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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington D.C. 20549
  Form 10-K
  (Mark One)þ

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

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF
    THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to          .   Commission File Number: 0-28402
 Aradigm Corporation
 (Exact Name of Registrant as
    Specified in Its Charter)
  California


94-3133088(State or Other Jurisdiction
    of


(I.R.S. EmployerIncorporation or
    Organization)


Identification No.
)   3929 Point Eden Way, Hayward, CA 94545
 (Address of Principal Executive
    Offices)
  Registrants telephone number, including area code:
 (510) 265-9000
  Securities registered pursuant to Section 12(b) of the
    Act:
  None
  Securities registered pursuant to Section 12(g) of the
    Act:
  Common Stock, no par value
  o þ
  o þ
  o þ
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  o o þ
  Rule 12b-2 o þ




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##### 



TABLE OF
    CONTENTS
  
  PagePART IItem 1.


Business


1Item 1A.


Risk
    Factors


20Item 1B.


Unresolved Staff
    Comments


31Item 2.


Properties


31Item 3.


Legal
    Proceedings


31Item 4.


Submission of
    Matters to a Vote of Security Holders


31PART IIItem 5.


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


31Item 6.


Selected Financial
    Data


34Item 7.


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


35Item 7A.


Quantitative and
    Qualitative Disclosure About Market Risk


44Item 8.


Financial
    Statements and Supplementary Data


46Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


71Item 9A.


Controls and
    Procedures


71Item 9B.


Other
    Information


71PART IIIItem 10.


Directors,
    Executive Officers and Corporate Governance


71Item 11.


Executive
    Compensation


72Item 12.


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


84Item 13.


Certain
    Relationships and Related Transactions and Director
    Independence


86Item 14.


Principal
    Accountant Fees and Services


88PART IVItem 15.


Exhibits and
    Financial Statement Schedules


88SIGNATURES


91EXHIBIT
    INDEX


92EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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Forward
    Looking Statements
  Form 10-K
     PART I  Item 1.
    Business  Overview
     1




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Our
    Strategy
    
    Develop a proprietary portfolio of products for the treatment
    of respiratory diseases.  We believe our expertise
    in the development of pulmonary pharmaceutical products should
    enable us to advance and commercialize respiratory products for
    a variety of indications. We will continue to evaluate
    appropriate drugs and biologics for inclusion in our proprietary
    pipeline. We will do so in consideration of the expected market
    opportunity, cost, time and potential returns and the resources
    needed to advance our self-initiated programs and programs with
    collaborators. We select for development those products that can
    benefit from our experience in pulmonary delivery and that we
    believe are likely to provide a superior therapeutic profile or
    other valuable benefits to patients when compared to existing
    products. A key component of our strategy will be to continue to
    actively seek product opportunities where we can pursue either a
    new indication or route of administration for drugs already
    approved by the FDA. In each case, we will then combine the drug
    with the most appropriate pulmonary delivery system and
    formulation to create a proprietary product candidate with an
    attractive therapeutic profile and that is safe, effective and
    convenient for patients to use.
    Accelerate the regulatory approval process.  We
    believe our management teams regulatory expertise in
    pharmaceutical inhalation products, new indications and
    reformulations of existing drugs will enable us to 2




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pursue the most appropriate regulatory pathway for our product
    candidates. Because many of our product candidates incorporate
    FDA-approved drugs, we believe that the most expedient review
    and approval pathway for many of these product candidates in the
    United States will be under Section 505(b)(2) of the Food,
    Drug and Cosmetic Act, or the FDCA. Section 505(b)(2)
    permits the FDA to rely on scientific literature or on the
    FDAs prior findings of safety
    and/or
    effectiveness for approved drug products. By choosing to develop
    new applications or reformulations of FDA-approved drugs, we
    believe that we can substantially reduce or potentially
    eliminate the significant time, expenditure and risks associated
    with preclinical testing of new chemical entities and biologics,
    as well as utilize knowledge of these approved drugs to reduce
    the risk, time and cost of the clinical trials needed to obtain
    drug approval. In addressing niche market opportunities, we
    intend to pursue orphan drug designation for our products when
    appropriate. Orphan drug designation may be granted to drugs and
    biologics that treat rare life-threatening diseases that affect
    fewer than 200,000 persons in the United States. Such
    designation provides a company with the possibility of market
    exclusivity for up to seven years as well as regulatory
    assistance, reduced filing fees and possible tax credits.  
    Develop our own sales and marketing capacity for products in
    niche markets.  We intend to develop our own
    targeted sales and marketing force for those of our products
    prescribed primarily by the approximately 11,000 pulmonologists,
    or their subspecialty segments, in the United States. We expect
    to begin establishing a sales force as we approach
    commercialization of the first of such products. We believe that
    by developing a small sales group dedicated to interacting with
    disease-specific physicians in the respiratory field, we can
    create greater value from our products for our shareholders. For
    markets where maximizing sales of the product would depend on
    marketing to primary healthcare providers that are only
    addressable with a large sales force, we plan to enter into
    co-marketing arrangements. We also intend to establish
    collaborative relationships to commercialize our products in
    cases where we cannot meet these goals with a small sales force
    or when we need collaborators with relevant expertise and
    capabilities, such as the ability to address international
    markets. Through such collaborations, we may also utilize our
    collaborators resources and expertise to conduct large
    late-stage clinical development.
    Exploit the broad applicability of our delivery technology
    through opportunistic collaborations.  We continue
    to believe that companies can benefit by collaborating with us
    when our proprietary delivery technologies can create new
    pharmaceutical and biologics product opportunities. We intend to
    continue to exploit the broad applicability of our delivery
    technologies for systemic applications of our validated
    technologies in collaborations with companies that will fund
    development and commercialization. We intend to continue to
    out-license technologies and product opportunities that we have
    already developed to a certain stage and that are outside of our
    core strategic focus. Collaborations and out-licensing may
    generate additional revenues while we progress towards the
    development and potential launch of our own proprietary products.
    Outsource manufacturing activities.  We intend
    to to outsource the late stage clinical and commercial scale
    manufacturing of our products to conserve our capital for
    product development. We believe that the manufacturing processes
    for our AERx delivery systems are now sufficiently advanced that
    the required late stage clinical and commercial manufacturing
    capacity can be obtained from contract manufacturers. We are
    also utilizing contract manufacturers to make our liposomal
    formulations. With this approach, we seek manufacturers whose
    expertise should allow us to reduce risk and costs normally
    incurred if we were to build, operate and maintain large-scale
    production facilities ourselves.  Product
    Candidates
  and/or
 3




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Product Candidate

Indication

Stage of DevelopmentProprietary Programs Under
    DevelopmentARD-3100 (Liposomal ciprofloxacin)

Cystic Fibrosis

PreclinicalARD-1100 (Liposomal ciprofloxacin)

Inhalation Anthrax

PreclinicalCollaborative Programs Under
    DevelopmentAERx iDMS (Insulin)

Type 1 and Type 2 Diabetes

Phase 3ARD-1300 (Hydroxychloroquine)

Asthma

Phase 2(1)ARD-1500 (Liposomal treprostinil)

Pulmonary Arterial Hypertension

Preclinical     (1)
    
    A Phase 2a clinical study did not meet pre-specified
    clinical endpoints. The program is currently under review by
    APT, and in our view is unlikely to continue.    Liposomal
    Ciprofloxacin
    ARD-3100 
    Liposomal Ciprofloxacin for the Treatment of Cystic
    Fibrosis
     4




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Pseudomonas aeruginosa,
    Development
      ARD-1100 
    Liposomal Ciprofloxacin for the Treatment of Inhalation
    Anthrax
      Development
  Francisella
    tularensis,
 5




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F. tularensis
    AERx
    iDMS  Inhaled Insulin for the Treatment of
    Diabetes
     6




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Development
      
    HbAlc levels, a key marker of blood glucose control, are
    statistically the same in patients using AERx iDMS and patients
    using subcutaneous insulin injections.
    The onset of action of inhaled insulin via AERx iDMS is not
    significantly different from subcutaneous injection of
    rapid-acting insulin, but significantly faster than subcutaneous
    injection of human regular insulin.
    The duration of action of inhaled insulin via AERx iDMS is not
    significantly different from subcutaneous injection of human
    regular insulin, but significantly longer than subcutaneous
    injection of rapid-acting insulin.
    Although small declines were seen on some pulmonary function
    parameters following
    12-24 months
    of dosing on AERx iDMS, these declines were not considered to be
    of clinical significance, and the findings are not expected to
    have an impact on overall pulmonary safety of the product.      ARD-1300 
    Hydroxychloroquine for the Treatment of Asthma
   7




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Development
      ARD-1500 
    Treprostinil for the Treatment of Pulmonary Arterial
    Hypertension
     8




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Development
    Additional
    Potential Product Applications
    
    Smoking Cessation.  Based on internal work and
    work funded under grants from the National Institutes of Health,
    we are developing intellectual property in the area of smoking
    cessation. To date, we have two issued United States patents
    containing claims directed towards the use of titrated nicotine
    replacement therapy for smoking cessation.
    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 post-surgical patients.    Pulmonary
    Drug Delivery Background
      
    emitted dose;
    particle size distribution; and
    breathing maneuver.   9




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i.e.
    The AERx
    Delivery Technology
      
    Liquid Formulation.  Most drugs being
    considered by us for pulmonary delivery, especially biologics,
    are currently marketed in stable water formulations. The AERx
    delivery system takes advantage of existing liquid-drug
    formulations, reducing the time, cost and risk of formulation
    development compared to dry-powder-based technologies. The
    formulation technology of the AERx delivery system allows us to
    use 10




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conventional, sterile pharmaceutical manufacturing techniques.
    We believe that this approach will result in lower cost
    production methods than those used in dry powder systems because
    we are able to bypass much of the complex formulation and
    manufacturing processes required for those systems. Moreover,
    the liquid drug formulations used in the AERx delivery system
    are expected to have the same stability profile as the currently
    marketed versions of the same drugs. Because of the nature of
    liquid formulations, the additives we use are standard and
    therefore minimize safety concerns.  
    Efficient, Precise Aerosol Generation.  Our
    proprietary technology produces the low-velocity, small-particle
    aerosols necessary for efficient deposition of a drug in the
    deep lung. The AERx delivery system aerosolizes liquid drug
    formulations from pre-packaged, single-use, disposable packets.
    Each disposable packet comprises a small blister package of the
    drug and an adjacent aerosolization nozzle. The AERx device
    compresses the packet to push the drug through the nozzle and
    thereby creates the aerosol. No propellants are required since
    mechanical pressure is used to generate the aerosol. Each packet
    is used only once to avoid plugging or wearing that could
    degenerate aerosol quality if reused. Through this technology,
    we believe we can achieve highly efficient and reproducible
    aerosols. The AERx device also has the ability to deliver a
    range of patient-selected doses, making it ideal for
    applications where the dose must be changed between uses or over
    time.
    Breath-Control Technology and Automated Breath-Controlled
    Delivery.  Studies have shown that even well
    trained patients tend to develop improper inhalation technique
    over time, resulting in less effective therapy. The typical
    problems are associated with the inability to coordinate the
    start of inhalation with the activation of the dose delivery,
    inappropriate inspiratory flow rate and inhaled volume of air
    with the medication. The AERx delivery system employs breath
    control methods and technologies to guide the patient into the
    proper breathing maneuver. As a result, a consistent dose of
    medication is delivered each time the product is used. The
    characteristics of the breath control can be customized for
    different patient groups, such as young children or other
    patients with small lung volumes.      Formulation
    Technologies
   11




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Intellectual
    Property and Other Proprietary Rights
    non-United
       12




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Competition
      
    ARD-3100.  Currently marketed products include
    Tobi marketed by Novartis, Pulmozyme marketed by Genentech,
    Zithromax marketed by Pfizer and Cipro marketed by Bayer. CF
    products under development include inhaled aztreonam under
    development by Gilead, inhaled amikacin under development by
    Transave, Doripenam under development by Johnson &
    Johnson and inhaled ciprofloxacin under development by Bayer.
    ARD-1100.  Current anthrax treatment products
    include various oral generic and proprietary antibiotics, such
    as Cipro marketed by Bayer.
    AERx iDMS.  Currently marketed diabetes
    products include insulin products marketed by companies such as
    Novo Nordisk, Eli Lilly and sanofi-aventis. Pfizer, in
    collaboration with Nektar Therapeutics, has recently obtained
    FDA approval for Exubera, an inhaled form of insulin. Eli Lilly,
    in collaboration with Alkermes Pharmaceuticals, and Mannkind
    Corporation have announced they have inhaled insulin products in
    development.
    ARD-1300.  Currently marketed products include
    Advair marketed by GlaxoSmithKline, Xolair marketed by Novartis
    in collaboration with Genentech, Singulair marketed by Merck,
    Asmanex marketed by Schering-Plough and Pulmicort marketed by
    AstraZeneca International. Similar asthma products under 13




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development include Symbicort under development by AstraZeneca
    and Alvesco under development by sanofi-aventis.  
    ARD-1500.  Currently marketed products include
    intravenous delivery and subcutaneous infusion of prostacyclins,
    such as Remodulin marketed by United Therapeutics, and inhaled
    prostacyclins, such as Ventavis, marketed by Schering AG and
    CoTherix, (acquired by Actelion Pharmaceuticals Ltd. In 2007).      Government
    Regulation
  United
    States
          
    preclinical laboratory and animal tests, and formulation studies;
    the submission to the FDA of an Investigational New Drug
    application, or IND, for human clinical testing that must become
    effective before human clinical trials may begin;
    adequate and well controlled human clinical trials to establish
    the safety and efficacy of the product candidate for each
    indication for which approval is sought;
    the submission to the FDA of a New Drug Application, or NDA, and
    FDAs acceptance of the NDA for filing;
    satisfactory completion of an FDA inspection of the
    manufacturing facilities at which the product is to be produced
    to assess compliance with the FDAs Good Manufacturing
    Practices, or GMP; and
    FDA review and approval of the NDA.  Preclinical
    Testing
   14




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Clinical
    Trials
      
    Phase 1.  Phase 1 clinical trials
    usually involve the initial introduction of the drug into human
    subjects, frequently healthy volunteers. In Phase 1, the
    drug is usually evaluated for safety, including adverse effects,
    dosage tolerance, absorption, distribution, metabolism,
    excretion and pharmacodynamics.
    Phase 2.  Phase 2 usually involves
    studies in a limited patient population with the disease or
    condition for which the drug is being developed to
    (1) preliminarily evaluate the efficacy of the drug for
    specific, targeted indications; (2) determine dosage
    tolerance and appropriate dosage; and (3) identify possible
    adverse effects and safety risks.
    Phase 3.  If a drug is found to be
    potentially effective and to have an acceptable safety profile
    in Phase 2 studies, the clinical trial program will be
    expanded, usually to further evaluate clinical efficacy and
    safety by administering the drug in its final form to an
    expanded patient population at geographically dispersed clinical
    trial sites. Phase 3 studies usually include several
    hundred to several thousand patients.         15




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Section 505(b)(2)
    Applications
  e.g.
  and/or
    Orphan
    Drug Designation
   16




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International
    Regulation
    Scientific
    Advisory Board
    Name

Affiliation

Area of ExpertisePeter R. Byron, Ph.D.

Medical College of Virginia,
    Virginia Commonwealth University

Aerosol Science/PharmaceuticsPeter S. Creticos, M.D.

The Johns Hopkins University
    School of Medicine

Allergy/Immunology/AsthmaStephen J. Farr, Ph.D.

Zogenix, Inc.

Pulmonary Delivery/ PharmaceuticsMichael Powell, Ph.D.

Sofinnova Ventures

Drug DevelopmentRobert E. Ratner, M.D.

MedStar Research Institute

EndocrinologyAdam Wanner, M.D.

University of Miami

Chronic Obstructive Pulmonary
    Disease (COPD)Martin Wasserman, Ph.D.

Roche, AtheroGenics (retired)

Asthma     Employees
   17




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Corporate
    History and Website Information
  (510) 265-9000. Form 10-K, Form 10-Q, Form 8-K 1-800-SEC-0330.
    Executive
    Officers and Directors
    Name

Age

PositionIgor Gonda, Ph.D.


59


President, Chief Executive Officer
    and DirectorThomas C. Chesterman


47


Senior Vice President and Chief
    Financial OfficerBabatunde A.
    Otulana, M.D.


50


Senior Vice President, Development
    and Chief Medical OfficerFrank H. Barker(1)(3)


76


DirectorStephen O. Jaeger(1)(2)


62


DirectorJohn M. Siebert, Ph.D.(2)(3)


66


DirectorVirgil D. Thompson(1)(2)(3)


67


Chairman of the Board     (1)
    
    Member of the Audit Committee.(2)
    
    Member of the Compensation Committee.(3)
    
    Member of the Nominating and Corporate Governance Committee.  Igor Gonda, Ph.D.
  Thomas C. Chesterman
  Babatunde A. Otulana, M.D.
 18




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Frank H. Barker
  Stephen O. Jaeger
  John M. Siebert Ph.D.
  Virgil D. Thompson
 19




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Item 1A.
    Risk
    Factors  Except for historical information contained herein, the
    discussion in this Report on
    Form 10-K
    contains forward-looking statements, including, without
    limitation, statements regarding timing and results of clinical
    trials, the establishment of corporate partnering arrangements,
    the anticipated commercial introduction of our products and the
    timing of our cash requirements. These forward-looking
    statements involve certain risks and uncertainties that could
    cause actual results to differ materially from those in such
    forward-looking statements. Potential risks and uncertainties
    include, without limitation, those mentioned in this report and
    in particular the factors described below.
  Risks
    Related to Our Business
  We are
    an early-stage company.
    We
    recently changed our product development strategy, and if we do
    not successfully implement this new strategy our business and
    reputation will be damaged.
    We
    will need additional capital, and we may not be able to obtain
    it.
    
    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; 20




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
    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.    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.
    
    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
    establish a sales and marketing force to commercialize certain
    of our proprietary products if these products obtain regulatory
    approval.    Our
    dependence on collaborators may delay or prevent the progress of
    certain of our programs.
   21




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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.
    If our
    clinical trials are delayed because of patient enrollment or
    other problems, we would incur additional cost and postpone the
    potential receipt of revenues.
   22




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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.
      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.
    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.
   23




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Since
    one of our key proprietary programs, the ARD-3100 liposomal
    ciprofloxacin program, relies 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.
    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.
         24




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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.
    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.
    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.
    
    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.   25




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We
    depend upon our proprietary technologies, and we may not be able
    to protect our potential competitive proprietary
    advantage.
      non-United
  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.
     26




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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.
    If we
    do not continue to attract and retain key employees, our product
    development efforts will be delayed and impaired.
    Acquisition
    of complementary businesses or technologies could result in
    operating difficulties and harm our results of
    operations.
   27




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
    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.    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.
    We may
    be exposed to product liability claims, which would hurt our
    reputation, market position and operating results.
    If we
    cannot arrange for adequate third-party reimbursement for our
    products, our revenues will suffer.
   28




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Our
    use of hazardous materials could subject us to liabilities,
    fines and sanctions.
    If we
    are unable to effectively implement or maintain a system of
    internal controls over financial reporting, we may not be able
    to accurately or timely report our financial results and our
    stock price could be adversely affected.
  Form 10-K
  Risks
    Related to Our Common Stock
  Our
    stock price is likely to remain volatile.
    
    investor perception of us;
    research analyst recommendations and our ability to meet or
    exceed quarterly performance expectations of analysts or
    investors;
    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; 29




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
    publicity regarding actual or potential developments relating to
    products under development by us or our competitors;
    failure to maintain existing or establish new collaborative
    relationships;
    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.    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.
    We
    have implemented certain anti-takeover provisions, which make it
    less likely that we would be acquired and you would receive a
    premium price for your shares.
      We
    have never paid dividends on our capital stock, and we do not
    anticipate paying cash dividends for at least the foreseeable
    future.
   30




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Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders   PART II  Item 5.
    Market
    for the Registrants Common Stock Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities  Market
    Information
  over-the-counter,
 31




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High


Low2004First Quarter

$
13.70


$
9.05Second Quarter


11.35



4.20Third Quarter


6.40



3.30Fourth Quarter


10.00



5.902005First Quarter

$
8.65


$
5.60Second Quarter


5.90



5.00Third Quarter


6.05



4.95Fourth Quarter


5.25



3.452006First Quarter

$
5.04


$
3.03Second Quarter


3.32



1.29Third Quarter


2.24



1.40Fourth Quarter


1.69



0.812007First Quarter (through
    February 28, 2007)


1.46



0.90     Dividend
    Policy
   32




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##### Table of Contents



Stock
    Performance Graph
  over-the-counter.
  COMPARISON
    OF 5 YEAR CUMULATIVE TOTAL RETURN*
 Among Aradigm Corporation, The NASDAQ Composite Index
 And The NASDAQ Pharmaceutical Index
  
  Cumulative Total Return12/01



12/02



12/03



12/04



12/05



12/06Aradigm Corporation



100.00




22.82




24.08




24.37




10.28




2.54NASDAQ Composite



100.00




68.85




101.86




112.16




115.32




127.52NASDAQ Pharmaceutical



100.00




64.40




92.31




100.78




113.36




115.84   *
    
    This section is not soliciting material, is not
    deemed filed with the SEC, and is not to be
    incorporated by reference into any filing of the Company under
    the 1933 Act or 1934 Act, whether made before or after
    the date hereof and irrespective of any general incorporation
    language contained in such filing. 33




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##### Table of Contents



Item 6.
    Selected
    Financial Data  Form 10-K.
  Years Ended December 31,2006(1)


2005


2004


2003


2002Statements of operations
    data:Contract and license revenues

$
4,814


$
10,507


$
28,045


$
33,857


$
28,967Operating expenses:Research and development


22,1998



30,174



46,477



49,636



54,680General and administrative


10,717



10,895



11,934



10,391



10,394Restructuring and asset impairment


6,003















Total operating expenses


38,918



41,069



58,411



60,027



65,074Loss from operations


(34,104
)


(30,562
)


(30,366
)


(26,170
)


(36,107
)Gain on sale of patent and royalty
    interest (to related party)


20,000















Interest income


1,251



1,317



194



338



818Interest expense


(197
)


(6
)


(16
)


(138
)


(499
)Other income (expense)


23



36



(1
)






(143
)Net Loss

$
(13,027
)

$
(29,215
)

$
(30,189
)

$
(25,970
)

$
(35,931
)Basic and diluted net loss per
    share

$
(0.89
)

$
(2.01
)

$
(2.37
)

$
(2.59
)

$
(5.94
)Shares used in computing basic and
    diluted net loss per share


14,642



14,513



12,741



10,039



6,052   As of December 31,Pro Forma2006(2)


2006(1)


2005


2004


2003


2002Balance sheet data:Cash, cash equivalents and
    short-term investments

$
61,403


$
27,514


$
27,694


$
16,763


$
29,770


$
31,443Working capital


59,295



25,406



21,087



4,122



19,708



16,039Total assets


66,115



32,226



39,497



79,741



95,218



97,129Non-current portion of notes
    payable and capital lease obligations


7,686



7,686















497Convertible preferred stock






23,669



23,669



23,669



23,669



30,665Accumulated deficit


(287,865
)


(287,865
)


(274,838
)


(245,623
)


(215,436
)


(189,443
)Total shareholders equity
    (deficit)


53,611



(3,947
)


7,171



35,754



52,970



41,410     (1)
    
    On July 3, 2006, we further restructured our relationship
    with Novo Nordisk through an intellectual property assignment, a
    royalty prepayment and an eight-year promissory note with Novo
    Nordisk. The promissory note was secured by the royalty payments
    on any AERx iDMS sales by Novo Nordisk under the license with
    us. The key features of this restructuring included:  
    our transfer to Novo Nordisk of the ownership of 23 issued
    United States patents and their corresponding
    non-United
    States counterparts, if any, as well as related pending
    applications, in exchange for $12.0 million paid to us in
    cash. We retained exclusive, royalty-free control of these
    patents outside the field of glucose control and will continue
    to be entitled to royalties under our license agreement that
    will rise to an average of 34




---



##### Table of Contents



five percent or higher by the fifth year after commercialization
    with respect to any inhaled insulin products marketed or
    licensed by Novo Nordisk.  
    our receipt of a royalty prepayment of $8.0 million in
    exchange for a one percent reduction on our average royalty rate
    for the commercialized AERx iDMS product. As a result, we are
    entitled to receive royalty rates under our license agreement
    with Novo Nordisk that will commence at a minimum of 3.25% on
    launch, and that we estimate will average 5% over the life
    of the product.
    our issuance of an eight-year promissory note to Novo Nordisk in
    connection with our receipt from Novo Nordisk of a loan in the
    principal amount of $7.5 million with interest accruing at
    5% per year. The principal and interest are payable to Novo
    Nordisk in three equal payments of $3.5 million on
    July 2, 2012, July 1, 2013 and June 30, 2014. Our
    obligations under the note are secured by royalty payments upon
    any commercialization of the AERx iDMS product.  (2)
    
    Pro forma data reflects the issuance of 37,950,000 shares
    of common stock in an underwritten public offering that closed
    on January 30, 2007 and resulted in net proceeds, after
    underwriting discount and expenses, of approximately
    $33.3 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).  Item 7.
    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 this report. This discussion should be read in
    conjunction with the financial statements and notes to the
    financial statements contained in this report.
  Overview
     35




---



##### Table of Contents



Restructured
    Relationship with Novo Nordisk
      
    an amended and restated license agreement amending the
    development and license agreement previously in place with Novo
    Nordisk, expanding Novo Nordisks development and
    manufacturing rights to the AERx iDMS program and providing for
    royalties to us on future AERx iDMS net sales in lieu of a
    percentage interest in the gross profits from the
    commercialization of AERx iDMS, which royalties run until the
    later of last patent expiry or last use of our intellectual
    property and which apply to future enhancements or generations
    of our AERx delivery technology;
    a three-year agreement under which NNDT agreed to perform
    contract manufacturing of AERx iDMS-identical devices and dosage
    forms filled with compounds provided by us in support of
    preclinical and initial clinical development of other products
    that incorporate our AERx delivery system; and 36




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##### Table of Contents




    an amendment of the common stock purchase agreement in place
    with Novo Nordisk prior to the closing of the restructuring
    transaction, (i) deleting the provisions whereby we can
    require Novo Nordisk to purchase certain additional amounts of
    common stock, (ii) imposing certain restrictions on the
    ability of Novo Nordisk to sell shares of our common stock and
    (iii) providing Novo Nordisk with certain registration and
    information rights with respect to these shares.      
    our transfer to Novo Nordisk of the ownership of 23 issued
    United States patents and their corresponding
    non-United
    States counterparts, if any, as well as related pending
    applications, in exchange for $12.0 million paid to us in
    cash. We retained exclusive, royalty-free control of these
    patents outside the field of glucose control and will continue
    to be entitled to royalties that will rise to an average of five
    percent or higher by the fifth year after commercialization with
    respect to any inhaled insulin products marketed or licensed by
    Novo Nordisk.
    our receipt of a royalty prepayment of $8.0 million in
    exchange for a one percent reduction on our average royalty rate
    for the commercialized AERx iDMS product. As a result, we are
    entitled to receive royalty rates under our license agreement
    with Novo Nordisk that will commence at a minimum of 3.25% on
    launch, and that we estimate will average 5% over the life
    of the product.
    our issuance of an eight-year promissory note to Novo Nordisk in
    connection with our receipt from Novo Nordisk of a loan in the
    principal amount of $7.5 million with interest accruing at
    5% per year. The principal and interest are payable to Novo
    Nordisk in three equal payments of $3.5 million on
    July 2, 2012, July 1, 2013 and June 30, 2014. Our
    obligations under the note are secured by royalty payments upon
    any commercialization of the AERx iDMS product.     37




---



##### Table of Contents



Purchase
    and Sale of Intraject Technology
        Critical
    Accounting Policies and Estimates
    Revenue
    Recognition
   38




---



##### Table of Contents



Impairment
    of Long-Lived Assets
    Stock-Based
    Compensation Expense
          Results
    of Operations
  Years
    Ended December 31, 2006, 2005 and 2004
  Revenues
  Years Ended December 31,


% Increase (Decrease)2006


2005


2004


2004 to 2005


2005 to 2006(In thousands)Revenues:Related parties

$
59


$
8,013


$
26,999



(99
)%


(70
)%Unrelated parties


4,755



2,494



1,046



91
%


138
%Total revenues

$
4,814


$
10,507


$
28,045



(54
)


(63
)%    39




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##### Table of Contents



Research
    and Development Expenses
      Research
    and Development
  Years Ended December 31,


% Increase (Decrease)2006


2005


2004


2005 to 2006


2004 to 2005(In thousands)Research and development expenses:Collaborative

$
4,440


$
5,996


$
28,164



(26
)%


(79
)%Self-initiated


17,758



24,178



18,313



(27
)%


32
%Total research and development
    expenses

$
22,198


$
30,174


$
46,477



(26
)%


(35
)%          40




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##### Table of Contents



General
    and Administrative Expenses
  Years Ended December 31,


% Increase (Decrease)2006


2005


2004


2005 to 2006


2004 to 2005(In thousands)General and administrative expenses

$
10,717


$
10,895


$
11,934



(2
)%


(9
)%       Restructuring
    and Asset Impairment
  Years Ended December 31,


% Increase (Decrease)2006


2005


2004


2005 to 2006


2004 to 2005(In thousands)Restructuring and asset impairment
    expenses

$
6,003











100
%


     Gain on
    sale of patents and royalty interest
  Years Ended December 31,


% Increase (Decrease)2006


2005


2004


2005 to 2006


2004 to 2005(In thousands)Gain on sale of patent and royalty
    interest

$
20,000











100
%


      41




---



##### Table of Contents



Interest
    Income, Interest Expense and Other Income (Expense)
  Years Ended December 31,


% Increase (Decrease)2006


2005


2004


2005 to 2006


2004 to 2005(In thousands)Interest income, interest expense
    and other income (expense):Interest income

$
1,251


$
1,317


$
194



(5
)%


579
%Interest expense


(197
)


(6
)


(16
)


3,183
%


(63
)%Other income (expense)


23



36



(1
)


(36
)%


(3,700
)%Total interest income, interest
    expense and other income (expense)

$
1,077


$
1,347


$
177



(20
)%


661
%         Liquidity
    and Capital Resources
     42




---



##### Table of Contents



available-for-sale available-for-sale
    scale-up
     43




---



##### Table of Contents



Off-Balance
    Sheet Financings and Liabilities
    Contractual
    Obligations
    Payment Due by PeriodLess Than








AfterTotal


1 Year


1-3 Years


3-5 Years


5 Years(In thousands)Operating lease obligations

$
21,361


$
2,366


$
4,810


$
4,245


$
9,940Unconditional capital purchase
    obligations


485



485











Unconditional purchase obligations


1,595



1,595











Total contractual commitments

$
23,441


$
4,446


$
4,810


$
4,245


$
9,940   Recent
    Accounting Pronouncements
  Accounting for
    Income Taxes
  Fair Value Measurements
 Item 7A.  Quantitative
    and Qualitative Disclosure About Market Risk   44




---



##### Table of Contents



45




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM            Ernst &
    Young LLP
    46




---



##### Table of Contents



ARADIGM
    CORPORATION
  BALANCE SHEETS
  December 31,Pro Forma(Note 13)2006


2006


2005(In thousands, except share data)(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
60,902


$
27,013


$
27,694Short-term investments


501



501



Receivables


643



643



400Current portion of notes receivable
    from officers and employees










62Prepaid and other current assets


1,002



1,002



874Total current assets


63,048



29,159



29,030Property and equipment, net


2,592



2,592



9,875Non-current portion of notes
    receivable from officers and employees


31



31



129Other assets


444



444



463Total assets

$
66,115


$
32,226


$
39,497LIABILITIES, CONVERTIBLE
    PREFERRED STOCK AND
    SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable

$
1,151



1,151


$
3,034Accrued clinical and cost of other
    studies


278



278



398Accrued compensation


1,814



1,814



3,814Deferred revenue










222Other accrued liabilities


511



511



475Total current liabilities


3,754



3,754



7,943Non-current portion of deferred rent


1,035



1,035



714Non-current portion of capital lease


29



29



Note payable and accrued interest
    to related party


7,686



7,686



Commitments and contingenciesConvertible preferred stock, no par
    value; 2,050,000 shares authorized; issued and outstanding
    shares: 1,544,626 at December 31, 2006 and 2005;
    liquidation preference of $41,866 at December 31, 2006 and
    2005; none outstanding on an unaudited pro forma basis






23,669



23,669Shareholders equity (deficit):Preferred stock,
    2,950,000 shares authorized but none outstandingCommon stock, no par value;
    authorized shares: 100,000,000 at December 31, 2006;
    150,000,000 at December 31, 2005; issued and outstanding
    shares: 14,765,474 at December 31, 2006; 14,562,809 at
    December 31, 2005; and 53,951,175 on an unaudited pro forma
    basis


341,472



283,914



282,004Accumulated other comprehensive
    income


4



4



5Accumulated deficit


(287,865
)


(287,865
)


(274,838
)Total shareholders equity
    (deficit)


53,611



(3,947
)


7,171Total liabilities, convertible
    preferred stock and shareholders equity (deficit)

$
66,115



32,226


$
39,497    47




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##### Table of Contents



ARADIGM
    CORPORATION
  STATEMENTS OF OPERATIONS
  Years Ended December 31,2006


2005


2004(In thousands, except per share data)Contract and license revenues:Related parties

$
59


$
8,013


$
26,999Unrelated parties


4,755



2,494



1,046Total revenues


4,814



10,507



28,045Operating expenses:Research and development


22,198



30,174



46,477General and administrative


10,717



10,895



11,934Restructuring and asset impairment


6,003







Total expenses


38,918



41,069



58,411Loss from operations


(34,104
)


(30,562
)


(30,366
)Gain on sale of patent and royalty
    interest (to related party)


20,000







Interest income


1,251



1,317



194Interest expense


(197
)


(6
)


(16
)Other income (expense)


23



36



(1
)Net loss

$
(13,027
)

$
(29,215
)

$
(30,189
)Basic and diluted net loss per
    common share

$
(0.89
)

$
(2.01
)

$
(2.37
)Shares used in computing basic and
    diluted net loss per common share


14,642



14,513



12,741    48




---



##### Table of Contents



ARADIGM
    CORPORATION
  STATEMENT OF CONVERTIBLE PREFERRED STOCK
 AND SHAREHOLDERS EQUITY (DEFICIT)
  Accumulated





TotalConvertible











Other





ShareholdersPreferred Stock


Common Stock


Deferred


Comprehensive


Accumulated


EquityShares


Amount


Shares


Amount


Compensation


Income (Loss)


Deficit


(Deficit)(In thousands, except share data)Balances at December 31, 2003


1,544,626


$
23,669



12,550,239


$
268,406


$



$
(2
)

$
(215,434
)

$
52,970Issuance of common stock for cash,
    net of issuance costs of $817, including warrants valued at
    $2,278










1,666,679



11,683















11,683Issuance of common stock under the
    employee stock purchase plan










167,946



911















911Issuance of common stock upon
    exercise of stock options










81



1















1Issuance of common stock upon
    exercise of warrants










74,200



304















304Issuance of options and warrants to
    purchase common stock for services














82















82Comprehensive loss:Net loss


























(30,189
)


(30,189
)Net change in unrealized loss on
    available-for-sale
    investments






















(8
)






(8
)Total comprehensive loss






























(30,197
)Balances at December 31, 2004


1,544,626



23,669



14,459,145



281,387







(10
)


(245,623
)


35,754Issuance of common stock under the
    employee stock purchase plan










93,662



458















458Issuance of common stock upon
    exercise of stock options










10,077



42















42Adjustment to common stock shares
    for rounding of partial shares from the reverse stock split










(75
)


















Warrant revaluation














90















90Issuance of options for services














27



(21
)










6Amortization of deferred
    compensation


















21











21Comprehensive loss:Net loss


























(29,215
)


(29,215
)Net change in unrealized gain
    (loss) on
    available-for-sale
    investments






















15







15Total comprehensive loss






























(29,200
)Balances at December 31, 2005


1,544,626



23,669



14,562,809



282,004







5



(274,838
)


7,171Issuance of common stock under the
    employee stock purchase plan










111,553



286















286Issuance of common stock under the
    restricted stock award plan










145,500



















Issuance of common stock upon
    exercise of stock options










645



2















2Stock-based compensation related to
    issuance of stock option grants














1,622















1,622Reversal of restricted stock award
    due to forfeiture










(55,033
)


















Net loss


























(13,027
)


(13,027
)Net change in unrealized gain
    (loss) on
    available-for-sale
    investments






















(1
)






(1
)Total comprehensive loss






























(13,028
)Balances at December 31, 2006


1,544,626


$
23,669



14,765,474


$
283,914


$



$
4


$
(287,865
)

$
(3,947
)    49




---



##### Table of Contents



ARADIGM
    CORPORATION
  STATEMENTS OF CASH FLOWS
  Years Ended December 31,2006


2005


2004(In thousands)Cash flows from operating
    activities:Net loss

$
(13,027
)

$
(29,215
)

$
(30,189
)Adjustments to reconcile net loss
    to net cash used in operating activities:Non-cash asset impairment on
    property and equipment


4,014







Amortization and accretion of
    investments






50



166Depreciation and amortization


934



1,412



3,813Stock-based compensation expense
    related to employee stock options and employee stock purchases


1,622







Loss on retirement and sale of
    property and equipment


164



268



544Cost of warrants and common stock
    options for services






117



82Amortization and accretion of
    investments






50



Gain on sale of patent and royalty
    interest


(20,000
)






Changes in operating assets and
    liabilities:Receivables


(243
)


(301
)


41Prepaid and other current assets


(128
)


728



308Other assets


19



(24
)


(51
)Accounts payable


(1,883
)


565



1,584Accrued compensation


(2,000
)


830



963Accrued liabilities


129



(558
)


439Deferred rent


321



(1,229
)


620Deferred revenue


(222
)


(7,250
)


(1,440
)Net cash used in operating
    activities


(30,298
)


(34,607
)


(23,120
)Cash flows from investing
    activities:Capital expenditures


(1,829
)


(5,311
)


(2,300
)Sales of property and equipment


4,000



50,292



Purchases of
    available-for-sale
    investments


(502
)


(5,330
)


(6,376
)Proceeds from maturities of
    available-for-sale
    investments






7,750



15,190Proceeds from sale of patents and
    royalty interest


20,000







Net cash provided by investing
    activities


21,669



47,401



6,514Cash flows from financing
    activities:Proceeds from the issuance of note
    payable to related party


7,500







Proceeds from issuance of common
    stock


288



500



12,899Payments received on notes
    receivable from officers and employees


160







Forgiveness of notes receivable
    from officers and employees






92



115Payments on capital lease
    obligations and equipment loans










(427
)Net cash provided by financing
    activities


7,948



592



12,587Net increase (decrease) in cash and
    cash equivalents


(681
)


13,386



(4,019
)Cash and cash equivalents at
    beginning of year


27,694



14,308



18,327Cash and cash equivalents at end of
    year

$
27,013


$
27,694


$
14,308Supplemental disclosure of cash
    flow information:Cash paid for interest

$
11


$
6


$
16Non-cash investing and financing
    activities:Issuance of options and warrants to
    purchase common stock for services






117



82Issuance of warrants with private
    placement of common stock










2,278    50




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##### Table of Contents



ARADIGM
    CORPORATION  NOTES TO FINANCIAL STATEMENTS
  1.
    Organization
    and Summary of Significant Accounting Policies  Organization
    Liquidity
    and Financial Condition
  and/or
  Use of
    Estimates
    Cash
    and Cash Equivalents
    Investments
  available-for-sale, available-for-sale other-than-temporary other-than-temporary,
 51




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##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   Notes Receivable
  and/or
  Property
    and Equipment
      Machinery and equipment


5 to 7 yearsFurniture and fixtures


5 to 7 yearsLab equipment


5 to 7 yearsComputer equipment and software


3 to 5 yearsLeasehold improvements


5 to 17 years   Impairment
    of Long-Lived Assets
    Revenue
    Recognition
   52




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##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   Research
    and Development
    Advertising
    Stock-Based
    Compensation
    Years Ended December 31,2005


2004Net loss  as reported

$
(29,215
)

$
(30,189
)Add:Stock-based employee compensation
    expense included in reported net loss


21



Less:Total stock-based employee
    compensation expense determined under fair value based method
    for all awards


(3,066
)


(4,585
)Pro forma net loss

$
(32,260
)

$
(34,774
)Basic and diluted net loss per
    common share:As reported

$
(2.01
)

$
(2.37
)Pro forma

$
(2.22
)

$
(2.73
)   Valuation
    assumptions
   53




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##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2006

2005

2004Employee Stock
    OptionsDividend yield


0
.0%


0
.0%


0
.0%Volatility factor


86
.6%


97
.6%


98
.0%Risk-free interest rate


4
.9%


3
.8%


3
.1%Expected life (years)


4
.2


4
.0


4
.0Weighted-average fair value of
    options granted during the periods


$1
.40


$4
.10


$5
.50   96-18,
  Adoption
    of SFAS No. 123R
    FAS123(R)-3, Share-Based paid-in-capital stock-based
 54




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##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
     December 31,2006Costs and expenses:Research and development

$
882General and administrative


740Total stock-based compensation
    expense

$
1,622Impact on basic and diluted net
    loss per common share

$
(0.11
)           Income
    Taxes
    Net
    Loss Per Common Share
   55




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##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
     Years Ended December 31,2006


2005


2004Outstanding stock options


3,064



1,730



1,883Unvested restricted stock


70







Warrants to purchase common stock


1,255



2,120



2,566Convertible preferred stock


1,236



1,236



1,236   Significant
    Concentrations
      Comprehensive
    Income (Loss)
  available-for-sales
  Recently
    Issued Accounting Pronouncements
  Accounting for
    Income Taxes
  Fair Value Measurements
 56




---



##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   2.
    Cash and
    Cash Equivalents and Investments    December 31,2006


2005Cash equivalents:Money market fund

$
1,248


$
1,321Commercial paper


25,765



26,373$
27,013


$
27,694Short-term investments:Corporate and government notes

$
501



   available-for-sale available-for-sale
  3.
    Property
    and Equipment    December 31,2006


2005Machinery and equipment

$
3,905


$
4,505Furniture and fixtures


1,142



1,150Lab equipment


2,658



2,539Computer equipment and software


3,798



3,790Leasehold improvements


1,068



1,564Property and equipment at cost


12,571



13,548Less accumulated depreciation and
    amortization


(10,204
)


(10,201
)Net depreciable assets


2,367



3,347Construction in progress


225



6,528Property and equipment, net

$
2,592


$
9,875     4.
    Leases,
    Commitments and Contingencies   57




---



##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    OperatingLeasesYear ending December 31:2007

$
2,3662008


2,4322009


2,3782010


2,2532011


1,9922012 and thereafter


9,940Total minimum lease payments

$
21,361         Indemnification
    Legal
    Matters
    5.
    Convertible
    Preferred Stock and Common Stock Warrants   58




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##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
      6.
    Shareholders
    Equity         59




---



##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
      Reverse
    Stock Split
  1-for-5
  Reserved
    Shares
    Other
    Common Stock Warrants
     60




---



##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   1996
    Equity Incentive Plan, 2005 Equity Incentive Plan and 1996
    Non-Employee Directors Plan
           61




---



##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
      62




---



##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
     Options OutstandingWeightedShares Available








Averagefor Grant of


Number of





ExerciseOption


Shares


Price per Share


PriceBalance at December 31, 2003


599,704



1,296,765


$
1.85



-


$
120.65


$
31.15Options authorized


762,774



















Options granted


(697,760
)


697,760


$
3.80



-


$
12.00


$
7.75Options exercised






(81
)

$
4.75



-


$
7.10


$
6.20Options cancelled


111,274



(111,274
)

$
1.85



-


$
117.85


$
31.60Balance at December 31, 2004


775,992



1,883,170


$
2.15



-


$
120.65


$
22.20Options authorized






















Options granted


(325,460
)


325,460


$
4.30



-


$
7.95


$
5.97Options exercised






(10,077
)

$
2.17



-


$
4.75


$
4.39Adjustment for rounding for
    reverse stock split






10















Options cancelled


468,854



(468,854
)

$
2.83



-


$
120.63


$
21.84Balance at December 31, 2005


919,386



1,729,709


$
2.83



-


$
120.63


$
19.47Options authorized


2,000,000



















Options granted


(2,498,000
)


2,498,000


$
1.02



-


$
3.77


$
2.11Options exercised






(645
)









$
2.83


$
2.83Restricted stock awards granted


(145,500
)


















Performance Bonus stock award
    granted


(100,000
)


















Options cancelled


1,163,083



(1,163,083
)

$
1.64



-


$
115.00


$
10.03Restricted share awards cancelled


55,033



















Balance at December 31, 2006


1,394,002



3,063,981


$
1.02



-


$
120.63


$
8.90  63




---



##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Options OutstandingWeighted





Options ExercisableAverage


Weighted





WeightedNumber


Remaining


Average





Averageof


Contractual


Exercise


Number of


ExerciseExercise Price Range

Shares


Life (In Years)


Price


Shares


Price$  1.02 -
    $  1.29


348,000



9.54


$
1.26



37,642


$
1.29$  1.52 -
    $  1.70


397,500



9.50



1.68



48,687



1.67$  1.80 -
    $  1.80


603,287



9.66



1.80



162,385



1.80$  1.87 -
    $  1.87


500,000



9.61



1.87







$  3.14 -
    $  5.30


384,494



8.09



4.37



179,257



4.95$  5.35 - $ 12.00


348,813



7.54



8.33



270,530



8.55$ 13.00 - $ 35.00


313,659



4.91



22.49



313,659



22.49$ 41.25 - $112.50


161,056



2.14



72.32



161,056



72.32$115.00 - $115.00


400



3.83



115.00



400



115.00$120.63 - $120.63


6,772



3.11



120.63



6,772



120.633,063,981



8.28


$
8.90



1,180,388


$
19.65   Performance
    Stock Award
    Employee
    Stock Purchase Plan
     64




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##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   7.
    Employee
    Benefit Plans    8.
    Related
    Party Transactions    Development
    and License Agreement
    January
    2005 Restructuring
    
    an amended and restated license agreement amending the
    Development and License Agreement previously in place with Novo
    Nordisk, expanding Novo Nordisks development and
    manufacturing rights to the AERx iDMS program and providing for
    royalties that will rise to an average of five percent or higher
    by the fifth year after commercialization to the Company on
    future AERx iDMS net sales; and
    a three-year agreement under which NNDT agreed to perform
    contract manufacturing of AERx iDMS-identical devices and dosage
    forms filled with compounds provided by the Company in support
    of preclinical and initial clinical development by the Company
    of other AERx products.   65




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##### Table of Contents



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


2005


2004Deferred revenue 
    beginning balance

$
222


$
11,491


$
12,931Payments:Novo Nordisk


59



727



25,373Other collaborator-funded programs


4,524



2,530



1,232Total payments


4,583



3,257



26,605Contract revenues recognized:Novo Nordisk


59



8,013



26,999Other collaborator-funded programs


4,746



2,494



1,046Total contract revenues recognized


4,805



10,507



28,045Deferred revenue at
    December 31, 2004 recognized on January 26, 2005 as
    payment for assets pursuant to the restructuring agreement with
    Novo Nordisk






4,019



Deferred revenue 
    ending balance






222



11,491Less: non-current portion of
    deferred revenue










(3,966
)Current portion of deferred revenue

$



$
222


$
7,525     July
    2006 Restructuring
     66




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##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
   Securities
    Purchase Agreements
      9.
    Income
    Taxes      December 31,2006


2005Net operating loss carry forward

$
96,000


$
91,800Deferred revenue






100Research and development credits


19,600



14,400Capitalized research and
    development


3,900



3,100Other


1,100



1,300Total deferred tax assets


120,600



110,700Valuation allowance


(120,600
)


(110,700
)Net deferred tax assets

$



$
        67




---



##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
        10.
    Restructuring
    and Asset Impairment  Accounting for Costs Associated
    with Exit or Disposal.
    Balance atNon-Cash


Restructuring








December 31,Type of Liability

Impairment


Charges


Adjustments


Payments


2006Year ended December 31,
    2006Severance and related benefits

$



$
2,134


$
(233
)

$
(1,185
)

$
716Out-placement services






88







(52
)


36Impairment on Intraject-related
    assets


4,014















$
4,014


$
2,222


$
(233
)

$
(1,237
)

$
752  68




---



##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  11.
    Sale of
    Intraject-Related Assets      12.
    Quarterly
    Results of Operations (unaudited)    March 31,


June 30,


September 30,


December 31,2006


2006


2006


2006Contract and license revenues

$
1,073


$
1,807


$
1,126


$
807Operating expenses:Research and development


6,740



6,357



4,547



4,554General and administrative


2,853



2,685



3,514



1,665Restructuring and asset impairment






5,370



347



286Total expenses


9,593



14,412



8,408



6,505Loss from operations


(8,520
)


(12,605
)


(7,282
)


(5,698
)Gain on sale of patent and royalty
    interest (to related parties)










20,000



Interest income


245



135



459



412Interest expense


(3
)


(3
)


(95
)


(96
)Other income (expense)


(7
)


40



(7
)


(3
)Net loss

$
(8,285
)

$
(12,433
)

$
13,075


$
(5,385
)Basic net income (loss) per common
    share

$
(0.57
)

$
(0.85
)

$
0.89


$
(0.37
)Diluted net income (loss) per
    common share

$
(0.57
)

$
(0.85
)

$
0.82


$
(0.37
)Shares used in computing basic net
    income (loss) per common share


14,563



14,656



14,660



14,531Shares used in computing diluted
    net income (loss) per common share


14,563



14,656



15,982



14,531   69




---



##### Table of Contents



ARADIGM CORPORATION
  NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  March 31,


June 30,


September 30,


December 31,2005


2005


2005


2005Contract and license revenues

$
7,714


$
1,212


$
719


$
862Operating expenses:Research and development


7,070



7,317



6,471



9,316General and administrative


3,235



2,713



2,326



2,621Total expenses


10,305



10,030



8,797



11,937Loss from operations


(2,591
)


(8,818
)


(8,078
)


(11,075
)Interest income


288



350



342



337Interest expense














(6
)Other income (expense)


(37
)


(8
)


8



73Net loss

$
(2,340
)

$
(8,476
)

$
(7,728
)

$
(10,671
)Basic and diluted net loss per
    common share

$
(0.16
)

$
(0.58
)

$
(0.53
)

$
(0.73
)Shares used in computing basic and
    diluted net loss per common share


14,459



14,512



14,518



14,563   13.
    Subsequent
    Events  Public
    Offering of Common Shares
     70




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Evaluation of disclosure controls and
    procedures:
    Changes in internal controls:
  Item 9B.
    Other
    Information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance  Identification
    of Directors and Executive Officers
    Audit
    Committee Information
  Form 10-K
   71




---



##### Table of Contents



Section 16(a)
    Compliance
      Code of
    Conduct and Ethics
    Item 11.
    Executive
    Compensation      Benchmarking
    of Cash and Equity Compensation
   72




---



##### Table of Contents



Compensation
    Components
  Base Salary.
    Annual Executive Bonus Plan.
       73




---



##### Table of Contents



Equity Awards.
          Severance Benefits.
 74




---



##### Table of Contents



Other Compensation.
    Non-EquityStock


Option


Incentive Plan


All OtherSalary


Bonus


Awards


Awards(1)


Compensation(2)


Compensation


TotalYear


($)


($)


($)


($)


($)


($)


($)Igor Gonda, Ph.D.(3)


2006



113,230



100,000



20,340



68,942



22,363



50,966



375,841President and Chief Executive
    OfficerThomas C. Chesterman


2006



305,076











202,471



48,202



28,596



584,291Senior Vice President and Chief
    Financial OfficerBabatunde A.
    Otulana, M.D.


2006



287,038











183,319



45,352



22,980



538,689Senior Vice President of
    Development and Chief Medical OfficerFormer Executive
    OfficersV. Bryan
    Lawlis, Jr., Ph.D.(4)


2006



274,139











259,936







452,393



986,468Former President and Chief
    Executive OfficerStephen J. Farr, Ph.D.(5)


2006



210,000











163,357







167,456



540,813Former Senior Vice President and
    Chief Scientific OfficerBobba Venkatadri(6)


2006



260,089











141,237







379,339



780,665Former Senior Vice President of
    Operations     (1)
    
    The method of and assumptions used to calculate the value of the
    options granted to our named executive officers is discussed in
    note 1 to our financial statements included elsewhere in
    this prospectus.(2)
    
    Each executive officer employed at the end of 2006 received a
    cash bonus for achievement of certain corporate and personal
    goals pursuant to our 2006 Executive Bonus Plan.(3)
    
    Dr. Gonda commenced his employment with us on
    August 10, 2006. Dr. Gondas bonus reflects a
    $100,000 signing bonus for accepting his offer of employment.
    Dr. Gonda also received a stock bonus award for up to
    100,000 shares of our common stock. We valued
    Dr. Gondas stock bonus on a Monte-Carlo simulation
    due to the path-dependency of the award. We believe that the
    Monte-Carlo simulation provides a more precise estimate for the
    grant date fair value of a market-based equity award as the
    simulation allows for vesting throughout the vesting period. In
    accordance with Securities and Exchange Commission regulations,
    the cost reflected in the table above only includes the portion
    of the awards value that was amortized for 2006.
    Dr. Gondas compensation includes $21,000 in director
    fees and options expense of $2,485 that were both attributable
    to his services as a director prior to his appointment as our
    CEO in August 2006. Dr. Gonda has not received any
    additional compensation for his services as a director since he
    was appointed CEO in August 2006.(4)
    
    Dr. Lawlis ceased serving as our CEO on August 10,
    2006. 75




---



##### Table of Contents



(5)
    
    Dr. Farr ceased serving as an executive officer on
    June 16, 2006.(6)
    
    Mr. Venkatadri ceased serving as an executive officer on
    September 15, 2006.    Life


401(k)


EmployeeClub


Health Care


Moving


Insurance


Matching


Stock


Director


SeveranceMemberships


Contribution


Allowance


Premiums


Contributions


Purchase


Fees


Benefits


TotalName

Year


($)


($)


($)


($)


($)


($)


($)


($)


($)Igor Gonda, Ph.D.


2006



350



3,386



23,304



595



2,331







21,000







50,966Thomas C. Chesterman


2006



350



14,855







1,707



9,065



2,618











28,596Babatunde A.
    Otulana, M.D.


2006



350



14,855







1,613



6,163















22,980Former Executive
    OfficersV. Bryan
    Lawlis, Jr., Ph.D.


2006







6,585







1,172



7,000











437,636



452,393Stephen J. Farr, Ph.D.


2006



300



7,427







872



4,643











154,214



167,456Bobba Venkatadri


2006



300



7,230







1,184



5,344











365,281



379,339   2006
    Grants of Plan-Based Awards
    All OtherOption





GrantEstimated Future


Estimated Future


Awards:


Exercise


Date FairPayouts Under Non-


Payouts Under


Number of


or Base


Value ofEquity Incentive


Equity Incentive


Securities


Price of


Stock andPlan Awards(1)


Plan Awards(2)


Underlying


Option


OptionGrant


Approval


Target


Maximum


Target


Maximum


Options


Awards


Awards(3)Name

Date


Date


($)


($)


(#)


(#)


(#)


($/sh)


($)Igor Gonda, Ph.D.


5/18/2006



5/18/2006



















4,000



1.52



3,9968/10/2006



8/8/2006



37,743



56,615



















8/10/2006



8/8/2006



















500,000



1.87



621,50010/4/2006



10/4/2006











100,000



100,000











94,000Thomas C. Chesterman


3/7/2006



3/2/2006



122,031



183,046



















3/7/2006



3/2/2006



















80,000



3.77



198,0326/27/2006



6/27/2006



















300,000



1.29



255,660Babatunde A.
    Otulana, M.D.


3/7/2006



3/2/2006



114,815



172,223



















3/7/2006



3/2/2006



















60,000



3.77



148,5246/8/2006



6/8/2006



















300,000



1.70



334,650Former Executive
    OfficersV. Bryan
    Lawlis, Jr., Ph.D.


3/7/2006



3/2/2006



157,500



236,250



















3/7/2006



3/2/2006



















150,000



3.77



371,310Stephen J. Farr, Ph.D.


3/7/2006



3/2/2006



119,524



179,286



















3/7/2006



3/2/2006



















60,000



3.77



148,524Bobba Venkatadri


3/7/2006



3/2/2006



112,692



169,038



















3/7/2006



3/2/2006



















40,000



3.77



99,016  76




---



##### Table of Contents



(1)
    
    Reflects each executive officers participation in our 2006
    Executive Bonus Plan. The amount of bonus actually paid under
    the plan is reflected in the summary compensation table above.(2)
    
    Reflects a stock bonus award for up to 100,000 shares of
    our common stock granted to Dr. Gonda. Dr. Gonda will
    earn half of the shares underlying his award if the average
    closing price of our common stock between June 9, 2007 and
    August 9, 2007 is 120% of the average closing price between
    June 9, 2006 and August 9, 2006 and he will earn the
    other half of the shares underlying his award if the average
    closing price of our common stock between June 9, 2008 and
    August 9, 2008 is 125% of the greater of (i) the
    average closing price between June 9, 2006 and
    August 9, 2006 or (ii) the average closing price
    between June 9, 2007 and August 9, 2007. In addition,
    if the average closing price of our common stock between
    June 9, 2008 and August 9, 2008 is 150% of the average
    closing price between June 9, 2006 and August 9, 2006,
    Dr. Gonda will be entitled to receive the full award of
    100,000 share notwithstanding either of the first two price
    targets being achieved. If we undergo a change in control on or
    prior to August 9, 2008, Dr. Gonda, will earn the full
    100,000 shares underlying the award if our shareholders
    receive consideration in the transaction that reflects at least
    a 15% return per annum from the average closing price of our
    common stock between June 9, 2006 and August 9, 2006.
    If we terminate Dr. Gondas employment without cause
    between August 10, 2007 and August 9, 2008 and
    Dr. Gonda had previously received the first half of his
    bonus award, he will be entitled to receive the second half of
    the bonus award upon his termination. In no event will the value
    of the shares awarded to Dr. Gonda under the bonus award
    exceed $1,000,000.(3)
    
    The method of and assumptions used to calculate the value of
    options granted to our named executive officers is discussed in
    note 1 to our Financial Statements included elsewhere in
    this prospectus. We valued Dr. Gondas stock bonus on
    a Monte-Carlo simulation due to the path-dependency of the
    award. We believe that the Monte-Carlo simulation provides a
    more precise estimate for the grant date fair value of a
    market-based equity award as the simulation allows for vesting
    throughout the vesting period. 77




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##### Table of Contents



Outstanding
    Equity Awards At December 31, 2006
    Option Awards


Stock AwardsMarket orNumber of


Payout ValueUnearned


of UnearnedShares, Units


Shares, UnitsNumber of Securities








or Other


or OtherUnderlying Unexercised


Option





Rights That


Rights ThatOptions


Exercise


Option


Have Not


Have NotExercisable


Unexercisable


Price(1)


Expiration


Vested


VestedName




(#)


(#)


($)


Date


(#)


($)Igor Gonda, Ph.D.


(2
)


















100,000



94,000(3
)






500,000



1.87



08/10/2016







(4
)


2,000



2,000



1.52



05/18/2016







4,000







5.30



05/19/2015







4,000







5.30



05/20/2014







2,000







5.30



05/13/2014







4,000







6.50



05/15/2013







4,000







4.75



02/19/2013







2,000







17.25



05/21/2012







4,000







17.15



05/17/2012







3,000







24.10



02/11/2012







Thomas C. Chesterman


(5
)


37,500



262,500



1.29



06/27/2016







(6
)






80,000



3.77



03/07/2016







(6
)


15,312



19,688



5.90



02/22/2015







(6
)


13,061



5,939



12.00



02/27/2014







(5
)


6,562



438



4.75



02/19/2013







30,000







13.00



09/05/2012







Babatunde A.
    Otulana, M.D.


(5
)


37,500



262,500



1.70



06/08/2016







(6
)






60,000



3.77



03/07/2016







(6
)


10,936



14,064



5.90



02/22/2015







(6
)


15,123



6,877



12.00



02/27/2014







(5
)


9,375



625



4.75



02/19/2013







26,000







24.10



02/11/2012







8,000







17.20



09/20/2011







12,000







30.00



03/15/2011







8,000







112.50



02/15/2010







3,000







35.00



05/21/2009







3,000







60.00



02/02/2009







2,000







61.25



03/30/2008







11,000







64.38



10/21/2007







V. Bryan
    Lawlis, Jr., Ph.D.






9,420







5.90



02/22/2015







23,437







12.00



02/27/2014







Stephen J. Farr, Ph.D.


























Bobba Venkatadri


























  78




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##### Table of Contents



(1)
    
    Represents the fair market value of a share of our common stock
    on the grant date of the option.(2)
    
    The stock bonus award vests as described in the section above
    entitled 2006 Grants of Plan-based Awards.(3)
    
    The option vests over four years with 1/4 of the shares of
    underlying common stock vesting on the first anniversary of the
    grant date and 1/48 of the shares of underlying common stock
    vesting each month thereafter.(4)
    
    The option vests over one year with 1/4 of the shares of
    underlying common stock vesting every three months from the
    grant date.(5)
    
    The option vests over four years with 1/16 of the shares of
    underlying common stock vesting every three months from the
    grant date.(6)
    
    The option vests over four years with 1/4 of the shares of
    underlying common stock vesting on the first anniversary of the
    grant date and 1/16 of the shares of underlying common stock
    vesting every three months thereafter.  2006
    Option Exercises and Stock Vested
    Pension
    Benefits
    Nonqualified
    Deferred Compensation
   79




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##### Table of Contents



Potential
    Payments Upon Termination or Change in Control
    Termination WithoutCause orConstructiveTermination Without





TerminationCause Prior to a


Change in


Following a ChangeChange in Control


Control


in ControlName

Benefit

($)


($)


($)Igor Gonda, Ph.D.

Salary


320,000







640,000Bonus


114,032







228,064Option acceleration










562,180Stock bonus acceleration(1)






90,000



90,000Benefits continuation


12,539







25,078Career transition assistance










20,000Total value:


446,571



90,000



1,565,322Thomas C. Chesterman

Salary


306,000







459,000Bonus


87,234







130,851Option acceleration










482,388Benefits continuation


18,906







28,360Career transition assistance










10,000Total value:


412,140







1,110,599Babatunde A.
    Otulana, M.D.

Salary


289,000







433,500Bonus


82,388







123,582Option acceleration










497,583Benefits continuation


18,906







28,360Career transition assistance










10,000Total value:


390,294







1,093,025     (1)
    
    The value of Dr. Gondas stock bonus is calculated
    using a value of $0.90 per share of common stock, which was
    the last reported closing sale price of our common stock prior
    to December 31, 2006. Dr. Gonda is only entitled to
    acceleration of his stock bonus upon a change in control if our
    shareholders receive consideration in the transaction that
    reflects at least a 15% return per annum from the average
    closing price of our common stock between June 9, 2006 and
    August 9, 2006.  Termination without cause prior to a change in
    control.
  
    an amount equal to such executives annual base salary;
    an amount equal to such executives current target bonus
    multiplied by the average annual percentage achievement of
    corporate goals for the three complete fiscal years preceding
    the termination date; and
    continuation of such executives health insurance benefits
    for 12 months.   80




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##### Table of Contents



Termination without cause or constructive termination
    following a change in control. 18-month
  
    a lump sum payment equal to such executives annual base
    salary multiplied by two, in the case of Dr. Gonda, and one
    and one-half, in the case of Mr. Chesterman and
    Dr. Otulana;
    a lump sum payment equal to such executives current target
    bonus multiplied by (i) the average annual percentage
    achievement of corporate goals for the three complete fiscal
    years preceding the termination date and (ii) two, in the
    case of Dr. Gonda, and one and one-half, in the case of
    Mr. Chesterman and Dr. Otulana;
    continuation of such executives health insurance benefits
    for 24 months, in the case of Dr. Gonda, and
    18 months, in the case of Mr. Chesterman and
    Dr. Otulana;
    reimbursement of actual career transition assistance
    (outplacement services) incurred by such executive within six
    months of termination in an amount up to $20,000, in the case of
    Dr. Gonda, and $10,000, in the case of Mr. Chesterman
    and Dr. Otulana; and
    acceleration of vesting of any stock options or restricted stock
    awards that remain unvested as of the date of such
    executives termination.  Compensation
    Committee Interlocks and Insider Participation
    Report of
    the Compensation Committee
  Regulation S-K, Form 10-K. Form 10-K.
          81




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##### Table of Contents



Non-Employee
    Director Compensation
    FeesEarned orPaid in


OptionCash


Awards(1)


TotalName

($)


($)


($)Frank H. Barker(2)


39,500



12,266



51,766Igor Gonda(3)


21,000



2,485



23,485Stephen O. Jaeger(4)


45,750



12,266



58,016John Nehra(5)


8,500



5,626



14,126Wayne Roe(6)


10,000



5,626



15,626John M. Siebert(7)


4,810



3,165



7,975Richard Thompson(8)


10,000



213,333



223,333Virgil D. Thompson(9)


68,250



20,889



89,139     (1)
    
    The method of and assumptions used to calculate the value of the
    options granted to our directors is discussed in note 1 to
    our financial statements included elsewhere in this prospectus.(2)
    
    Mr. Barker owns options to purchase up to
    54,043 shares of our common stock as of December 31,
    2006, of which 36,043 shares are vested as of
    December 31, 2006.(3)
    
    Represents compensation received by Dr. Gonda in 2006 for
    services as a director prior to his appointment as our CEO in
    August 2006. Dr. Gonda did not receive compensation for his
    services as a director after he was appointed as our CEO.
    Dr. Gonda owns options to purchase up to
    551,809 shares of our common stock as of December 31,
    2006, of which 49,809 shares are vested as of
    December 31, 2006.(4)
    
    Mr. Jaeger owns options to purchase up to
    32,000 shares of our common stock as of December 31,
    2006, of which 14,000 shares are vested as of
    December 31, 2006.(5)
    
    Mr. Nehra did not stand for re-election to our board of
    directors at the 2006 Annual Meeting of Shareholders.
    Mr. Nehra did not own any outstanding options as of
    December 31, 2006.(6)
    
    Mr. Roe did not stand for re-election to our board of
    directors at the 2006 Annual Meeting of Shareholders.
    Mr. Roe did not own any outstanding options as of
    December 31, 2006.(7)
    
    Dr. Siebert joined our board in November 2006. The fees
    paid to him represent a pro-rated portion of his retainer for
    the period during which he served as a director.
    Dr. Siebert owns options to purchase up to
    30,000 shares of our common stock as of December 31,
    2006, of which no shares are vested as of December 31, 2006.(8)
    
    Mr. R. Thompson did not stand for re-election to our board
    of directors at the 2006 Annual Meeting of Shareholders.
    Mr. R. Thompsons option awards includes option
    expense related to the options that were granted when he
    previously served as our CEO. Mr. R. Thompson did not own
    any outstanding options as of December 31, 2006.(9)
    
    Mr. V. Thompson owns options to purchase up to
    87,600 shares of our common stock as of December 31,
    2006, of which 54,600 shares are vested as of
    December 31, 2006.   82




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##### Table of Contents



out-of-pocket
    Limitation
    of Liability of Officers and Directors and
    Indemnification
     83




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##### Table of Contents



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


Percent ofBeneficial Owner

Shares


Total (%)Wellington Management Company
    LLP(1)


6,441,400



11.975 State Street
    Boston, MA 02109RA Capital Management, LLC(2)


6,355,000



11.8111 Huntington Avenue,
    Suite 610
    Boston, MA 02199Kevin C. Tang(3)


6,262,500



11.64401 Eastgate Mall
    San Diego, CA 92121Highbridge International LLC(4)


4,330,000



8.0c/o Harmonic Fund Services
    The Cayman Corporate Centre,
    4th Floor
    27 Hospital Road
    Grand Cayman, Cayman Islands, B.W.I.Deerfield Capital, L.P.(5)


3,303,100



6.1780
    3rd Avenue,
    37th Floor
    New York, NY 10017Igor Gonda(6)


79,626



*Thomas C. Chesterman(7)


155,001



*Babatunde A. Otulana(8)


191,266



*Virgil D. Thompson(9)


75,000



*Frank H. Barker(10)


45,043



*Stephen O. Jaeger(11)


23,000



*John M. Siebert(12)


11,500



*V. Bryan Lawlis(13)


43,869



*Stephen J. Farr(14)


10,470



*All executive officers and
    directors as a group (7 persons)(15)


580,436



1.1     (1)
    
    Based upon information contained in a Schedule 13G as filed
    with the Securities and Exchange Commission (SEC) on
    February 12, 2007 and a letter to us dated March 16,
    2007, Wellington Management Company LLP
    (Wellington), in its capacity as investment adviser,
    may be deemed to beneficially own 6,441,400 shares of the
    Issuer which are held of record by clients of Wellington. Those
    clients have the right to receive, or the power to direct the
    receipt of, dividends from, or the proceeds from the sale of,
    such securities. No such client is known by Wellington to have
    such right or power with respect to more than five percent of
    our securities. Wellington disclaims beneficial ownership and
    any pecuniary interest in these shares.(2)
    
    Based upon information contained in a Schedule 13G filed
    with the SEC on February 5, 2007, Mr. Richard H.
    Aldrich and Mr. Peter Kolchinsky (together, the
    Managers) are the managers of RA Capital Management,
    LLC (Capital), which is the sole general partner of
    RA Capital Biotech Fund, L.P. (the Fund). In the
    aggregate, the Reporting Persons beneficially own
    6,355,000 shares of common stock (the RA
    Shares). Each Reporting Person beneficially own the RA
    Shares. The Fund has the power to vote and dispose of the shares
    beneficially owned by it (as described above). Capital, as the
    sole general partner of the Fund, has the sole authority to vote
    and dispose of the RA Shares. The Manager, by virtue of his
    position as manager of Capital, has the shared authority to vote
    and dispose of all of the RA Shares. 84




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##### Table of Contents



(3)
    
    Based upon information contained in a Schedule 13G filed
    with the SEC on February 2, 2007, Kevin C Tang may be
    deemed to beneficially own 6,262,500 shares of our common
    stock, which includes 5,310,000 shares owned of record by
    Tang Capital Partners, for which Tang Capital Management, of
    which Mr. Tang is manager, serves as general partner.
    Mr. Tang shares voting and dispositive power over such
    shares with Tang Capital Management and Tang Capital Partners.
    With respect to the remaining 952,500 shares that
    Mr. Tang may be deemed to beneficially own, Mr. Tang
    has shared dispositive power and no voting power over
    210,000 shares and sole voting and dispositive power over
    742,500 shares. Mr. Tang disclaims beneficial
    ownership of all such shares except to the extent of his
    pecuniary interest therein.(4)
    
    Based upon information contained in a Schedule 13G filed
    with the SEC on February 1, 2007, each reporting person
    therein may be deemed the beneficial owner of
    4,330,000 shares of common stock owned by Highbridge
    International LLC. Highbridge International LLC is a subsidiary
    of Highbridge Master L.P. Highbridge Capital Corporation and
    Highbridge Capital L.P. are limited partners of Highbridge
    Master L.P. Highbridge GP, Ltd. is the General Partner of
    Highbridge Master L.P. Highbridge GP, LLC is the General Partner
    of Highbridge Capital L.P. Highbridge Capital Management, LLC is
    the trading manager of Highbridge Capital Corporation,
    Highbridge Capital L.P., Highbridge International LLC and
    Highbridge Master L.P. Glenn Dubin is a Co-Chief Executive
    Officer of Highbridge Capital Management, LLC. Henry Swieca is a
    Co-Chief Executive Officer of Highbridge Capital Management,
    LLC. The foregoing should not be construed in and of itself as
    an admission by any reporting person as to beneficial ownership
    of shares of common stock owned by another reporting person. In
    addition, each of Highbridge Master L.P., Highbridge Capital
    Corporation, Highbridge Capital L.P., Highbridge GP, Ltd.,
    Highbridge GP, LLC, Highbridge Capital Management, LLC, Glenn
    Dubin and Henry Swieca disclaims beneficial ownership of shares
    of common stock owned by Highbridge International LLC.(5)
    
    Based upon information contained in a Schedule 13G filed
    with the SEC on February 2, 2007, and information provided
    directly to us, Deerfield Capital, L.P., Deerfield Special
    Situations Fund, L.P., Deerfield Management Company, L.P.,
    Deerfield Special Situations Fund International Limited and
    James E. Flynn share voting and dispositive power over the
    3,303,100 shares reflected as beneficially owned.(6)
    
    Includes 30,000 shares of common stock subject to options
    exercisable within 60 days of March 1, 2007.(7)
    
    Includes 144,998 shares of common stock subject to options
    and 570 shares of common stock subject to outstanding
    warrants that are each exercisable within 60 days of
    March 1, 2007.(8)
    
    Includes 183,247 shares of common stock subject to options
    exercisable within 60 days of March 1, 2007.(9)
    
    Includes 71,100 shares of common stock subject to options
    exercisable within 60 days of March 1, 2007.  (10)
    
    Includes 45,043 shares of common stock subject to options
    exercisable within 60 days of March 1, 2007.(11)
    
    Includes 23,000 shares of common stock subject to options
    exercisable within 60 days of March 1, 2007.(12)
    
    Includes 7,500 shares of common stock subject to options
    exercisable within 60 days of March 1, 2007.(13)
    
    Includes 32,857 shares of common stock subject to options
    and 1,709 shares of common stock subject to outstanding
    warrants that are each exercisable within 60 days of
    March 1, 2007. Dr. Lawlis ceased serving as our
    President and Chief Executive Officer as of August 10, 2006.(14)
    
    Dr. Farr ceased serving as an executive officer on
    June 16, 2006.(15)
    
    See footnotes (6) through (12) above. 85




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##### Table of Contents



Equity
    Compensation Plan Information
    Common StockAvailable forFuture IssuanceCommon Stock to





Under Equitybe Issued Upon


Weighted-Average


CompensationExercise of


Exercise Price of


Plans (ExcludingOutstanding Options


Outstanding Options


Securities ReflectedPlan Category

and Rights(1)


and Rights


in Column (a))(1)(a)


(b)


(c)Equity compensation plans approved
    by Aradigm stockholders


3,163,981
(1)

$
8.90



1,834,849
(2)Equity compensation plans not
    approved by Aradigm stockholders










     (1)
    
    Includes 100,000 shares that we agreed to grant to our
    President and Chief Executive Officer, in two 50,000 share
    tranches, to be earned based on achievement of minimum share
    price appreciation objectives after each of the first two years
    from the employment start date of August 10, 2006.(2)
    
    Issued pursuant to the Companys 1996 Equity Incentive
    Plan, the 1996 Non-Employee Directors Plan, and the 2005
    Equity Incentive Plan and shares available for future issuance
    includes 340,847 shares reserved under ESPP. (See
    Note 6 of the Financial Statements.)  Item 13.
    Certain
    Relationships and Related Transactions and Director
    Independence  Independence
    of Directors
    Review,
    Approval or Ratification of Transactions with Related
    Persons
    Transactions
    with Novo Nordisk
   86




---



##### Table of Contents




    an amended and restated license agreement amending the
    development and license agreement previously in place with Novo
    Nordisk, expanding Novo Nordisks development and
    manufacturing rights to the AERx iDMS program and providing
    for royalties to us on future AERx iDMS net sales in lieu of a
    percentage interest in the gross profits from the
    commercialization of AERx iDMS, which royalties run until the
    later of last patent expiry or last use of our intellectual
    property and which apply to future enhancements or generations
    of our AERx delivery technology;
    a three-year agreement under which NNDT agreed to perform
    contract manufacturing of AERx
    iDMS-identical
    devices and dosage forms filled with compounds provided by us in
    support of preclinical and initial clinical development of other
    products that incorporate our AERx delivery system; and
    an amendment of the common stock purchase agreement in place
    with Novo Nordisk prior to the closing of the restructuring
    transaction, (i) deleting the provisions whereby we can
    require Novo Nordisk to purchase certain additional amounts of
    common stock, (ii) imposing certain restrictions on the
    ability of Novo Nordisk to sell shares of our common stock
    and (iii) providing Novo Nordisk with certain registration
    and information rights with respect to these shares.      
    our transfer to Novo Nordisk of the ownership of 23 issued
    United States patents and their corresponding
    non-United
    States counterparts, if any, as well as related pending
    applications, in exchange for $12.0 million paid to us in
    cash. We retained exclusive, royalty-free control of these
    patents outside the field of glucose control and will continue
    to be entitled to royalties that will rise to an average of five
    percent or higher by the fifth year after commercialization with
    respect to any inhaled insulin products marketed or licensed by
    Novo Nordisk.
    our receipt of a royalty prepayment of $8.0 million in
    exchange for a one percent reduction on our average royalty rate
    for the commercialized AERx iDMS product. As a result, we will
    receive royalty rates under our license agreement with Novo
    Nordisk that will commence at a minimum of 3.25% on launch, and
    that we estimate will average 5% over the life of the
    product.
    our issuance of an eight-year promissory note to Novo Nordisk in
    connection with our receipt from Novo Nordisk of a loan in
    the principal amount of $7.5 million with interest accruing
    at 5% per year. The principal and accrued interest will be
    payable to Novo Nordisk in three equal payments of
    $3.5 million on July 2, 2012, July 1, 2013 and
    June 30, 2014, commencing in six years at a five percent
    annual interest rate. Our obligations under the note are secured
    by royalty payments upon any commercialization of the AERx iDMS
    product.   87




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##### Table of Contents



Item 14.
    Principal
    Accountant Fees and Services    Fiscal Year EndedDecember 31,2006


2005(In thousands)Audit Fees(1)

$
505


$
377Audit-related Fees






30Tax Fees






All Other Fees






Total Fees

$
505


$
407     (1)
    
    Audit fees represent fees for professional services related to
    the performance of the audit of our annual financial statements,
    review of our quarterly financial statements and consents on SEC
    filings.  case-by-case
   PART IV  Item 15.
    Exhibits
    and Financial Statements Schedules  (a)(1) Financial
    Statements.
    Page inForm 10-KReport of
    Independent Registered Public Accounting Firm


46Balance
    Sheets  December 31, 2006 and 2005


47Statements of
    Operations  Years ended December 31, 2006, 2005
    and 2004


48Statements of
    Convertible Preferred Stock and Shareholders Equity
    (Deficit)  Years ended December 31, 2006, 2005
    and 2004


49Statements of Cash
    Flows  Years ended December 31, 2006, 2005 and
    2004


50Notes to Financial
    Statements


51  88




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##### Table of Contents



(2) Financial
    Statement Schedules.
    (3) Exhibits.
  Exhibit No.

Description3
.1(1)

Amended and Restated Articles of
    Incorporation of the Company.3
.2(2)

Bylaws of the Company, as amended.3
.3(3)

Certificate of Determination of
    Series A Junior Participating Preferred Stock.3
.4(4)

Amended and Restated Certificate
    of Determination of Preferences of Series A Convertible
    Preferred Stock.3
.5(3)

Certificate of Amendment of
    Amended and Restated Articles of Incorporation of the Company.3
.6(3)

Certificate of Amendment of
    Certificate of Determination of Series A Junior
    Participating Preferred Stock.3
.7(5)

Certificate of Amendment of
    Amended and Restated Articles of Incorporation of the Company.3
.8(5)

Certificate of Amendment of
    Certificate of Determination of Series A Junior
    Participating Preferred Stock.3
.9(6)

Certificate of Amendment of
    Amended and Restated Articles of Incorporation of the Company.4
.1

Reference is made to
    Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.8 and 3.9.4
.2(1)

Specimen common stock certificate.10
.1(1)+

Form of Indemnity Agreement
    between the Registrant and each of its directors and officers.10
.2(7)+

2005 Equity Incentive Plan, as
    amended.10
.3(1)+

Form of the Companys
    Incentive Stock Option Agreement under the 2005 Equity Incentive
    Plan.10
.4(1)+

Form of the Companys
    Non-statutory Stock Option Agreement under the 2005 Equity
    Incentive Plan.10
.5(1)+

1996 Non-Employee Directors
    Stock Option Plan.10
.6(1)+

Form of the Companys
    Non-statutory Stock Option Agreement under the 1996 Non-Employee
    Directors Stock Option Plan.10
.7(7)+

Employee Stock Purchase Plan, as
    amended.10
.8(1)+

Form of the Companys
    Employee Stock Purchase Plan Offering Document.10
.9(8)

Lease Agreement for the property
    located in Phase V of the Britannia Point Eden Business Park in
    Hayward, California, dated January 28, 1998, between the
    Company and Britannia Point Eden, LLC.10
.10(9)

Rights Agreement, dated as of
    August 31, 1998, between the Company and ComputerShare
    Trust Company, N.A.10
.10a(3)

Amendment to Rights Agreement,
    dated as of October 22, 2001, by and between the Company
    and ComputerShare Trust Company, N.A.10
.10b(3)

Amendment to Rights Agreement,
    dated as of December 6, 2001, by and between the Company
    and ComputerShare Trust Company, N.A.10
.10c(10)

Amendment No. 3 to Rights
    Agreement, dated as of January 24, 2007, by and between the
    Company and Computershare Trust Company, N.A.10
.11(11)

Securities Purchase Agreement,
    dated as of November 7, 2003, by and among the Company and
    the purchasers named therein.10
.12(12)

Securities Purchase Agreement,
    dated as of November 14, 2003, by and among the Company and
    the purchaser named therein.10
.13(13)#

Restructuring Agreement, dated as
    of September 28, 2004, by and among the Company, Novo
    Nordisk A/ S and Novo Nordisk Delivery Technologies, Inc.10
.14(14)

Securities Purchase Agreement,
    dated as of December 17, 2004, by and among the Company and
    the purchasers named therein.10
.15(7)

Amended and Restated Stock
    Purchase Agreement, dated as of January 26, 2005, by and
    among the Company, Novo Nordisk A/ S and Novo Nordisk
    Pharmaceuticals, Inc.10
.16(7)+

Form of Change of Control
    Agreement entered into between the Company and certain of the
    Companys senior officers.10
.17(15)+

Executive Officer Severance
    Benefit Plan. 89




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##### Table of Contents



Exhibit No.

Description10
.18(6)+

Form of the Companys
    Restricted Stock Bonus Agreement under the 2005 Equity Incentive
    Plan.10
.19(16)#

Second Amended and Restated
    License Agreement, dated as of July 3, 2006, by and between
    the Company and Novo Nordisk A/ S.10
.20(7)

Promissory Note and Security
    Agreement, dated July 3, 2006, by and between the Company
    and Novo Nordisk A/ S.10
.21(7)#

Asset Purchase Agreement, dated as
    of August 25, 2006, by and between the Company and Zogenix,
    Inc.10
.22(7)+

Employment Agreement, dated as of
    August 10, 2006, with Dr. Igor Gonda.23
.1

Consent of Independent Registered
    Public Accounting Firm.24
.1

Power of Attorney. Reference is
    made to the signature page.31
.1

Section 302 Certification of
    the Chief Executive Officer.31
.2

Section 302 Certification of
    the Chief Financial Officer.32
.1

Section 906 Certification of
    the Chief Executive Officer and the Chief Financial Officer.     +
    
    Represents a management contract or compensatory plan or
    arrangement.#
    
    The Commission has granted the Companys request for
    confidential treatment with respect to portions of this exhibit.(1)
    
    Incorporated by reference to the Companys
    Form S-1
    (No. 333-4236)
    filed on April 30, 1996, as amended.(2)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on August 14, 1998.(3)
    
    Incorporated by reference to the Companys
    Form 10-K
    filed on March 29, 2002.(4)
    
    Incorporated by reference to the Companys
    Form S-3
    (No. 333-76584)
    filed on January 11, 2002, as amended.(5)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on August 13, 2004.(6)
    
    Incorporated by reference to the Companys
    Form 10-K
    filed on March 31, 2006.(7)
    
    Incorporated by reference to the Companys
    Form S-1
    (No. 333-138169)
    filed on October 24, 2006, as amended.(8)
    
    Incorporated by reference to the Companys
    Form 10-K
    filed on March 24, 1998, as amended.(9)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on September 2, 1998.(10)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on January 30, 2007.(11)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on November 12, 2003.(12)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on November 20, 2003.(13)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on December 23, 2004.(14)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on August 14, 2006.(15)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on November 15, 2004.(16)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on October 13, 2005.  (b)
    Index to
    Exhibits.    (c)
    Financial
    Statement Schedules.   90




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##### Table of Contents



SIGNATURES      By:
    /s/  Igor
    Gonda   President and Chief Executive Officer
  attorneys-in-fact Form 10-K, attorneys-in-fact,
      Signature

Title

Date/s/  Igor
    GondaIgor
    Gonda

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

March 30, 2007/s/  Thomas
    C. ChestermanThomas
    C. Chesterman

Sr. VP and Chief Financial Officer
    (Principal Financial and Accounting Officer)

March 30, 2007/s/  Virgil
    D. ThompsonVirgil
    D. Thompson

Chairman of the Board and Director

March 30, 2007/s/  Frank
    H. BarkerFrank
    H. Barker

Director

March 30, 2007/s/  Stephen
    O. JaegerStephen
    O. Jaeger

Director

March 30, 2007/s/  John
    M. SiebertJohn
    M. Siebert

Director

March 30, 2007  91




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##### Table of Contents



EXHIBIT INDEX  Exhibit No.

Description3
.1(1)

Amended and Restated Articles of
    Incorporation of the Company.3
.2(2)

Bylaws of the Company, as amended.3
.3(3)

Certificate of Determination of
    Series A Junior Participating Preferred Stock.3
.4(4)

Amended and Restated Certificate
    of Determination of Preferences of Series A Convertible
    Preferred Stock.3
.5(3)

Certificate of Amendment of
    Amended and Restated Articles of Incorporation of the Company.3
.6(3)

Certificate of Amendment of
    Certificate of Determination of Series A Junior
    Participating Preferred Stock.3
.7(5)

Certificate of Amendment of
    Amended and Restated Articles of Incorporation of the Company.3
.8(5)

Certificate of Amendment of
    Certificate of Determination of Series A Junior
    Participating Preferred Stock.3
.9(6)

Certificate of Amendment of
    Amended and Restated Articles of Incorporation of the Company.4
.1

Reference is made to
    Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.8 and 3.9.4
.2(1)

Specimen common stock certificate.10
.1(1)+

Form of Indemnity Agreement
    between the Registrant and each of its directors and officers.10
.2(7)+

2005 Equity Incentive Plan, as
    amended.10
.3(1)+

Form of the Companys
    Incentive Stock Option Agreement under the 2005 Equity Incentive
    Plan.10
.4(1)+

Form of the Companys
    Non-statutory Stock Option Agreement under the 2005 Equity
    Incentive Plan.10
.5(1)+

1996 Non-Employee Directors
    Stock Option Plan.10
.6(1)+

Form of the Companys
    Non-statutory Stock Option Agreement under the 1996 Non-Employee
    Directors Stock Option Plan.10
.7(7)+

Employee Stock Purchase Plan, as
    amended.10
.8(1)+

Form of the Companys
    Employee Stock Purchase Plan Offering Document.10
.9(8)

Lease Agreement for the property
    located in Phase V of the Britannia Point Eden Business Park in
    Hayward, California, dated January 28, 1998, between the
    Company and Britannia Point Eden, LLC.10
.10(9)

Rights Agreement, dated as of
    August 31, 1998, between the Company and ComputerShare
    Trust Company, N.A.10
.10a(3)

Amendment to Rights Agreement,
    dated as of October 22, 2001, by and between the Company
    and ComputerShare Trust Company, N.A.10
.10b(3)

Amendment to Rights Agreement,
    dated as of December 6, 2001, by and between the Company
    and ComputerShare Trust Company, N.A.10
.10c(10)

Amendment No. 3 to Rights
    Agreement, dated as of January 24, 2007, by and between the
    Company and Computershare Trust Company, N.A.10
.11(11)

Securities Purchase Agreement,
    dated as of November 7, 2003, by and among the Company and
    the purchasers named therein.10
.12(12)

Securities Purchase Agreement,
    dated as of November 14, 2003, by and among the Company and
    the purchaser named therein.10
.13(13)#

Restructuring Agreement, dated as
    of September 28, 2004, by and among the Company, Novo
    Nordisk A/ S and Novo Nordisk Delivery Technologies, Inc.10
.14(14)

Securities Purchase Agreement,
    dated as of December 17, 2004, by and among the Company and
    the purchasers named therein.10
.15(7)

Amended and Restated Stock
    Purchase Agreement, dated as of January 26, 2005, by and
    among the Company, Novo Nordisk A/ S and Novo Nordisk
    Pharmaceuticals, Inc.10
.16(7)+

Form of Change of Control
    Agreement entered into between the Company and certain of the
    Companys senior officers. 92




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##### Table of Contents



Exhibit No.

Description10
.17(15)+

Executive Officer Severance
    Benefit Plan.10
.18(6)+

Form of the Companys
    Restricted Stock Bonus Agreement under the 2005 Equity Incentive
    Plan.10
.19(16)#

Second Amended and Restated
    License Agreement, dated as of July 3, 2006, by and between
    the Company and Novo Nordisk A/ S.10
.20(7)

Promissory Note and Security
    Agreement, dated July 3, 2006, by and between the Company
    and Novo Nordisk A/ S.10
.21(7)#

Asset Purchase Agreement, dated as
    of August 25, 2006, by and between the Company and Zogenix,
    Inc.10
.22(7)+

Employment Agreement, dated as of
    August 10, 2006, with Dr. Igor Gonda.23
.1

Consent of Independent Registered
    Public Accounting Firm.24
.1

Power of Attorney. Reference is
    made to the signature page.31
.1

Section 302 Certification of
    the Chief Executive Officer.31
.2

Section 302 Certification of
    the Chief Financial Officer.32
.1

Section 906 Certification of
    the Chief Executive Officer and the Chief Financial Officer.     +
    
    Represents a management contract or compensatory plan or
    arrangement.#
    
    The Commission has granted the Companys request for
    confidential treatment with respect to portions of this exhibit.(1)
    
    Incorporated by reference to the Companys
    Form S-1
    (No. 333-4236)
    filed on April 30, 1996, as amended.(2)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on August 14, 1998.(3)
    
    Incorporated by reference to the Companys
    Form 10-K
    filed on March 29, 2002.(4)
    
    Incorporated by reference to the Companys
    Form S-3
    (No. 333-76584)
    filed on January 11, 2002, as amended.(5)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on August 13, 2004.(6)
    
    Incorporated by reference to the Companys
    Form 10-K
    filed on March 31, 2006.(7)
    
    Incorporated by reference to the Companys
    Form S-1
    (No. 333-138169)
    filed on October 24, 2006, as amended.(8)
    
    Incorporated by reference to the Companys
    Form 10-K
    filed on March 24, 1998, as amended.(9)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on September 2, 1998.(10)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on January 30, 2007.(11)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on November 12, 2003.(12)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on November 20, 2003.(13)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on December 23, 2004.(14)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on August 14, 2006.(15)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on November 15, 2004.(16)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on October 13, 2005. 93