to the foregoing, and in consideration of ARADIGM’s past and future development activities, NOVO NORDISK agrees to make the following milestone payments to ARADIGM at first occurrence of each of the following events:

	(a)		Twenty (20) days after the Effective Date: USD two million (USD 2,000,000).

	(b)		Upon initiation of the Phase IIb clinical study (first patient, first dose) (see development plan): [ * ]

	(c)		Upon initiation of the Phase III clinical study (first patient, first dose) (see development plan): [ * ]

	(d)		At NOVO NORDISK’s first Regulatory Submission in the United States, the EEC or Japan: [ * ]

	(e)		Upon first Regulatory Approval in the United States: [ * ]

	(f)		Upon first Regulatory Approval in the EEC: [ * ]

	(g)		Upon first Regulatory Approval in Japan: [ * ]


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Notwithstanding any other provision of this Agreement, and for the avoidance of doubt, each of the amounts referred to in [ * ] shall be payable only once with respect to the development of the initial Packaged Product and shall be non-refundable. Consequently, maximum total milestone payments to be paid by NOVO NORDISK to ARADIGM under this Agreement in respect of such milestones shall amount to [ * ]

	(h)		Upon initiation (first patient, first dose) of a Phase IIb clinical trial of a Packaged Product containing the second Programme Compound: [ * ]

	(i)		Upon initiation (first patient, first dose) of a pivotal Phase III clinical trial of such second Packaged Product: [ * ]

	(j)		When cumulative Net Sales of Devices and Packaged Products reach [ * ]

	(k)		When cumulative Net Sales of Devices and Packaged Products reach [ * ]

	(l)		When cumulative Net Sales of Devices and Packaged Products reach [ * ]

For the avoidance of doubt, each of the amounts referred to in [(h)-(l) of this Article 2.4] shall be payable only once. Moreover, no further payments in respect of such milestones will become due once NOVO NORDISK has paid ARADIGM a total of [ * ]. Consequently, maximum total milestone payments to be paid by NOVO NORDISK to ARADIGM under this Agreement in respect of such milestones shall amount to [ * ].

Thus, the total milestone payments in respect of the Packaged Product containing the second Programme Compound will be [ * ], plus milestone amounts in respect of regulatory submission and approvals thereof to be agreed upon at the time it is added to the Development Programme. Upon request by NOVO NORDISK to develop a third Programme Compound in the Development Programme pursuant to Article 2.1, the parties will agree in good faith on the milestone payments to apply to the clinical development of Packaged Products containing such Other Compound.

Furthermore, NOVO NORDISK shall invest up to a total of USD ten million (USD 10,000,000) equity in ARADIGM at times and under terms as specified in a separate agreement between the parties.

2.5 Development Costs of ARADIGM to be borne by NOVO NORDISK will be paid quarterly [ * ] by NOVO NORDISK based on budgeted expenses approved by the Steering Committee, subject to a reconciliation to actual costs incurred at the end of each year (based on a presentation to the Steering Committee no later than sixty (60) days after the end of such year) approved by the Steering Committee (such approval not to be unreasonably withheld or delayed) or more frequently if requested by either party. NOVO NORDISK shall pay or ARADIGM shall refund, as applicable, any difference between amounts advanced and actual costs incurred within thirty (30) days after such reconciliation is approved. Any anticipated material deviations from established budgets will be reported as promptly as practicable to the Steering Committee.


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

2.6 NOVO NORDISK and ARADIGM shall use their Diligent Efforts to obtain all necessary regulatory approvals for pre-clinical and clinical development work. All regulatory submissions required for clinical development work in the USA to be filed initially by ARADIGM that are needed by NOVO NORDISK to continue development will be transferred to NOVO NORDISK as soon as practicable but in any event prior to the commencement of Phase III trials, and NOVO NORDISK will thereafter be the holder thereof and will have responsibility for all further regulatory filings worldwide unless otherwise approved by the Steering Committee.

2.7 NOVO NORDISK agrees that it will use its Diligent Efforts to clinically develop and register, to the deadlines included in the Development Programme agreed between the Parties, and market the Packaged Products for administration using the Device in the Territory. [ * ]

2.8 All supplies of Programme Compounds (including certificates of analysis and safety handling data) required for the Development Programme, shall be supplied by NOVO NORDISK to ARADIGM, [ * ] and in a timely manner, so as not to adversely affect the expected duration of the Development Programme.

2.9 All supplies of Packaged Product and the Device plus safety and handling information and training required for the Development Programme, shall be supplied by ARADIGM to NOVO NORDISK, [ * ] and in a timely manner, so as not to adversely affect the expected duration of the Development Programme.

2.10 NOVO NORDISK shall furnish ARADIGM with such data and information as ARADIGM shall reasonably require regarding each Programme Compound to enable ARADIGM to carry out the work under the Development Programme.

2.11 ARADIGM shall furnish NOVO NORDISK with such data and information as NOVO NORDISK shall reasonably require regarding the Packaged Products, the Devices and components thereof, as well as the manufacturing processes therefor, to enable NOVO NORDISK to carry out the work under the Development Programme.

2.12 ARADIGM shall only use Programme Compounds supplied by NOVO NORDISK and the NOVO NORDISK Know-How as provided for in this Agreement. NOVO NORDISK shall only use the ARADIGM Know-How as provided for in this Agreement. Upon termination of this Agreement, ARADIGM undertakes to return, upon NOVO NORDISK’s written request, all written documentation embodying NOVO NORDISK Know-How and any and all remaining Programme Compound to NOVO NORDISK, except and to the extent retention thereof is reasonably necessary during any post termination period in which NOVO NORDISK continues to supply insulin to ARADIGM. Upon termination of this Agreement, NOVO NORDISK undertakes to return, upon Aradigm’s written request, all written documentation embodying ARADIGM Know-How to ARADIGM.


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

2.13 ARADIGM hereby acknowledges that NOVO NORDISK may be simultaneously conducting exploratory research and development on alternative pulmonary delivery technologies that may be applicable in the Field and that NOVO NORDISK is free to develop and commercialise such technology outside the Field. NOVO NORDISK may also supply insulin to third parties free of charge for use in such third party’s clinical studies using such third party’s pulmonary delivery technology in exchange for rights in such technology in the Field. However, NOVO NORDISK [ * ] and [ * ] provided that NOVO NORDISK has given written notice (the “Alternative Technology Notice”) to ARADIGM of its intention to commence such commercialization at least one year prior to such commencement. Notwithstanding the foregoing, in the event NOVO NORDISK proposes to add an Other Compound to the Development Programme pursuant to Article 2.1, and ARADIGM is unwilling or unable to do so, NOVO NORDISK may thereafter develop and commercialize such Other Compound with an alternative pulmonary delivery technology without being in breach of this Agreement and such Other Compound, together with equivalent compounds, will thereafter be excluded from the Field.

2.14 During the term of this Agreement, in the event NOVO NORDISK becomes aware of [ * ] it agrees subject to the rights and demands of the potential licensor, to inform ARADIGM of such opportunity and, [ * ] then the parties will jointly consider in good faith terms under which ARADIGM would license such rights for application within pulmonary delivery, further develop the applicable technology and make it available to a collaboration between the two parties.

2.15 For so long as the license to NOVO NORDISK under Article 3 is exclusive, and subject to Article 2.13 above, ARADIGM shall not be entitled to enter into any other agreement with any third party within the Field, and shall not conduct any work programme with Initial Compound or any Other Compound from any third party supplier without the written consent of NOVO NORDISK.

2.16 NOVO NORDISK agrees that, in the event it cannot produce sufficient quantities of the Initial Compound to satisfy all customer demand on its capacity, [ * ] form.

ARTICLE 3 – GRANT OF LICENSE; OPTION

3.1 ARADIGM hereby grants NOVO NORDISK a world-wide sole and exclusive license under the ARADIGM Patent Rights and ARADIGM Know-How a) to use, market, distribute, sell, offer for sale, import and export the Packaged Products and the Device in and from the Territory for use within the Field, with the right to sublicense, and b) to otherwise exercise and perform its rights and obligations under this Agreement.

3.2 ARADIGM hereby grants NOVO NORDISK the right to sublicense its customers to a) use the Packaged Products and the Device, and b) sell, offer to sell, import or export the Packaged Products and the Device, so long as said items were bought from NOVO NORDISK.


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

3.3 Notwithstanding the foregoing and except as set forth herein, effective one year after NOVO NORDISK gives ARADIGM the Alternative Technology Notice pursuant to Article 2.13, the licences granted to NOVO NORDISK under Article 3.1 and 3.2 will become nonexclusive, and ARADIGM shall be entitled from and after receipt of the Alternative Technology Notice to engage marketing partners and other distributors and otherwise prepare itself to commence commercial marketing of Devices and Packaged Products on the effective date of such conversion. If at the time of delivery of the Alternative Technology Notice, NOVO NORDISK is engaged in clinical development of one or more Packaged Products containing one or more Other Compounds, or intends to promptly commence clinical development of one or more such Packaged Products, it may at its option elect to [ * ] with respect to such Other Compounds by specifying such Other Compounds in the Alternative Technology Notice. In this case, (a) the parties will proceed promptly under Article 2.1 to add any of such specified Other Compounds to the Development Programme (if they are not already in development), (b) the parties will thereafter meet their respective obligations to diligently develop and commercialize such specified Other Compounds and (c) the terms and conditions of this Agreement, including but not limited to Articles 2.13 (with NOVO NORDISK’s obligation not to conduct or fund clinical studies to apply until the first Regulatory Approval of a specified Other Compound), 2.15 and 3.1, shall remain in full force and effect but only with respect to Packaged Products containing such specified Other Compounds until NOVO NORDISK provides a supplemental Alternative Technology Notice at least one year in advance of its commencement of commercialization of any of such specified Other Compounds using an [ * ], provided that such supplemental notice may not be given prior to the end of the fifth year after First Marketing of a Packaged Product containing a specified Other Compound. ARADIGM shall be granted access to, and be given sufficient rights under, relevant [ * ], NOVO NORDISK Patents and NOVO NORDISK Know-How to the extent reasonably necessary to enable it to commercialise Devices and Packaged Products directly or through marketing partners. The foregoing notwithstanding, it is expressly understood that neither ARADIGM nor any marketing partner of ARADIGM shall be granted access to [ * ] Moreover, NOVO NORDISK will continue to supply the Initial Compound in bulk to ARADIGM for use in Packaged Products to be marketed by ARADIGM during the term of this Agreement at the price specified in Article 9.5.

3.4 In consideration of NOVO NORDISK undertaking the development and marketing activities hereunder, ARADIGM hereby grants to NOVO NORDISK an exclusive option to enter into a development and license agreement addressing the development of a product for pulmonary delivery of [ * ] using the Device or a modified version of the Device. During the term of this option, ARADIGM agrees to conduct feasibility studies on compounds covered by this option, if requested to do so by NOVO NORDISK, [ * ]. Upon exercise of this option, the parties will negotiate in good faith an agreement for the development and commercialisation of such products. The parties will negotiate financial terms for such agreement which take into consideration product economics and market conditions in the applicable field, which may be different from those in the Field. This option will expire [ * ]. During the term of this option, ARADIGM will not enter into any agreement


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

with any third party concerning the development of any such product without the written consent of NOVO NORDISK.

ARTICLE 4 – MANUFACTURING AND SUPPLY

4.1 The parties hereto shall as soon as reasonably practicable after the Effective Date enter into a supply agreement (“the Supply Agreement”) for the purpose of setting forth terms and conditions for ARADIGM’s supply of the Packaged Product and the Device to NOVO NORDISK. The Supply Agreement shall include provisions for arrangements according to which NOVO NORDISK can maintain a) sufficient supplies of the Packaged Product and the Device in the event of ARADIGM becoming unable to perform by reason of insolvency or bankruptcy and b) sufficient supply security at all other times based on the maintenance of inventories, redundant production capacity and contingency planning.

4.2 ARADIGM shall, at its sole cost, establish and maintain in operation at least one (1) fully validated site of manufacture, to all relevant regulatory requirements within the Territory, to supply the Packaged Products and the Device to NOVO NORDISK in accordance with the Supply Agreement. NOVO NORDISK shall have a right to inspect the site of manufacture. NOVO NORDISK shall supply ARADIGM with any information specifically related to each Programme Compound that may be required from ARADIGM by the relevant regulatory authorities and required by ARADIGM to establish said manufacturing site.

4.3 ARADIGM shall supply all clinical trial quantities and all commercial quantities of the Packaged Products and the Device to NOVO NORDISK in a timely fashion in accordance with the Supply Agreement.

4.4 For the quantities referred to in Article 4.3 above, NOVO NORDISK shall [ * ] supply sufficient amounts of each Programme Compound in solid bulk form for filling and packaging of the Packaged Products by ARADIGM in a timely fashion.

4.5 ARADIGM shall supply the clinical trial quantities of the Packaged Products referred to in Article 4.3 above at its Development Cost. As payment for the commercial quantities of the Packaged Product referred to in Article 4.3 above, NOVO NORDISK shall [ * ] For clinical trial supplies of the Packaged Products, the Development Costs will be estimated by the parties and paid quarterly in advance by NOVO NORDISK based on the forecasted number of units to be produced for the Development Programme in such quarter, subject to reconciliation to actual costs and the actual number of units produced at the end of each year. For commercial supplies of the Packaged Products, [ * ] will be estimated annually by the parties to establish an interim transfer price, subject to reconciliation at the end of each year. Payment of the interim transfer price will be made net 30 days from date of shipment by ARADIGM.

4.6 As payment for the clinical trial quantities of the Device referred to in Article 4.3 above, NOVO NORDISK shall [ * ]. The parties will cooperate to minimize the number


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

of such units required, consistent with meeting the objectives of the Development Programme, and will provide for re-use of Devices to the extent practicable. As payment for the commercial quantities of the Device referred to in Article 4.3 above, NOVO NORDISK shall [ * ]. For clinical trial supplies of the Device, [ * ] will be estimated by the parties and NOVO NORDISK’s share thereof will be paid quarterly in advance by NOVO NORDISK based on the forecasted number of units to be produced for the Development Programme in such quarter, subject to reconciliation to actual costs and the actual number of units produced at the end of each year. For commercial supplies of the Device, [ * ] will be estimated annually by the parties to establish an interim transfer price, subject to reconciliation at the end of each year. [ * ] The parties will reset this component of the interim transfer price at the end of each year based on anticipated commercial pricing for the coming year. Payment of the interim transfer price will be made net thirty (30) days from date of shipment by ARADIGM.

4.7 NOVO NORDISK may following consultation with ARADIGM, at its sole cost and for the purpose of ensuring sufficient security of supply, choose to establish and operate a second commercial production facility for the Packaged Product or the Device, at a site owned either by NOVO NORDISK or by ARADIGM, at the election of ARADIGM. The location of the second site of manufacture shall be negotiated in good faith between the parties hereto, but NOVO NORDISK may require that it be located at least fifty (50) miles from the first production facility. ARADIGM will provide NOVO NORDISK with any non-monetary assistance required to design and construct a second site. All costs directly related to such transfer of manufacture will be borne by NOVO NORDISK. In the event ARADIGM elects to own such facility, it will do so through an Affiliate established for the sole purpose of owning and operating such facility, and NOVO NORDISK will not bear any such transfer costs or the cost of that portion of such facility that will be used by ARADIGM to meet the needs of its other customers. In the event NOVO NORDISK is the owner of such facility, its license under Article 3.1 above shall be enlarged to include the right to make Devices and/or Packaged Products, as applicable, at such facility, and ARADIGM shall continue to share in the Gross Profit as contemplated by Article 5. Regardless of which party owns such facility, [ * ] of product produced, [ * ] will be included in the calculation of Gross Profit.

4.8 ARADIGM agrees to keep NOVO NORDISK informed as to its financial condition during the term of this Agreement. If at any time the financial resources of ARADIGM are not reasonably sufficient to enable it to continue to meet its obligations hereunder for at least the next six (6) months, the parties will meet to review and consider steps that might be taken to ensure that ARADIGM will be able to perform. Such steps could include, but are not limited to, the termination of ARADIGM activities that it is not contractually obligated to perform in order to conserve resources. If steps implemented by ARADIGM are not sufficient to correct the situation within a sixty (60) day period and ARADIGM cannot demonstrate to the reasonable satisfaction of NOVO NORDISK that it will be able to complete any needed financing within the next thirty (30) days, (a) then NOVO NORDISK shall have the right but not the obligation to provide such financing on terms and conditions, including security, that are reasonable under the circumstances and (b) if this situation arises after Regulatory Approval, NOVO NORDISK may also exercise its


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

right to have a second commercial facility established pursuant to Article 4.7 and in this case ARADIGM shall not have the right to elect to own such facility.

4.9 The Supply Agreement will, in addition to the foregoing, contain terms and conditions consistent with the following principles:

	(a)		Devices and Packaged Products will be supplied by ARADIGM in final packaging or, if it is more efficient, in primary packaging with secondary packaging to be done by NOVO NORDISK (and [ * ] of any such secondary packaging will be included in the calculation of Gross Profit).

	(b)		NOVO NORDISK, as part of its sales and marketing responsibility, will provide [ * ], but ARADIGM will provide [ * ] (the costs of which will be included in product transfer pricing) as reasonably requested by NOVO NORDISK.

	(c)		If for any reason a product recall is required, the decision to implement the recall will be made by NOVO NORDISK and ARADIGM will provide support as reasonably requested. The cost of such recall, including the cost of replacement product, shall be borne [ * ]; provided, however, that if upon analysis of actually defective recalled product the fault or relative fault can be determined or allocated, then the cost of product to replace such defective product shall be borne based on such determination or allocation. [ * ]

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	(d)		The specifications for the Device and Packaged Products and production processes affecting safety or efficacy will be subject to the review and approval of NOVO NORDISK. NOVO NORDISK will accordingly be


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

			responsible for all product liability other than product liability attributable to the negligence of ARADIGM or any failure by ARADIGM to manufacture the product in accordance with applicable standards and practices. Product liabilities that are incurred will be allocated between the parties based on the fault or relative fault of the parties. If negligence or fault cannot be so determined or allocated, then such liability shall be borne [ * ].

	(e)		In view of the need to ensure customer satisfaction, NOVO NORDISK’s customer service operation is expected to accept returns and provide replacements of products in response to customer complaints often without reference to whether or not such product was defective. Replacement product will be pulled from regular inventories [ * ].

	(f)		NOVO NORDISK will also have the right to order samples of product containing active compound or placebo (i.e., product that is ordered, labeled and distributed as sample product), which ARADIGM will supply at [ * ] and such cost will not be included in the calculation of Gross Profit.

	(g)		ARADIGM will carry insurance against such risks and in such amounts as is reasonable under the circumstances, including insurance of bulk compound supplied by NOVO NORDISK against loss and other casualties that can be reasonably insured against. Since the efficiency with which bulk compound is packaged into Packaged Product is an important cost factor, ARADIGM and NOVO NORDISK will jointly develop and review all aspects of the production process that affect efficiency. If, notwithstanding these efforts, production efficiencies are predicted to be below objectives established by the Steering Committee [ * ], the parties will meet to consider corrective action, and any improvements that are reasonable in light of anticipated capital expenditures and the impact on profitability will be implemented by ARADIGM.

	(h)		In the event that this Agreement is terminated by NOVO NORDISK pursuant to Article 9.7 or by ARADIGM other than for a breach by NOVO NORDISK and if in such case NOVO NORDISK elects to continue the commercialization of Packaged Products and Devices, then NOVO NORDISK shall have a right to set-up at its sole cost production facilities for Packaged Products and Devices and ARADIGM shall in such case provide NOVO NORDISK with access to all necessary or useful documentation for its existing facilities and reasonable non-monetary assistance required by NOVO NORDISK for setting up such production facilities. Furthermore, in such case NOVO NORDISK shall be granted a license to all necessary rights under ARADIGM Patents and ARADIGM Know-How required for production of Packaged Products and Devices in its facilities. In such case ARADIGM shall continue to be entitled to


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

receive on an ongoing basis its [ * ] as specified in Article 5.2, but reduced by the [ * ] associated with the transfer prices, as specified in Articles 4.5 and 4.6, which shall be retained by NOVO NORDISK as compensation for being required to undertake the manufacturing function.

4.10 In light of the length of time necessary to establish production capacity, the Steering Committee will address long range capacity planning as a part of the Development Programme. Within [ * ] of the Effective Date, NOVO NORDISK will present to the Steering Committee a non-binding, long-term forecast [ * ] of projected Device and Packaged Product unit sales on a worldwide basis. Such forecast will be updated from time to time as part of NOVO NORDISK’s standard strategic planning process and such updates and any interim forecast changes will be provided to the Steering Committee to ensure that significant decisions with respect to capacity plans are made on the basis of the most recent market forecasts. Subject to the review and approval of the Steering Committee, ARADIGM and NOVO NORDISK will develop plans and associated time lines for establishing needed production capacity for [ * ] for at least [ * ] after First Marketing. Each party will keep the other fully informed as to the status of implementation of those aspects of such plans for which such party is responsible. The Steering Committee will also assess the flexibility of the planned production capacity to respond to changes in market demand and will supervise the establishment of forecasting and order lead time procedures that will optimize overall supply chain efficiency. It is the goal of the parties that the ARADIGM will produce and ship product to NOVO NORDISK substantially as follows:

	(a)		Once each quarter, NOVO NORDISK shall provide a [ * ] rolling forecast to ARADIGM projecting unit volumes for Packaged Product and Devices on a worldwide basis. The forecast for the first quarter will be binding and may not be changed from the previous forecast. The second quarter forecast may be changed by plus or minus [ * ] from the previous forecast. The third quarter forecast may be changed by plus or minus [ * ] from the previous forecast. The fourth quarter may be changed by plus or minus [ * ] from the previous forecast. The fifth and sixth quarters may be changed without limit subject to the limits of production capacity. The first six quarter rolling order forecast will be provided to ARADIGM no later than [ * ] months prior to First Marketing. The Steering Committee will review and establish actual forecast and order procedures, which will be incorporated in the Supply Agreement.

	(b)		NOVO NORDISK and ARADIGM shall use diligent efforts to keep each other informed concerning changes in demand or capability to meet demand and shall use diligent efforts to meet requests for changes in the forecast that do not comply with the foregoing.

	(c)		The Steering Committee will have the responsibility to review and approve ARADIGM’s inventory policies including the amounts carried at each level of production. All orders will be shipped on completion and the


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

			maintenance of finished goods inventory will be the responsibility of NOVO NORDISK. Upon ARADIGM’s request, NOVO NORDISK will provide an update of current inventory levels held in finished goods at all NOVO NORDISK or Affiliate locations. Likewise, ARADIGM will upon NOVO NORDISK’s request provide an update of current inventory levels of raw materials for Devices and Packaged Product, including inventory levels of Initial Compound.

	(d)		NOVO NORDISK shall use diligent efforts to maintain sufficient production capacity for Initial Compound and shall keep ARADIGM informed of its plans for increasing capacity as necessary to meet the requirements of ARADIGM for the production of Packaged Product.

	(e)		The parties will on a regular basis review long term market forecasts generated by NOVO NORDISK in its normal internal planning cycle for the purpose of anticipating the need for expanded production capacity in sufficient time to develop and implement plans for such expansions.

4.11 If the volume of Packaged Products containing Initial Compound supplied to NOVO NORDISK exceeds [ * ] NOVO NORDISK shall have the right, after consultation with ARADIGM, to establish at its sole cost an additional site for manufacturing such Packaged Products at an existing NOVO NORDISK site where insulin is already being processed. In such case, ARADIGM may require that the key production equipment installed at this site will be [ * ] and that the production steps involving laser drilling will be maintained and performed by ARADIGM at an existing or new ARADIGM facility. In such case, ARADIGM will supply [ * ] to NOVO NORDISK on the terms specified in Article 4.5 and in other respects in a manner that is equivalent to how it provides such [ * ] to its own Packaged Product production facility, with allocations in the event of a shortage to be made on a pro rata basis. NOVO NORDISK’s license under Article 3.1 above shall be enlarged to include the right to make such Packaged Products at such facility, and ARADIGM will provide NOVO NORDISK reasonable non-monetary assistance in establishing such production facility. All costs directly related to such assistance will be borne by NOVO NORDISK. NOVO NORDISK shall have the right to [ * ], provided that ARADIGM shall have the right to implement such improvements in its own facilities and to otherwise use such improvements outside the Field as well as in its own production of Packaged Products. NOVO NORDISK acknowledges and agrees that this facility will be used to meet demand for Packaged Products in excess of the threshold volumes required to trigger NOVO NORDISK’s right to establish such facility and that priority will be given to maintaining the production levels of ARADIGM at or above such threshold volumes in order to ensure that ARADIGM’s production capacity is used efficiently. ARADIGM shall continue to share in the Gross Profit associated with Packaged Products produced in this facility as specified by Article 5 (with the [ * ] of product produced at such facility to be included in the calculation of Gross Profit). In the event the parties determine that additional capacity beyond that which has been established by ARADIGM and by NOVO NORDISK hereunder, such additional capacity will be planned and added on such basis as the parties agree upon.


*[]**	=	Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

ARTICLE 5 – LICENSE PAYMENTS AND PROFIT SHARING

5.1 In consideration of the licence and marketing rights granted by ARADIGM in accordance with Article 3 above, NOVO NORDISK shall pay to ARADIGM the sum of USD two million (USD 2,000,000) within twenty (20) days after the Effective Date. Such payment is non-refundable and will be in addition to, and may not be applied toward or otherwise credited against, any other payment required hereunder, including but not limited to the payments provided for in Article 2.4.

5.2 In addition to the payments referred to in Article 5.1 above, each year during the term of this Agreement NOVO NORDISK shall pay to ARADIGM [ * ] on Net Sales of the Packaged Products and the Devices during such year; provided, however, that a different percentage may be applicable to Packaged Products containing Other Compounds as agreed by the parties pursuant to Article 2.1. Interim payments shall be made to ARADIGM during such year in the form of a percentage of Net Sales of Packaged Products and Devices intended to approximate ARADIGM’s interest in the Gross Profit. The applicable interim payment percentage shall be established by agreement of the parties at the beginning of each calendar year to govern payments during such year and a reconciliation account established and settled at the end of the year to achieve the Gross Profit specified above. The interim payments above and the transfer price profit components referred to in Articles 4.5 and 4.6 shall be credited against ARADIGM’s share in the Gross Profit.

5.3 If the parties agree that it is necessary to enter into a Licence Agreement with a third party to secure intellectual property rights in any country in the Territory for the Packaged Products or the Device, [ * ]. Notwithstanding the foregoing, NOVO NORDISK shall bear all such costs that may be payable in respect of any Programme Compound to secure freedom of operation for that compound.

5.4 NOVO NORDISK shall keep complete and correct records of the Net Sales of the Packaged Products and the Device and other financial information necessary to determine the Gross Profit and shall report such information as is pertinent along with each payment to ARADIGM. ARADIGM will maintain similar records with respect to its pertinent costs hereunder.

5.5 Interim payments under Article 5.2 of this Agreement shall be due and payable within forty-five (45) days after January 1, April 1, July 1 and October 1 of each calendar year. To achieve a year-end reconciliation, ARADIGM will provide NOVO NORDISK with [ * ] NOVO NORDISK within thirty (30) days after receipt of ARADIGM’s report or, if later, within seventy-five (75) days after the end of the year. NOVO NORDISK shall pay or ARADIGM shall refund, as applicable, any difference between interim payments made and actual results within thirty (30) days after delivery of such reconciliation report, subject to the audit rights of the parties.

5.6 Payments under this Agreement in respect of Net Sales made in currencies other than USD shall be calculated on the average daily exchange rate for the applicable year


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

to date period (i.e., from January 1 of each year to the last business day of the quarter in question) for exchanging the local currency into USD at the rate for buying USD quoted by Den Danske Bank, and its successor(s) in Copenhagen, Denmark.

5.7 Not more than once in a calendar year, at ARADIGM’s request, NOVO NORDISK agrees to provide to ARADIGM, at ARADIGM’s expense, a statement from an independent auditor selected by ARADIGM and reasonably acceptable to NOVO NORDISK, attesting to the correctness of NOVO NORDISK’s payments. In the event such auditor determines that additional amounts are due to ARADIGM, such amounts shall be promptly paid by NOVO NORDISK, together with the reasonable costs of conducting the audit, it being understood that ARADIGM will otherwise bear such audit costs. NOVO NORDISK shall likewise have the right to require an auditor’s statement as to the accuracy of the pertinent costs of ARADIGM. In the event such auditor determines that additional amounts are due to NOVO NORDISK, such amounts shall be promptly paid by ARADIGM, together with the reasonable costs of conducting the audit, it being understood that NOVO NORDISK will otherwise bear such audit costs. Notwithstanding the foregoing, relevant NOVO NORDISK personnel shall once a year have a right to review with relevant ARADIGM personnel cost and investment accounts related to activities under this Agreement.

5.8 NOVO NORDISK agrees to use Diligent Efforts to achieve commercial success for the Packaged Products and the Device in each country in the Territory in which Regulatory Approval has been obtained, except for such countries in which it would not be desirable to market such products in light of the overall commercialisation strategy therefor. Prior to the initiation of Phase III clinical studies, reasonably documented sales forecasts for such products for each of the United States, the EEC and Japan [ * ]following commercial launch will be established. The initial [ * ] will be reviewed and approved by the Steering Committee, provided that if the Steering Committee is unable to agree on such forecast, the senior managements of the two parties will meet in an effort to reach agreement. If agreement cannot be reached, NOVO NORDISK will decide the matter. The initial sales forecasts for the EEC and Japan will be established by NOVO NORDISK after review and comment by the Steering Committee. Prior to First Marketing, NOVO NORDISK will update the [ * ] and review and discuss with the Steering Committee the marketing plan by which it intends to meet its marketing diligence obligation hereunder in respect of product launch and during the first year after launch. At the end of the first and second years following First Marketing, updated reasonably documented forecasts for the [ * ] will be similarly established and marketing plans will likewise be reviewed and discussed. If NOVO NORDISK subsequently revises such forecasts to less than [ * ] of initially forecasted levels for any year or if actual results in any year are less than [ * ] of the [ * ] for such year, NOVO NORDISK will develop and review with ARADIGM strategies to be implemented to ensure that the expected market potential will be realised. The parties will also discuss the establishment of [ * ] and will likewise in good faith discuss any failure or anticipated failure to achieve such minimum pricing. If, notwithstanding such efforts, sales forecasts or actual sales continue to be materially short of expectations or if pricing continues to be below targeted minimums for more than a year, NOVO NORDISK agrees that upon request by ARADIGM it will in good faith negotiate such modifications to this Agreement or the Supply


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Agreement as may be reasonably necessary to enable [ * ] in light of the scale of the forecasted or actual commercial results. Alternatively, NOVO NORDISK may at its election after such a renegotiation request by ARADIGM elect to terminate this Agreement and the Supply Agreement. At the end of each of the [ * ] commencing with the third year following First Marketing, NOVO NORDISK will review and discuss its latest reasonably documented [ * ] forecasts and marketing plans with ARADIGM.

ARADIGM agrees to use Diligent Efforts to realize its pre-Phase III cost estimate contemplated by the Minimum Product Profile that is the basis for a decision to proceed with Phase III trials. If, notwithstanding such efforts, Aradigm’s actual Fully Burdened Cost of producing Packaged Products (excluding for these purposes the cost of the Initial Compound) and Devices are materially higher than estimated (for reasons other than lower than expected volume or externalities such as exchange rates or inflation) and as a result gross margins contemplated by the Minimum Product Profile are not achieved, ARADIGM will develop and review with NOVO NORDISK strategies to be implemented to reduce costs to targeted levels. If, notwithstanding such efforts, ARADIGM costs continue to be materially higher than targeted levels for more than a year, then ARADIGM agrees that upon request by NOVO NORDISK it will in good faith negotiate such modifications to this Agreement or the Supply Agreement as may be reasonably necessary to enable NOVO NORDISK to realise a reasonable profit on its sales of Packaged Products and Devices. In no event will NOVO NORDISK be under any obligation to agree to pay ARADIGM Fully Burdened Cost amounts for Packaged Products and Devices that do not enable a Gross Profit Margin of at least 70%. Alternatively, ARADIGM may at its election after such a renegotiation request by NOVO NORDISK elect to terminate this Agreement and the Supply Agreement. Notwithstanding the foregoing, if in either of the above situations a party requests a renegotiation of the terms of the Agreement or the Supply Agreement, it is expressly understood that neither party will be required to agree to any terms that do not enable it to realise a reasonable profit on its activities under this Agreement and the Supply Agreement, it being further understood that the parties anticipate a termination of this Agreement and the Supply Agreement if it is not possible for both parties to realise a reasonable profit.

5.9 Under no circumstances shall NOVO NORDISK be required to pay any amount in excess of or in addition to the payments agreed under this Agreement. If any payment made by NOVO NORDISK under this Agreement is subject to withholding tax, such withholding tax shall be borne by ARADIGM and shall be deducted from the payments made by NOVO NORDISK. Upon ARADIGM’s written request, NOVO NORDISK shall support ARADIGM in its efforts of minimizing any such withholding taxes, and reasonably provide ARADIGM with relevant information about documentation needed to reduce the withholding tax to a legal minimum or to secure applicable credits in respect thereof.

ARTICLE 6 – INTELLECTUAL PROPERTY

6.1 ARADIGM shall remain the sole owner of all ARADIGM Patent Rights and ARADIGM Know-How obtained by ARADIGM individually prior to entering into this Agreement and shall use best efforts to maintain and defend their position. Furthermore,


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

ARADIGM warrants that it is not aware of any third party patent rights that would limit in any material respect the parties’ freedom of operation with respect to practicing the ARADIGM Patent Rights.

6.2 NOVO NORDISK shall remain the sole owner of all NOVO NORDISK Patent Rights and NOVO NORDISK Know-How obtained by NOVO NORDISK prior to entering into this Agreement.

6.3 (a) ARADIGM shall retain ownership of any and all results, improvements or inventions (“ARADIGM Programme Inventions”) whether patentable or not made jointly by the parties or individually by one of the parties as a part of the Development Programme during the term of this Agreement and which relate solely to [ * ]. ARADIGM shall be responsible for filing, maintaining and defending any patents filed based on ARADIGM Programme Inventions and will timely inform NOVO NORDISK of its intentions, activities and filings in this respect. ARADIGM will grant NOVO NORDISK a royalty free license, with the right to sublicense, under the ARADIGM Programme Inventions. Such license will be perpetual but will be limited to applications outside the field of pulmonary drug delivery. (b) Should ARADIGM decide not to patent an ARADIGM Programme Invention in any country, NOVO NORDISK shall have the right to do so. In such case, NOVO NORDISK shall be the owner of any patent or patent application based on such ARADIGM Programme Invention and will grant ARADIGM a royalty free licence thereunder, with the right to sublicence. Such licence will be for the life of the patent but will be limited to applications outside the Field for so long as NOVO NORDISK’s rights under Article 3 remain exclusive (and thereafter for so long as NOVO NORDISK retains exclusivity under Article 3.3 with respect to specified Packaged Products, to applications other than those for which there is continuing exclusivity under Article 3.3). Should ARADIGM decide to abandon any such patent or patent application, in any country, NOVO NORDISK shall have the option to take over such patent or patent application. In such case, NOVO NORDISK shall be the owner thereof and will grant ARADIGM a royalty free licence thereunder, with the right to sublicence. Such licence will be for the life of the patent but will be limited to applications outside the Field for so long as NOVO NORDISK’s rights under Article 3 remain exclusive (and thereafter for so long as NOVO NORDISK retains exclusivity under Article 3.3 with respect to specified Packaged Products, to applications other than those for which there is continuing exclusivity under Article 3.3). (c) Furthermore, NOVO NORDISK shall be entitled to enter any litigation in the defence and enforcement of any such patents by any infringer thereof in the Field and the parties shall agree in good faith regarding any such defence and enforcement, as well as how to pay for any costs incurred and how to share any rewards.

6.4 (a) NOVO NORDISK shall retain ownership of any and all results, improvements or inventions whether patentable or not made jointly by the parties or individually by one of the parties as a part of the Development Programme during the term of this Agreement and which relate solely to [ * ]. Inventions relating to the Formulated Compound owned by NOVO NORDISK are referred to as “NOVO Formulation Inventions.” NOVO NORDISK shall be responsible for filing, maintaining and defending any patents filed


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

based on NOVO Formulation Inventions and will timely inform ARADIGM of its intentions, activities and filings in this respect. NOVO NORDISK will grant ARADIGM a royalty free licence, with the right to sublicence, under the NOVO Formulation Inventions. Such licence will be perpetual but will be limited to applications outside the Field. (b) Should NOVO NORDISK decide not to patent a NOVO Formulation Invention in any country, ARADIGM shall have the right to do so. In such case, ARADIGM shall be the owner of any patent or patent application based on such NOVO Formulation Invention and will grant NOVO NORDISK a royalty free licence thereunder, with the right to sublicence, for the life of the patent. Should NOVO NORDISK decide to abandon any such patent or patent application, in any country, ARADIGM shall have the option to take over such patent or patent application. In such case, ARADIGM shall be the owner of such patent or patent application and will grant NOVO NORDISK a royalty free licence thereunder, with the right to sublicence, for the life of the patent. (c) Furthermore, ARADIGM shall be entitled to enter any litigation in the defence and enforcement of any such patents by any infringer thereof outside the Field and the parties shall agree in good faith regarding any such defence and enforcement, as well as how to pay for any costs incurred and how to share any reward.

6.5 The foregoing is not intended to limit in any respect the rights of ARADIGM under Articles 3.3, 9.3 and 9.5 to develop and commercialise Devices and Packaged Products under the circumstances specified therein. NOVO NORDISK will grant ARADIGM a perpetual royalty free licence, with the right to sublicence, [ * ] utilized in the Development Programme needed by ARADIGM in order only to conduct and continue the development, production and commercialisation activities contemplated by Article 3.3, 9.3 and 9.5 of this Agreement.

ARTICLE 7 – SECRECY

7.1 Any information from time to time communicated or delivered by one of the parties to the other, including, without limitation, trade secrets, business methods, and cost, supplier, manufacturing and customer information, and information regarding such party’s Patent Rights and Know-How, shall be treated by NOVO NORDISK and ARADIGM, respectively, as confidential information, and shall not be disclosed or revealed to any third party whatsoever or used in any manner except as expressly provided for herein; provided, however, that such confidential information shall not be subject to the restrictions and prohibitions set forth in this Article 7 to the extent that such confidential information:

	•		is available to the public in public literature or otherwise, or after disclosure by one party to the other becomes public knowledge through no default of the party receiving such confidential information; or

	•		was known to the party (as demonstrated by the written records of such party) receiving such confidential information with no obligation to maintain confidentiality prior to the receipt of such confidential information by such party, whether received before or after the date of this Agreement; or


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

	•		is obtained by the party receiving such confidential information from a third party not subject to a requirement of confidentiality with respect to such confidential information; or

	•		is required to be disclosed pursuant to (i) any order of a court having jurisdiction and power to order such information to be released or made public; or (ii) any lawful action of a governmental or regulatory agency.

7.2 Each party shall take all such precautions as it normally takes with its own confidential information to prevent any improper disclosure of such confidential information to any third party; provided, however, that such confidential information may be disclosed within the limits required to obtain any authorization from any governmental or regulatory agency or, with the prior written consent of the other party, which shall not be unreasonably withheld, or as may otherwise be required in connection with the purposes of this Agreement.

7.3 Each party agrees that it will not use, directly or indirectly, any Know-How or otherwise confidential information received from the other party pursuant to this Agreement other than as expressly provided herein.

7.4 NOVO NORDISK and ARADIGM will not publicise the existence of this Agreement in any way without the prior written consent of the other subject to the disclosure requirements of applicable law and regulations. However, it has been agreed between the parties that the parties will issue a joint press release, following signature of the Agreement, including information on the total potential value of the collaboration and stating that the collaboration involves the development of formulations for pulmonary administration within the Field as well as an option to expand the collaboration into two additional fields.

7.5 As a part of its marketing obligations hereunder, NOVO NORDISK shall be solely responsible for all publication planning, it being understood that NOVO NORDISK will endeavor to present to the Steering Committee its overall publication planning strategy in good time prior to implementation and will in such event in good faith consider any reasonable suggestion made by ARADIGM for amendments to such strategy, it being at all times understood that NOVO NORDISK shall not be entitled to publish any information covered by Article 7.1 without the prior written consent of ARADIGM. For other publications not covered by NOVO NORDISK’s publication planning hereunder, the parties agree not to publish in any technical or scientific article or otherwise any of the results of the Development Programme without the review and approval of both parties such approval not to be unreasonably withheld.

7.6 The confidentiality conditions shall remain in force for seven years from the day of termination of this Agreement.

ARTICLE 8 – NOTICE


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

8.1 Any notice to be given under this Agreement shall be sent in writing in English by registered airmail or telecopied to:

           ARADIGM CORPORATION
          26219 Eden Landing Road
          Hayward, California 94545
          Attention: Chief Financial Officer
          Telephone: 01 510-783-0100
          Telefax: 01 510-783-0410

           NOVO NORDISK A/S
          Novo Alle
          DK-2880 Bagsvaerd
          Denmark
          Attention: General Counsel
          Telephone: 45 44 44 88 88
          Telefax: 45 44 42 18 30

or to such other addresses and telecopier numbers as may from time to time be notified by either party to the other hereunder.

8.2 Any notice sent by mail shall be deemed to have been delivered within seven (7) working days after despatch and any notice sent by telex or telecopy shall be deemed to have been delivered within twenty-four (24) hours of the time of the despatch. Notice of change of address shall be effective upon receipt.

ARTICLE 9 – TERM AND TERMINATION

9.1 This Agreement shall commence on the Effective Date and, unless terminated in accordance with other Articles included in this Agreement, shall continue to be in full force and legal effect for a period of [ * ] from First Marketing and shall continue in effect thereafter until terminated by either party by written notice of termination given at least [ * ] ahead of the effective date thereof.

9.2 Prior to the Initial Regulatory Approval, NOVO NORDISK shall have the right to terminate this Agreement, by giving ARADIGM ninety (90) days prior written notice, for technical or scientific reasons and at agreed time points in the event that [ * ], which termination notice may be given only (a) if the Steering Committee has met to review the relevant problems and determined that they cannot reasonably be solved, or (b) if within sixty (60) days after the Steering Committee’s initial meeting to review the relevant problems, such problems have not been solved or the Steering Committee has not approved development actions reasonably likely to result in a solution or (c) if such approved development actions fail to solve such problems to the satisfaction of the Steering Committee. NOVO NORDISK


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

shall reimburse ARADIGM any reasonable costs and expenses incurred by ARADIGM during the ninety (90) day notice period referred to above. ARADIGM will use their best efforts to minimise such costs.

9.3 Should NOVO NORDISK terminate this Agreement, as allowed for in Article 9.2, or should ARADIGM terminate this Agreement due to a breach by NOVO NORDISK, before Regulatory Approval in the Territory, ARADIGM shall be entitled to use the data generated under the Agreement to work with a third party and shall have full access to the relevant sections of [ * ]. In such case, if in ARADIGM’s reasonable judgement further efforts could result in a commercially viable product, NOVO NORDISK shall also continue bulk supply of the Initial Compound to ARADIGM at Fully Burdened Cost for the duration of any continued development by ARADIGM. The foregoing notwithstanding, it is expressly understood that neither ARADIGM nor any marketing partner of ARADIGM shall have access to any [ * ].

9.4 Either party shall be entitled to terminate this Agreement upon thirty (30) days’ written notice in the event that the other party shall commit a material breach of any of the terms and conditions of this Agreement and shall fail to remedy such breach within sixty (60) days of notice of such breach.

9.5 Should ARADIGM terminate this Agreement due to a breach by NOVO NORDISK following Regulatory Approval in the Territory, ARADIGM will be entitled to gain ownership of the marketing authorisations in the Territory. In such case, the Marketing Authorisations, held by NOVO NORDISK, shall be transferred to ARADIGM at NOVO NORDISK’s cost of transfer; and NOVO NORDISK will agree to supply bulk Initial Compound to ARADIGM at [ * ]. The foregoing notwithstanding, it is expressly understood that neither ARADIGM nor any marketing partner of ARADIGM shall have access to any NOVO NORDISK bulk insulin Regulatory Approval or any [ * ].

9.6 During the six calendar months following the Effective date, NOVO NORDISK shall have a right to terminate the Agreement, with thirty days (30) written notice, in the event of [ * ].

9.7 Either party in addition to any other remedies available to it in law may terminate this Agreement forthwith by written notice to the other party in the event the other party shall

	(a)		become insolvent or bankrupt;

	(b)		make an assignment for the benefit of its creditors;

	(c)		appoint a trustee or receiver for itself for all or a substantial part of its property, seek reorganisation, liquidation, dissolution, a winding arrangement, composition or readjustment of its debts;


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

	(d)		have its controlling interests acquired by a third party manufacturer of an approved insulin product at any time.

	(e)		have its controlling interest acquired by any pharmaceutical company reasonably deemed to be a competitor by NOVO NORDISK or ARADIGM, as applicable, unless such company promptly and expressly assumes and agrees to be directly bound by the terms of this Agreement in writing.

9.8 Termination or expiration of this Agreement shall not affect the continuing validity and enforceability of Articles 6 and 7 of this Agreement. All confidential information provided under the Agreement shall be returned to the respective parties within 90 days of the termination date, except as otherwise contemplated by this Agreement.

ARTICLE 10 – DISPUTE RESOLUTION AND APPLICABLE LAW

10.1 Both parties will use their best endeavours to settle all matters in dispute amicably. Any matter in dispute that cannot be resolved by the Steering Committee will be referred to the senior management of the two parties, who shall meet in an effort to settle such dispute before further proceedings. All disputes and differences of any kind related to this Agreement, which cannot be so solved amicably by the parties, shall be referred to, and finally settled by, arbitration in New York, New York in accordance with the Arbitration Rules of the American Arbitration Association. The number of arbitrators shall be three (3). The award of the arbitrators shall be final and binding on both parties. The parties bind themselves to carry out the award of the arbitrators.

10.2 This Agreement shall be construed under and interpreted pursuant to the Laws of New York.


Hayward, 1998—		Bagsvaerd, 1998—
ARADIGM CORPORATION		NOVO NORDISK A/S

/s/ Richard P. Thompson		/s/ Lares Rebien Sørensen

By: Richard P. Thompson		By: Lars Rebien Sørensen
President & CEO		Executive Corporate Vice President Health Care


*[ ]**		= Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

EXHIBIT 10.30

FIRST AMENDMENT TO DEVELOPMENT AND LICENSE AGREEMENT

This First Amendment to the Development and License Agreement (the “First Amendment”) is made and entered into effective as of October 22, 2001 (the “Effective Date”), by and between Novo Nordisk A/S, Novo Allé DK-2880 Bagsværd, Denmark (“Novo Nordisk”), and Aradigm Corporation, 3929 Point Eden Way, Hayward, California 94545 (“Aradigm”). Novo Nordisk and Aradigm may be referred to herein as a “Party” or, collectively, as “Parties”.

RECITALS

WHEREAS, effective June 2, 1998, Novo Nordisk and Aradigm entered into a Development and License Agreement (the “Development Agreement”) for the development and commercialization of a system for pulmonary delivery of insulin (and potentially other related compounds);

WHEREAS, pursuant to the Development Agreement, Aradigm granted Novo Nordisk an exclusive, worldwide license under Aradigm’s Patent Rights and Know-how, to register, use, market, distribute, sell, with sublicense rights, and certain rights to package and produce products resulting from such development activities; and

WHEREAS , the Parties desire to amend the Development Agreement to correspond with the Manufacturing and Supply Agreement entered into between Novo Nordisk and Aradigm on October 22, 2001.

Now Therefore , the Parties agree as follows:

AGREEMENT

1. Amendment of the Development Agreement .

The Parties hereby agree to amend the terms of the Development Agreement as provided below. To the extent that the Development Agreement is explicitly amended by this Amendment, the terms of the Amendment will control where the terms of the Agreement are contrary to or conflict with the following provisions. Where the Development Agreement is not explicitly amended, the terms of the Agreement will remain in force. Capitalized terms used in this Amendment that are not otherwise defined herein shall have the meanings as such terms are defined in the Agreement.

1.1 Article 1.12 of the Development Agreement is hereby deleted in its entirety and replaced with the following:

“1.12 Fully Burdened Costs” shall mean the cost of raw materials (excluding unless otherwise stated the Programme Compound), components, labour (production), quality (labour, material and external analysis), third party royalties, freight, import duties, taxes and reasonably allocated facilities, depreciation of equipment, product and professional support, and manufacturing overheads relating to the production of the specified items.”

1.2 Article 4.9(h) of the Development Agreement is hereby amended by deleting the sentence “In such case ARADIGM shall continue to be entitled to receive on an ongoing basis its [ * ] as specified in Article 5.2, but reduced by the [ * ] associated with the transfer prices, as specified in Articles 4.5 and 4.6, which shall be retained by NOVO NORDISK as compensation for being required to undertake the manufacturing function”, and replacing such sentence with the following:

“In such case ARADIGM shall be entitled to, and NOVO NORDISK shall pay, all amounts owed under Articles 5.2 and 5.5 of the Development Agreement with respect to ARADIGM’s [ * ] on Net Sales of such Packaged Product, but, for clarification purposes, Aradigm will not receive payments of the interim transfer price pursuant to Article 4.5.”

1.3 Article 4.11 of the Development Agreement is hereby amended by deleting the sentence “ARADIGM shall continue to share in the Gross Profit associated with Packaged Products produced in this facility as specified by Article 5 (with the [ * ] of product produced at such facility to be included in the calculation of Gross Profit)”, and replacing such sentence with the following:

“ARADIGM shall continue to share in the Gross Profit associated with Packaged Products produced in this facility as specified by Article 5 (with the [ * ] of product produced at such facility to be included in the calculation of Gross Profit), but, for clarification purposes, Aradigm will not receive payments of the interim transfer price pursuant to Article 4.5.”

1.4 Article 5.2 of the Development Agreement is hereby amended by deleting the sentence “In addition to the payments referred to in Article 5.1 above, each year during the term of this Agreement NOVO NORDISK shall pay to ARADIGM [ * ] on Net Sales of the Packaged Products and the Devices during such year; provided, however, that a different percentage may be applicable to Packaged Products containing Other Compounds as agreed by the parties pursuant to Article 2.1”, and replacing such sentence with the following:

“In addition to the payments referred to in Article 5.1 above, each year during the term of this Agreement NOVO NORDISK shall pay to ARADIGM [ * ] on Net Sales of the Packaged Products and the Devices during such year; provided, however, that a different percentage may be applicable to Packaged Products containing Other Compounds as agreed by the parties pursuant to Article 2.1.”

2. Miscellaneous

2.1 Full Force and Effect. This Amendment amends the terms of the Agreement and is deemed incorporated into, and governed by all the other terms of, the Development Agreement. The provisions of the Development Agreement, as amended by this Amendment, remain in full force and effect.

2.2 Counterparts; Facsimile . This First Amendment may be executed in counterparts and by facsimile.

In Witness Whereof , the Parties have executed this First Amendment as of the Effective Date.


Novo Nordisk A/S		Aradigm Corporation

Novo Allé DK-2880		3929 Point Eden Way
Bagsværd, Denmark		Hayward, CA 94545

By:	/s/ Kåre Schultz	By:	/s/ Richard P. Thompson
Name:	Kåre Schultz	Name:	Rich Thompson
Title:	Executive Vice President	Title:	Chairman, President and Chief Executive Officer

EXHIBIT 31.1

CERTIFICATION

I, Igor Gonda, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Aradigm Corporation;

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 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 controls 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 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.



	/s/ Igor Gonda
	Igor Gonda
	President and Chief Executive Officer

Dated: August 8, 2008

EXHIBIT 31.2

CERTIFICATION

I, Norman Halleen, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Aradigm Corporation;

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.



	/s/ Norman Halleen
	Norman Halleen
	Interim Chief Financial Officer

Dated: August 8, 2008

EXHIBIT 32.1

CERTIFICATION*

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code, Igor Gonda, President and Chief Executive Officer of Aradigm Corporation (the “Company”), and Norman Halleen, Interim Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:

1. The Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2008, to which this Certification is attached as Exhibit 32.1 (the “Quarterly Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, and

2. The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Quarterly Report and results of operations of the Company for the period covered by the Quarterly Report.

IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the 8th day of August 2008.


/s/ Igor Gonda President and Chief Executive Officer		/s/ Norman Halleen Interim Chief Financial Officer

Dated: August 8, 2008		Dated: August 8, 2008

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Aradigm Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

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