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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, 2007oro

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

94-3133088(State or Other Jurisdiction
    of
    Incorporation or Organization)

(I.R.S. Employer
    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
    Large accelerated filer
    o

Accelerated filer
    o

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

Smaller reporting
    company þ   o þ
      DOCUMENTS INCORPORATED BY REFERENCE
  Form 10-K




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TABLE OF
    CONTENTS
   
 PagePART IItem 1.

Business


1Item 1A.

Risk Factors


20Item 1B.

Unresolved Staff Comments


30Item 2.

Properties


30Item 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


33Item 7.

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


33Item 7A.

Quantitative and Qualitative Disclosure About
    Market Risk


49Item 8.

Financial Statements and Supplementary Data


50Item 9.

Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


85Item 9A.

Controls and Procedures


85Item 9B.

Other Information


85PART IIIItem 10.

Directors, Executive Officers and Corporate
    Governance


86Item 11.

Executive  Compensation


86Item 12.

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


86Item 13.

Certain Relationships and Related Transactions
    and Director Independence


86Item 14.

Principal Accountant Fees and Services


86PART IVItem 15.

Exhibits and Financial Statement Schedules


87SIGNATURES


90EXHIBIT 23.1EXHIBIT 23.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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Forward
    Looking Statements
  Form 10-K
     PART I  Item 1.
    Business  Overview
  ®
  120-day
   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 2




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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 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 associates, 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 product development
    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 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 3




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manufacturers whose expertise should allow us to reduce risk and
    the costs normally incurred if we were to build, operate and
    maintain large-scale production facilities ourselves.  Product
    Candidates
  and/or
  Product Candidate

Indication

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

Cystic Fibrosis

Phase 2ARD-3150 (Liposomal ciprofloxacin)

Bronchiectasis

Phase 1ARD-1100 (Liposomal ciprofloxacin)

Inhalation Anthrax

PreclinicalARD-1600 (Nicotine)

Tobacco Smoking Cessation

Phase 1Collaborative Programs Under DevelopmentARD-1550 (Inhaled treprostinil)(1)

Pulmonary Arterial Hypertension

PreclinicalARD-1500 (Inhaled liposomal treprostinil)

Pulmonary Arterial Hypertension

PreclinicalARD-1300 (Hydroxychloroquine)(2)

Asthma

Phase 2ARD-1700 (combination products)

Asthma, COPD

Preclinical     (1)
    
    A bridging clinical study is to be conducted in 2008 to compare
    delivery with AERx Essence against the nebulizer used in the
    completed Phase 3 TRIUMPH study.(2)
    
    A Phase 2a clinical study did not meet pre-specified clinical
    endpoints. The program is currently under review by APT, a
    privately held biotechnology company.    Proprietary
    Programs Under Development
  Liposomal
    Ciprofloxacin
   4




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ARD-3100
    and ARD 3150  Liposomal Ciprofloxacin for the
    Treatment of Infections in Cystic Fibrosis and Non-CF
    Bronchiectasis Patients
    Pseudomonas
    aeruginosa,
    Development
      14-day Pseudomonas aeruginosa
 5




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ARD-1100 
    Liposomal Ciprofloxacin for the Treatment of Inhalation
    Anthrax
      Development
  Francisella tularensis, F.
    tularensis
    Smoking
    Cessation Therapy
  ARD-1600
    (Nicotine) Tobacco Smoking Cessation Therapy
   6




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Development
    ®
    Collaborative
    Programs Under Development:
  ARD-1550 
    Treprostinil for the Treatment of Pulmonary Arterial
    Hypertension
      Development
  once-a-day
 7




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ARD-1300 
    Hydroxychloroquine for the Treatment of Asthma
    Development
    ARD-1700
    (combination products) and Other Potential
    Applications
    
    Cyclodextrin Combination Products for Asthma, Cystic Fibrosis
    and other Chronic Obstructive Pulmonary Disease
    (COPD).  Asthma is a common chronic disorder of
    the lungs characterized by airway inflammation, airway
    hyper-responsiveness or airway narrowing due to certain stimuli.
    Despite several treatment options, asthma remains a major
    medical problem associated with high morbidity and large
    economic costs to the society. According to the American Lung
    Association, asthma accounted for $11.5 billion in direct
    healthcare costs annually in the United States, of which the
    largest single expenditure, at $5 billion, was prescription
    drugs. Primary symptoms of asthma include coughing, wheezing,
    shortness of breath and tightness of the chest with symptoms
    varying in frequency and degree. According to Datamonitor, in
    2005 asthma affected 41.5 million people in developed
    countries, with 9.5 million of those affected being
    children. The highest prevalence of asthma occurs in the United
    States and the United Kingdom. According to the American Lung
    Association, non-asthma COPD was the fourth leading cause of
    death in America, claiming the lives of 118,171 Americans in
    2004. In 2005, an estimated 8.9 million Americans reported
    a physician diagnosis of chronic bronchitis, an obstructive
    disease of the lung. In August 2007, we and CyDex began to
    collaborate on the development and commercialization of products
    that utilize our AERx pulmonary delivery technology and
    CyDexs solubilization and stabilization technologies to
    deliver inhaled corticosteroids, anticholinergics and beta-2
    agonists for the treatment of asthma and COPD.
    Pain Management System.  Based on our internal
    work and a currently dormant collaboration with GlaxoSmithKline,
    we have developed a significant body of preclinical and Phase 1
    clinical data on the use of inhaled morphine and fentanyl, and
    Phase 2 clinical data on inhaled morphine, with our proprietary
    AERx delivery system for the treatment of breakthrough pain in
    cancer and postsurgical patients.   8




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Pulmonary
    Drug Delivery Background
      
    emitted dose;
    particle size distribution; and
    breathing maneuver.      i.e.
   9




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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 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.   10




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®
    Formulation
    Technologies
    Intellectual
    Property and Other Proprietary Rights
     11




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Competition
   12




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
    ARD-3100.  Currently marketed products include
    TOBI marketed by Novartis, Pulmozyme marketed by Genentech, and
    Cipro* marketed by Bayer. CF products under development include
    inhaled aztreonam under development by Gilead, inhaled liposomal
    amikacin under development by Transave, Doripenem under
    development by Johnson & Johnson and inhaled
    ciprofloxacin under development by Bayer. Bayer was recently
    granted orphan drug designation for an inhaled ciprofloxacin
    product for the treatment of cystic fibrosis in Europe.
    ARD-1100.  Current anthrax treatment products
    include various oral generic and branded antibiotics, such as
    Ciprofloxacin marketed by Bayer.
    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
    development include Symbicort under development by AstraZeneca
    and Alvesco under development by Sanofi-Aventis.
    ARD-1550.  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; 13




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
    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
    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. 14




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
    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.          Section 505(b)(2)
    Applications
  e.g.
  and/or
 15




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Orphan
    Drug Designation
      International
    Regulation
   16




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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/PharmaceuticsPhyllis Gardner, M.D.

Stanford University

Clinical Pharmacology/Drug DevelopmentMichael Konstan, M.D.

Rainbow Babies and Childrens Hospital

Pulmonary Disease/Cystic FibrosisMichael Powell, Ph.D.

Sofinnova Ventures

Drug DevelopmentAdam Wanner, M.D.

University of Miami

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

Roche, AtheroGenics (retired)

Asthma     Employees
    Corporate
    History and Website Information
  (510) 265-9000. Form 10-K, Form 10-Q, Form 8-K http://www.aradigm.com 1-800-SEC-0330. http://www.sec.gov
   17




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Executive
    Officers and Directors
    Name

Age

PositionIgor Gonda, Ph.D.


60


President, Chief Executive Officer and DirectorNorman Halleen


54


Interim Chief Financial OfficerBabatunde A. Otulana, M.D.


51


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


77


DirectorStephen O. Jaeger(1)(2)(4)


63


DirectorTimothy P. Lynch(1)(2)


38


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


67


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


68


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.(4)
    
    Mr. Jaeger is not standing for reelection at the 2008
    annual meeting of shareholders.  Igor Gonda, Ph.D.
  Norman Halleen
  Babatunde A. Otulana, M.D.
  Frank H. Barker
 18




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Stephen O. Jaeger
  Timothy P. Lynch start-up start-up.
  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 Annual 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 terminate certain of
    our programs, and any such delay or termination would harm our
    business prospects and stock price.
   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.
    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.
   22




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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.
          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.
   24




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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.    We
    depend upon our proprietary technologies, and we may not be able
    to protect our potential competitive proprietary
    advantage.
   25




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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.
    
    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.   27




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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.
    Our
    use of hazardous materials could subject us to liabilities,
    fines and sanctions.
   28




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If we
    are unable to effectively implement or maintain a system of
    internal control over financial reporting, we may not be able to
    accurately or timely report our financial results and our stock
    price could be adversely affected.
  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;
    failure to maintain existing or establish new collaborative
    relationships;
    fluctuations in our operating results;
    market conditions relating to our segment of the industry or the
    securities markets in general;
    announcements of technological innovations or new commercial
    products by us or our competitors;
    publicity regarding actual or potential developments relating to
    products under development by us or our competitors;
    developments or disputes concerning patents or proprietary
    rights;
    delays in the development or approval of our product candidates;
    regulatory developments in both the United States and foreign
    countries;
    concern of the public or the medical community as to the safety
    or efficacy of our products, or products deemed to have similar
    safety risk factors or other similar characteristics to our
    products;
    period-to-period fluctuations in financial results;
    future sales or expected sales of substantial amounts of common
    stock by shareholders;
    our ability to raise financing; and
    economic and other external factors. 29




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##### Table of Contents



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 that 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.
    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties   30




---



##### Table of Contents



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
      High


Low2006First Quarter

$
5.04


$
3.03Second Quarter


3.32



1.29Third Quarter


2.24



1.40Fourth Quarter


1.69



0.812007First Quarter

$
1.46


$
0.90Second Quarter


1.69



1.18Third Quarter


1.40



1.12Fourth Quarter


1.81



1.272008First Quarter (through March 20, 2008)

$
1.58


$
1.17     Dividend
    Policy
   31




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##### Table of Contents



Stock
    Performance Graph
    COMPARISON
    OF 5 YEAR CUMULATIVE TOTAL RETURN*
    Among Aradigm Corporation, The NASDAQ Composite Index
    And The NASDAQ Pharmaceutical
  
  *
    
    $100 invested on 12/31/02 in stock or index-including
    reinvestment of dividends.
    Fiscal year ending December 31.  Cumulative Total ReturnIndex

12/02

12/03

12/04

12/05

12/06

12/07Aradigm Corporation


100.00



105.56



106.79



45.06



11.11



18.77NASDAQ Composite


100.00



149.75



164.64



168.60



187.83



205.22NASDAQ Pharmaceutical


100.00



144.89



160.46



160.65



163.42



154.46     *
    
    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. 32




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##### Table of Contents



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


2006


2005


2004


2003(In thousands, except per share data)Statements of operations data:Contract and license revenues

$
961


$
4,814


$
10,507


$
28,045


$
33,857Operating expenses:Research and development


16,770



22,198



30,174



46,477



49,636General and administrative


8,401



10,717



10,895



11,934



10,391Restructuring and asset impairment


2,182



6,003











Total operating expenses


27,353



38,918



41,069



58,411



60,027Loss from operations


(26,392
)


(34,104
)


(30,562
)


(30,366
)


(26,170
)Gain on sale of patent and royalty interest to related party






20,000











Interest income


2,573



1,251



1,317



194



338Interest expense


(393
)


(197
)


(6
)


(16
)


(138
)Other income (expense)


11



23



36



(1
)


Net loss

$
(24,201
)

$
(13,027
)

$
(29,215
)

$
(30,189
)

$
(25,970
)Basic and diluted net loss per share

$
(0.48
)

$
(0.89
)

$
(2.01
)

$
(2.37
)

$
(2.59
)Shares used in computing basic and diluted net loss per share


50,721



14,642



14,513



12,741



10,039   As of December 31,2007


2006


2005


2004


2003(In thousands)Balance sheet data:Cash, cash equivalents and short-term investments

$
40,510


$
27,514


$
27,694


$
16,763


$
29,770Working capital


36,594



25,405



21,087



4,122



19,708Total assets


45,813



32,226



39,497



79,741



95,218Note payable and accrued interest to related party


8,071



7,686











Convertible preferred stock






23,669



23,669



23,669



23,669Accumulated deficit


(312,066
)


(287,865
)


(274,838
)


(245,623
)


(215,436
)Total shareholders equity (deficit)


30,299



(3,947
)


7,171



35,754



52,970   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.
 33




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##### Table of Contents



Our business is subject to significant risks including, but
    not limited to, our ability to implement our new product
    development strategy, our ability to obtain additional
    financing, the success of product development efforts, our
    dependence on collaborators for certain programs, obtaining and
    enforcing patents important to our business, clearing the
    lengthy and expensive regulatory approval process and possible
    competition from other products. Even if product candidates
    appear promising at various stages of development, they may not
    reach the market or may not be commercially successful for a
    number of reasons. Such reasons include, but are not limited to,
    the possibilities that the potential products may be found to be
    ineffective during clinical trials, may fail to receive
    necessary regulatory approvals, may be difficult to manufacture
    on a large scale, are uneconomical to market, may be precluded
    from commercialization by proprietary rights of third parties or
    may not gain acceptance from health care professionals and
    patients.
  Overview
           34




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##### Table of Contents



120-day Form 10-Q
    Relationship
    with Novo Nordisk
  120-day
   35




---



##### 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 the 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 AERx
    Strip 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 certain intellectual property,
    including all rights, title and interest to the patents that
    contain claims that pertain generally to breath control or
    specifically to the pulmonary delivery of monomeric insulin and
    monomeric insulin analogs, together with interrelated patents,
    which are linked via terminal disclaimers, as well as certain
    pending patent applications and continuations thereof by us for
    a cash payment to us of $12.0 million, with Aradigm
    retaining exclusive, royalty-free control of these patents
    outside the field of glucose control.
    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.
    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 at 5% per
    year that will be payable to Novo Nordisk in three equal annual
    payments commencing in July 2012. Our obligations under the note
    are secured by royalty payments upon any commercialization of
    the AERx iDMS product.      Purchase
    and Sale of Intraject Technology
  construction-in-progress.
 36




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##### Table of Contents



Critical
    Accounting Policies and Estimates
    Revenue
    Recognition
  Revenue
    Recognition No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). EITF 00-21,
  EITF 00-21. EITF 00-21,
  Impairment
    of Long-Lived Assets
  Accounting for the
    Impairment or Disposal of Long-Lived Assets
 37




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##### Table of Contents



Accounting
    for Costs Associated with Exit or Disposal
    Activities
  Accounting for
    Costs Associated with Exit or Disposal Activities ,
  Research
    and Development
    Income
    Taxes
      Stock-Based
    Compensation
  Accounting for Stock Issued to Employees Accounting for Stock-Based
    Compensation Accounting for Stock-Based
    Compensation  Transition and Disclosure
 38




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##### Table of Contents



Year EndedDecember 31, 2005Net loss  as reported

$
(29,215
)Add:Stock-based employee compensation expense included in reported
    net loss


21Less:Total stock-based employee compensation expense determined under
    fair value based method for all awards


(3,066
)Pro forma net loss

$
(32,260
)Basic and diluted net loss per common share:As reported

$
(2.01
)Pro forma

$
(2.22
)   Valuation
    assumptions
    Year EndedDecember 31, 2005Employee Stock OptionsDividend yield

0.0%Volatility factor

97.6%Risk-free interest rate

3.8%Expected life (years)

4.0Weighted-average fair value of options granted during the year

$4.10   EITF 96-18, Accounting for Equity Instruments that are Issued to Other
    than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services
  Adoption
    of SFAS No. 123R
  Share-based
    Payment
 39




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##### Table of Contents



Transition Election Related to
    Accounting for the Tax Effects of Share-Based Payment
    Awards paid-in-capital
    Years Ended December 31,2007


2006Costs and expenses:Research and development

$
664


$
882General and administrative


718



740Total stock-based employee compensation expense

$
1,382


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

$
(0.03
)

$
(0.11
)     Years Ended December 312007

2006Employee Stock OptionsDividend yield

0.0%

0.0%Volatility factor

76.7%

86.6%Risk-free interest rate

4.0%

4.9%Expected life (years)

4.0

4.2Weighted-average fair value of options granted during the periods

$0.86

$1.40    40




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##### Table of Contents



Results
    of Operations
  Years
    Ended December 31, 2007 and 2006
  Revenue
  Years Ended December 31,2007


2006


Decrease(In thousands)Revenue:Related parties

$
23


$
59


$
(36
)


(61
)%Unrelated parties


938



4,755



(3,817
)


(80
)%Total revenue

$
961


$
4,814


$
(3,853
)


(80
)%     Research
    and Development Expenses
  Years Ended December 31,2007


2006


Decrease(In thousands)Research and development expenses:Collaborative

$
862


$
4,440


$
(3,578
)


(81
)%Self-initiated


15,908



17,758



(1,850
)


(10
)%Total research and development expenses

$
16,770


$
22,198


$
(5,428
)


(24
)%     General
    and Administrative Expenses
  Years Ended December 31,2007


2006


Decrease(In thousands)General and administrative expenses

$
8,401


$
10,717


$
(2,316
)


(22
)%  41




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##### Table of Contents



Restructuring
    and Asset Impairment
  Years Ended December 31,2007


2006


Decrease(In thousands)Restructuring and impairment expenses

$
2,182


$
6,003


$
(3,821
)


(64
)%       Gain on
    sale of patents and royalty interest
  Years Ended December 31,2007


2006


Decrease(In thousands)Gain on sale of patent and royalty interest

$



$
20,000


$
(20,000
)


(100
)%    42




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##### Table of Contents



Interest
    Income, Interest Expense and Other Income (Expense)
  Years Ended December 31,2007


2006


Increase (decrease)(In thousands)Interest income, interest expense and other income (expense):Interest income

$
2,573


$
1,251


$
1,322



106
%Interest expense


(393
)


(197
)


196



99
%Other income (expense)


11



23



(12
)


(52
)%Total interest income, interest expense and other income
    (expense)

$
2,191


$
1,077


$
1,114



103
%     Results
    of Operations
  Years
    Ended December 31, 2006 and 2005
  Revenue
  Years Ended December 31,2006


2005


Increase (decrease)(In thousands)Revenue:Related parties

$
59


$
8,013


$
(7,954
)


(99
)%Unrelated parties


4,755



2,494



2,261



91
%Total revenue

$
4,814


$
10,507


$
(5,693
)


(54
)%     Research
    and Development Expenses
  Years Ended December 31,2006


2005


Decrease(In thousands)Research and development expenses:Collaborative

$
4,440


$
5,996


$
(1,556
)


(26
)%Self-initiated


17,758



24,178



(6,420
)


(27
)%Total research and development expenses

$
22,198


$
30,174


$
(7,976
)


(26
)%    43




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##### Table of Contents



General
    and Administrative Expenses
  Years Ended December 31,2006


2005


Decrease(In thousands)General and administrative expenses

$
10,717


$
10,895


$
(178
)


(2
)%     Restructuring
    and Asset Impairment
  Years Ended December 31,2006


2005


Increase(In thousands)Restructuring and impairment expenses

$
6,003


$



$
6,003     Gain on
    sale of patents and royalty interest
  Years Ended December 31,2006


2005


Increase(In thousands)Gain on sale of patent and royalty interest

$
20,000


$



$
20,000    44




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##### Table of Contents



Interest
    Income, Interest Expense and Other Income (Expense)
  Years Ended December 31,2006


2005


Increase (decrease)(In thousands)Interest income, interest expense and other income (expense):Interest income

$
1,251


$
1,317


$
(66
)


(5
)%Interest expense


(197
)


(6
)


191



3,183
%Other income (expense)


23



36



(13
)


(36
)%Total interest income, interest expense and other income
    (expense)

$
1,077


$
1,347


$
(270
)


(20
)%         Liquidity
    and Capital Resources
       45




---



##### Table of Contents



scale-up
        Off-Balance
    Sheet Financings and Liabilities
   46




---



##### Table of Contents



Contractual
    Obligations
    Payment Due by PeriodLess Than








AfterTotal


1 Year


1-3 Years


3-5 Years


5 Years(In thousands)Operating lease obligations

$
18,830


$
2,366


$
4,532


$
4,060


$
7,872Promissory note(1)


10,543











3,514



7,029Unconditional capital purchase obligations


443



443











Unconditional purchase obligations


2,881



2,881











Total contractual commitments


32,697



5,690



4,532



7,574



14,901Less-sublease payments from Mendel(2)


(4,524
)


(866
)


(1,828
)


(1,830
)


Total contractual commitments, net(2)

$
28,173


$
4,824


$
2,704


$
5,744


$
14,901     (1)
    
    Represents repayments of principal and interest on the Novo
    Nordisk promissory note. The Novo Nordisk promissory note does
    contain a number of covenants that include restrictions in the
    event of changes to corporate structure, change in control and
    certain asset transactions (see Note 11 of the notes to the
    financial statements.)(2)
    
    Included to demonstrate the effect of the sublease with Mendel
    entered on July 18, 2007. Mendel has the option to
    terminate the sublease early on September 1, 2012 for a
    termination fee of $225,000. In the event that the sublease is
    not terminated early in 2012, $4.0 million in additional
    payments will be received through August 2016 (see Note 5
    of the notes to the financial statements).  Recent
    Accounting Pronouncements
  Accounting for Uncertainty in Income Taxes an
    interpretation of FAS 109, Accounting for Income Taxes
  Fair Value Measurements No. FAS 157-2 Effective Date of FASB Statement No. 157 FAS 157-2), FAS 157-2.
  The
    Fair Value Option for Financial Assets and Financial Liabilities
 47




---



##### Table of Contents



No. 07-3, Accounting for Non-Refundable Advance Payments for Goods or
    Services to Be Used in Future Research and Development
    Activities (EITF 07-3). EITF 07-3 EITF 07-3
  No. 07-1 (EITF 07-1), Accounting for Collaborative Arrangements Related to the
    Development and Commercialization of Intellectual Property. EITF 07-1 EITF 07-1
  Business Combinations
  Noncontrolling Interests in Consolidated Financial
    Statements  an amendment of ARB No. 51
 48




---



##### Table of Contents



Item 7A.
    Quantitative
    and Qualitative Disclosure About Market Risk     49




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM          Accounting for
    Uncertainty in Income Taxes an Interpretation of
    FAS 109 Share-Based Payment
  
    50




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            
    51




---



##### Table of Contents



ARADIGM
    CORPORATION
  BALANCE
    SHEETS
  December 31,2007


2006(In thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents

$
29,964


$
27,013Short-term investments


10,546



501Receivables


500



643Restricted cash


152



Prepaid and other current assets


971



1,002Total current assets


42,133



29,159Property and equipment, net


3,223



2,592Notes receivable from officers and employees


33



31Restricted cash


153



Other assets


271



444Total assets

$
45,813


$
32,226LIABILITIES, CONVERTIBLE PREFERRED STOCK AND
    SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable

$
1,658


$
1,151Accrued clinical and cost of other studies


789



278Accrued compensation


1,252



1,814Deferred revenue


880



Facility lease exit obligation


376



Other accrued liabilities


584



511Total current liabilities


5,539



3,754Deferred rent


283



1,035Facility lease exit obligation


1,373



Other non-current liabilities


248



29Note payable and accrued interest to related party


8,071



7,686Commitments and contingenciesConvertible preferred stock, no par value; 2,050,000 shares
    authorized; issued and outstanding shares: none outstanding at
    December 31, 2007 and 1,544,626 at December 31, 2006;
    liquidation preference of $0 at December 31, 2007 and
    $41,866 at December 31, 2006






23,669Shareholders equity (deficit):Preferred stock, 2,950,000 shares authorized, none
    outstandingCommon stock, no par value; authorized shares: 100,000,000 at
    December 31, 2007 and 2006; issued and outstanding shares:
    54,772,705 at December 31, 2007; 14,765,474 at
    December 31, 2006


342,355



283,914Accumulated other comprehensive income


10



4Accumulated deficit


(312,066
)


(287,865
)Total shareholders equity (deficit)


30,299



(3,947
)Total liabilities, convertible preferred stock and
    shareholders equity (deficit)

$
45,813


$
32,226    52




---



##### Table of Contents



ARADIGM
    CORPORATION
  STATEMENTS
    OF OPERATIONS
  Years Ended December 31,2007


2006


2005(In thousands, except per share data)Contract and license revenues:Related parties

$
23


$
59


$
8,013Unrelated parties


938



4,755



2,494Total revenues


961



4,814



10,507Operating expenses:Research and development


16,770



22,198



30,174General and administrative


8,401



10,717



10,895Restructuring and asset impairment


2,182



6,003



Total expenses


27,353



38,918



41,069Loss from operations


(26,392
)


(34,104
)


(30,562
)Gain on sale of patent and royalty interest to related party






20,000



Interest income


2,573



1,251



1,317Interest expense


(393
)


(197
)


(6
)Other income, net


11



23



36Net loss

$
(24,201
)

$
(13,027
)

$
(29,215
)Basic and diluted net loss per common share

$
(0.48
)

$
(0.89
)

$
(2.01
)Shares used in computing basic and diluted net loss per common
    share


50,721



14,642



14,513    53




---



##### 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, 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 and
    award grants














1,622















1,622Reversal of restricted stock award due to forfeiture










(55,033
)


















Comprehensive loss: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
)Issuance of common stock in a public offering, net of issuance
    costs










37,950,000



33,178















33,178Issuance of common stock for conversion of preferred stock
    related to public offering


(1,544,626
)


(23,669
)


1,235,699



23,669















23,669Issuance of common stock under the employee stock purchase plan










100,407



103















103Issuance of common stock under the restricted stock award plan










726,000



















Stock-based compensation related to issuance of stock option and
    award grants














1,491















1,491Reversal of restricted stock award due to forfeiture










(4,875
)


















Comprehensive loss:Net loss


























(24,201
)


(24,201
)Net change in unrealized gain (loss) on available-for-sale
    investments






















6







6Total comprehensive loss






























(24,195
)Balances at December 31, 2007





$




54,772,705


$
342,355


$



$
10


$
(312,066
)

$
30,299     54




---



##### Table of Contents



ARADIGM
    CORPORATION
 STATEMENTS OF CASH FLOWS  Years Ended December 31,2007


2006


2005(In thousands)Cash flows from operating activities:Net loss

$
(24,201
)

$
(13,027
)

$
(29,215
)Adjustments to reconcile net loss to net cash used in operating
    activities:Non-cash asset impairment on property and equipment


182



4,014



Facility lease exit costs


1,443







Amortization and accretion of investments


(26
)






50Depreciation and amortization


730



934



1,412Stock-based compensation expense related to employee stock
    options and employee stock purchases


1,382



1,622



Cost of warrants and common stock options for services


109







117Loss on retirement and sale of property and equipment


33



166



268Gain on sale of patent and royalty interest






(20,000
)


Changes in operating assets and liabilities:Receivables


141



(243
)


(301
)Prepaid and other current assets


31



(128
)


728Restricted cash


(305
)






Other assets


173



19



(24
)Accounts payable


36



(1,883
)


565Accrued compensation


(562
)


(2,000
)


830Accrued liabilities


1,188



129



(558
)Deferred rent


(132
)


321



(1,229
)Deferred revenue


880



(222
)


(7,250
)Facility lease exit obligation


(314
)






Net cash used in operating activities


(19,212
)


(30,298
)


(34,607
)Cash flows from investing activities:Capital expenditures


(1,115
)


(1,829
)


(5,311
)Sales of property and equipment


10



4,000



50,292Purchases of available-for-sale investments


(17,013
)


(502
)


(5,330
)Proceeds from maturities of available-for-sale investments


7,000







7,750Proceeds from sale of patent and royalty interest






20,000



Net cash provided (used) by investing activities


(11,118
)


21,669



47,401Cash flows from financing activities:Proceeds from public offering of common stock, net


33,178







Proceeds from issuance of common stock


103



288



500Proceeds from the issuance of note payable to related party






7,500



Payments received on notes receivable from officers and employees






160



Forgiveness of notes receivable from officers and employees










92Net cash provided by financing activities


33,281



7,948



592Net increase (decrease) in cash and cash equivalents


2,951



(681
)


13,386Cash and cash equivalents at beginning of year


27,013



27,694



14,308Cash and cash equivalents at end of year

$
29,964


$
27,013


$
27,694Supplemental disclosure of cash flow information:Cash paid for interest

$



$
11


$
6Supplemental disclosure of non-cash financing activities:Conversion of convertible preferred stock to common stock

$
23,669


$



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

$
471


$



$
    55




---



##### 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
   56




---



##### Table of Contents



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

5 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
  Accounting for the
    Impairment or Disposal of Long-Lived Assets
  Accounting
    for Costs Associated with Exit or Disposal
    Activities
  Accounting for Costs Associated with Exit or Disposal
    Activities ,
  Revenue
    Recognition
  Revenue Recognition No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). EITF 00-21,
 57




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    EITF 00-21. EITF 00-21,
  Research
    and Development
    Advertising
   58




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Stock-Based
    Compensation
  Accounting for Stock Issued to Employees Accounting for Stock-Based
    Compensation Accounting for Stock-Based
    Compensation  Transition and Disclosure
  Year EndedDecember 31, 2005Net loss  as reported

$
(29,215
)Add:Stock-based employee compensation expense included in reported
    net loss


21Less:Total stock-based employee compensation expense determined under
    fair value based method for all awards


(3,066
)Pro forma net loss

$
(32,260
)Basic and diluted net loss per common share:As reported

$
(2.01
)Pro forma

$
(2.22
)   Valuation
    assumptions
    Year EndedDecember 31, 2005Employee Stock OptionsDividend yield

0.0%Volatility factor

97.6%Risk-free interest rate

3.8%Expected life (years)

4.0Weighted-average fair value of options granted during the year

$4.10   EITF 96-18, Accounting for Equity Instruments that are Issued to Other
    than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services
 59




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Adoption
    of SFAS No. 123R
  Share-based
    Payment
  Transition Election Related to
    Accounting for the Tax Effects of Share-Based Payment
    Awards paid-in-capital
    Years Ended December 31,2007


2006Costs and expenses:Research and development

$
664


$
882General and administrative


718



740Total stock-based employee compensation expense

$
1,382


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

$
(0.03
)

$
(0.11
)    60




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Years Ended December 312007

2006Employee Stock OptionsDividend yield

0.0%

0.0%Volatility factor

76.7%

86.6%Risk-free interest rate

4.0%

4.9%Expected life (years)

4.0

4.2Weighted-average fair value of options granted during the periods

$0.86

$1.40     Income
    Taxes
  Accounting for Income Taxes
  Accounting for Uncertainty in Income Taxes  an
    interpretation of FASB Statement No. 109
  Net
    Loss Per Common Share
   61




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Years Ended December 31,2007


2006


2005Outstanding stock options


3,493



3,064



1,730Unvested restricted stock


771



70



Performance bonus stock award


100



100



Warrants to purchase common stock


427



1,255



2,120Convertible preferred stock






1,236



1,236   Significant
    Concentrations
      Comprehensive
    Income (Loss)
  Reporting Comprehensive Income
  Recently
    Issued Accounting Pronouncements
  Fair Value Measurements No. FAS 157-2 Effective Date of FASB Statement No. 157 FAS 157-2), FAS 157-2.
  The
    Fair Value Option for Financial Assets and Financial Liabilities
 62




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  No. 07-3, Accounting for Non-Refundable Advance Payments for Goods or
    Services to Be Used in Future Research and Development
    Activities (EITF 07-3). EITF 07-3 EITF 07-3
  No. 07-1 (EITF 07-1), Accounting for Collaborative Arrangements Related to the
    Development and Commercialization of Intellectual Property. EITF 07-1 EITF 07-1
  Business Combinations
  Noncontrolling Interests in Consolidated Financial
    Statements  an amendment of ARB No. 51
 63




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  2.
    Cash and
    Cash Equivalents and
    Short-term
    Investments  short-term
  December 31,2007


2006Cash and cash equivalents:Money market fund

$
1,345


$
1,248Commercial paper


28,619



25,765$
29,964


$
27,013Short-term investments:Corporate and government notes

$
10,546


$
501     3.
    Property
    and Equipment    December 31,2007


2006Machinery and equipment

$
4,049


$
3,905Furniture and fixtures


993



1,142Lab equipment


2,472



2,658Computer equipment and software


3,876



3,798Leasehold improvements


577



1,068Property and equipment at cost


11,967



12,571Less accumulated depreciation and amortization


(10,033
)


(10,204
)Net depreciable assets


1,934



2,367Construction in progress


1,289



225Property and equipment, net

$
3,223


$
2,592    64




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  4.
    Other
    Liabilities    December 31,2007


2006Other accrued liabilities:Accrued expense for services

$
308


$
415Payroll withholding liabilities


120



89Deposits


147



Other short term obligations


9



7Total other accrued liabilities

$
584


$
511Other non-current liabilities:Deposits

$
228


$
Other long term obligations


20



29Total other non-current liabilities

$
248


$
29   5.
    Leases,
    Commitments and Contingencies    Operating


Mendel


Net OperatingLeases


Sub-Lease


Lease PaymentsYear ending December 31:2008

$
2,366


$
(866
)

$
1,5002009


2,312



(900
)


1,4122010


2,220



(928
)


1,2922011


1,992



(955
)


1,0372012


2,068



(875
)


1,1932013 and thereafter


7,872







7,872Total minimum lease payments

$
18,830


$
(4,524
)

$
14,306      65




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        Indemnification
    Legal
    Matters
    6.
    Shareholders
    Equity (Deficit)       66




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      Reverse
    Stock Split
  1-for-5
  Reserved
    Shares
    Shareholder
    Rights Plan
   67




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    60-day
      Other
    Common Stock Warrants
     68




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Stock
    Option Plans: 1996 Equity Incentive Plan, 2005 Equity Incentive
    Plan and 1996 Non-Employee Directors Plan
           69




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    non-employee
   70




---



##### Table of Contents



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








Averagefor Grant of


Number of





ExerciseOption or Award


Shares


Price per Share


PriceBalance 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






$
2.83


$
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


$
8.90Options authorized


1,600,000



















Options granted


(1,414,750
)


1,414,750


$
1.23






$
1.60


$
1.44Restricted stock awards granted


(726,000
)


















Options cancelled


985,577



(985,577
)

$
1.15






$
120.63


$
10.71Restricted share awards cancelled


4,875



















Plan shares expired and not reauthorized


(6,543
)





$
41.25






$
120.63


$
93.63Balance at December 31, 2007


1,837,161



3,493,154


$
1.02






$
120.63


$
5.37  71




---



##### Table of Contents



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





Options ExercisableAverage


Weighted





WeightedRemaining


Average





AverageNumber of


Contractual


Exercise


Number of


ExerciseExercise Price Range

Shares


Life (In Years)


Price


Shares


Price$  1.02 - $  1.33


362,887



9.01


$
1.22



123,791


$
1.18$  1.37 - $  1.37


370,200



9.47



1.37



74,400



1.37$  1.41 - $  1.52


33,500



9.07



1.48



16,343



1.52$  1.60 - $  1.60


646,500



9.93



1.60







$  1.64 - $  1.70


369,000



8.50



1.69



179,562



1.68$  1.80 - $  1.80


540,475



8.63



1.80



405,660



1.80$  1.87 - $  1.87


500,000



8.61



1.87



166,666



1.87$  3.14 - $  9.30


354,040



6.84



5.34



284,079



5.55$  9.40 - $115.00


312,416



3.55



37.80



309,664



38.03$120.63 - $120.63


4,136



2.11



120.63



4,136



120.633,493,154



8.34


$
5.37



1 ,564,301


$
9.89       Weighted AverageNumber of


Grant Date FairShares


ValueBalance at December 31, 2005


Restricted stock awards granted


145,500


$
3.55Performance bonus stock award granted


100,000



1.64Restricted share awards vested


(20,618
)


1.61Restricted share awards cancelled


(55,033
)


3.63Balance at December 31, 2006


169,849



2.40Restricted stock awards granted


726,000



1.54Restricted share awards vested


(20,250
)


1.36Restricted share awards cancelled


(4,875
)


1.80Balance at December 31, 2007


870,724


$
1.66  72




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Performance
    Bonus Stock Award
    Employee
    Stock Purchase Plan
      Years EndedDecember 31,2007


2006


2005Pro formaEmployee Stock Purchase PlanDividend yield


0.0
%


0.0
%


0.0
%Volatility factor


78.1
%


86.4
%


87.1
%Risk-free interest rate


4.6
%


4.9
%


3.6
%Expected life (years)


1.18



0.49



1.15Weighted-average fair value of purchase rights granted during
    the period

$
0.59


$
0.60


$
2.90   7.
    Convertible
    Preferred Stock and Common Stock Warrants   73




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      8.
    Employee
    Benefit Plans    9.
    Related
    Parties  CyDex
      Novo
    Nordisk
   74




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    120-day
      
    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.   75




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    10.
    Revenue
    and Deferred Revenue:    December 31,2007


2006


2005Deferred revenue  beginning balance

$



$
222


$
11,491Payments/Amounts Billed:Novo Nordisk


23



59



727Other collaborator-funded programs


1,818



4,533



2,530Total


1,841



4,592



3,257Contract revenues recognized:Novo Nordisk


23



59



8,013Other collaborator-funded programs


938



4,755



2,494Total


961



4,814



10,507Deferred revenue at December 31, 2004 recognized on
    January 26, 2005 as payment for assets pursuant to the
    restructuring agreement with Novo Nordisk










4,019Deferred revenue  ending balance


880







222Less: non-current portion of deferred revenue










Current portion of deferred revenue

$
880


$



$
222     11.
    Promissory
    Note     76




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  12.
    Income
    Taxes      December 31,2007


2006Net operating loss carryforwards

$
102,700


$
94,300Research and development credits


20,300



19,600Capitalized research and development


3,100



3,900Other


1,400



1,100Total deferred tax assets


127,500



118,900Valuation allowance


(127,500
)


(118,900
)Net deferred tax assets

$



$
     Year Ended December 31,2007


2006


2005Income tax benefit at federal statutory rate

$
(8,471
)

$
(4,566
)

$
(10,225
)Expired net operating losses


1,407







State taxes (net of federal)


(1,339
)


(917
)


(1,676
)Credits


(951
)


(4,884
)


(888
)Prior year adjustment










3,948Other


748



436



(59
)Change in valuation allowance


8,606



9,931



8,900Total

$



$



$
        77




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
              13.
    Sublease
    Agreement and Lease Exit Liability:     78




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Balance atDecember 31,2007Loss on sublease upon subleasing to Mendel in July 2007

$
2,063Accretion of imputed interest expense


39Lease payments


(353
)Balance at December 31, 2007

$
1,749     Year EndedDecember 31,2007Loss on sublease upon subleasing to Mendel in July 2007

$
2,063Lease commission


420Accretion expense


39Reversal of deferred rent liability related to sublease space


(620
)Write-off of leasehold improvements and equipment related to
    sublease space, net


182Total

$
2,084   14.
    Restricted
    Cash    15.
    2006
    Restructuring and Asset Impairment  Accounting for Costs Associated
    with Exit or Disposal.
 79




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        2006


2007Balance at








Balance atNon-Cash


Restructuring








December 31,


Restructuring





December 31,Type of Liability

Impairment


Charges


Adjustments


Payments


2006


Charges


Payments


2007Severance and related benefits

$



$
2,134


$
(233
)

$
(1,185
)

$
716


$
98


$
(814
)

$
Out-placement services






88







(52
)


36







(36
)


Impairment on Intraject-related assets


4,014



























$
4,014


$
2,222


$
(233
)

$
(1,237
)

$
752


$
98


$
(850
)

$
   16.
    Sale of
    Intraject-Related Assets     80




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  17.
    Exclusive
    License, Development and Commercialization Agreement with Lung
    Rx, Inc.      country-by-country
  EITF 00-21
  18.
    Manufacturing
    and Supply Agreement   81




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    19.
    Quarterly
    Results of Operations (unaudited)    March 31,


June 30,


September 30,


December 31,2007


2007


2007


2007Contract and license revenues

$
416


$
297


$
230


$
18Operating expenses:Research and development


3,407



3,841



3,899



5,623General and administrative


1,987



2,628



1,757



2,029Restructuring and asset impairment


98







2,059



25Total expenses


5,492



6,469



7,715



7,677Loss from operations


(5,076
)


(6,172
)


(7,485
)


(7,659
)Interest income


637



699



684



553Interest expense


(96
)


(96
)


(101
)


(100
)Other income (expense)


(31
)


46







(4
)Net loss

$
(4,566
)

$
(5,523
)

$
(6,902
)

$
(7,210
)Basic and diluted net loss per common share

$
(0.11
)

$
(0.10
)

$
(0.13
)

$
(0.13
)Shares used in computing basic and diluted net loss per common
    share


40,820



53,942



53,948



53,997   82




---



##### Table of Contents



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


June 30,


September 30,


December 31,2006


2006


2006


2006Contract and license revenues

$
1,073


$
1,807


$
1,126


$
808Operating 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
)


(5,697
)Gain on sale of patent and royalty interest to related party










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


$
(5,384
)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   20.
    Subsequent
    Events    120-day
  Form S-3 (No. 333-148263)
 83




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
     84




---



##### 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
  Rules 13a-15(e) 15d-15(e)
    Managements
    Annual Report on Internal Control Over Financial
    Reporting
      Internal
    Control  Integrated Framework
    Changes
    in Internal Control Over Financial Reporting
    Item 9B.
    Other
    Information   85




---



##### Table of Contents



PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance    Identification
    of Executive Officers
    Section 16(a)
    Compliance
    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   86




---



##### 



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Financial Statements.
     
 Page inForm 10-KReports of Independent Registered Public
    Accounting Firms


50Balance Sheets  December 31, 2007
    and 2006


52Statements of Operations  Years ended
    December 31, 2007, 2006 and 2005


53Statements of Convertible Preferred Stock and
    Shareholders Equity (Deficit)  Years ended
    December 31, 2007, 2006 and 2005


54Statements of Cash Flows  Years ended
    December 31, 2007, 2006 and 2005


55Notes to Financial Statements


56    Financial Statement Schedules.
    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. 87




---



##### Table of Contents



Exhibit No.

Description10
.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.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.10
.23 (17)+

2005 Equity Incentive Plan, as amended10
.24(18)

Consulting Agreement effective as of July 2, 2007 by and
    between the Company and Norman Halleen.10
.25(19)

Sublease between the Company and Mendel Biotechnology, Inc.,
    dated July 11, 2007, under the Lease Agreement by and
    between the Company and Hayward Point Eden I Limited
    Partnership, a Delaware limited partnership, as
    successor-in-interest
    to Britannia Point Eden, LLC, as amended, for 3929 Point Eden
    Way, Hayward, California.10
.26(20)

Manufacturing Agreement between the Company and Enzon
    Pharmaceuticals, Inc. dated August 8, 2007.10
.27(21)#

Exclusive License, Development and Commercialization Agreement,
    dated as of August 30, 2007, by and between the Company and
    Lung Rx, Inc.10
.28(22)#

Collaboration Agreement, dated as of August 31, 2007, by
    and between the Company and CyDex, Inc.23
.1

Consent of Odenberg Ullakko Muranishi & Co LLP23
.2

Consent of Ernst & Young LLP, 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.  88




---



##### Table of Contents



+
    
    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.(17)
    
    Incorporated by reference to the Registrants definitive
    proxy statement filed on May 2, 2007(18)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on July 11, 2007.(19)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on July 24, 2007.(20)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on August 14, 2007.(21)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on November 14, 2007.(22)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on November 14, 2007.  Index to Exhibits.
    Financial Statement Schedules.
       *
    Other names and brands may be claimed as the property of others. 89




---



##### Table of Contents



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

Title

Date/s/  Igor
    GondaIgor
    Gonda

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

March 26, 2008/s/  Norman
    HalleenNorman
    Halleen

Interim Chief Financial Officer (Principal Financial and
    Accounting Officer)

March 26, 2008/s/  Virgil
    D. ThompsonVirgil
    D. Thompson

Chairman of the Board and Director

March 26, 2008/s/  Frank
    H. BarkerFrank
    H. Barker

Director

March 26, 2008/s/  Stephen
    O. JaegerStephen
    O. Jaeger

Director

March 26, 2008/s/  John
    M. SiebertJohn
    M. Siebert

Director

March 26, 2008/s/  Timothy
    P. LynchTimothy
    P. Lynch

Director

March 26, 2008  90




---



##### 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.10
.17(15)+

Executive Officer Severance Benefit Plan. 91




---



##### 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.10
.23 (17)+

2005 Equity Incentive Plan, as amended10
.24(18)

Consulting Agreement effective as of July 2, 2007 by and
    between the Company and Norman Halleen.10
.25(19)

Sublease between the Company and Mendel Biotechnology, Inc.,
    dated July 11, 2007, under the Lease Agreement by and
    between the Company and Hayward Point Eden I Limited
    Partnership, a Delaware limited partnership, as
    successor-in-interest
    to Britannia Point Eden, LLC, as amended, for 3929 Point Eden
    Way, Hayward, California.10
.26(20)

Manufacturing Agreement between the Company and Enzon
    Pharmaceuticals, Inc. dated August 8, 2007.10
.27(21)#

Exclusive License, Development and Commercialization Agreement,
    dated as of August 30, 2007, by and between the Company and
    Lung Rx, Inc.10
.28(22)#

Collaboration Agreement, dated as of August 31, 2007, by
    and between the Company and CyDex, Inc.23
.1

Consent of Odenberg Ullakko Muranishi & Co LLP23
.2

Consent of Ernst & Young LLP, 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. 92




---



##### Table of Contents



(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.(17)
    
    Incorporated by reference to the Registrants definitive
    proxy statement filed on May 2, 2007(18)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on July 11, 2007.(19)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on July 24, 2007.(20)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on August 14, 2007.(21)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on November 14, 2007.(22)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on November 14, 2007. 93