##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 Or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                      to .
 Commission File Number 0-28402
 Aradigm Corporation
 (Exact name of registrant as specified in its charter)
 California
    
    94-3133088(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 3929 Point Eden Way
Hayward, CA 94545  (Address of principal executive offices including zip code)  (510) 265-9000  (Registrants telephone number, including area code)
 þ o
  o o þ
 o þ
  (Class) 
Common
    
    (Outstanding at October 31, 2007)
54,046,705




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##### 



ARADIGM CORPORATION
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Balance Sheets at September 30, 2007 and December 31, 2006 (unaudited)
    
    
    3Condensed Statements of Operations for the three months and nine months ended September 30, 2007 and 2006 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 (unaudited)
    
    
    5Condensed Statement of Shareholders Equity (Deficit) for the nine months ended September 30, 2007 (unaudited)
    
    
    6Notes to Condensed Financial Statements (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    33Item 4.
Controls and Procedure
    
    
    33
    

PART II. OTHER INFORMATION
    
    
    34Item 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    34Item 6. Exhibits
    
    
    45SIGNATURES
    
    
    46EXHIBIT 10.4EXHIBIT 10.5EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. CONDENSED FINANCIAL STATEMENTS
 ARADIGM CORPORATION
 
 CONDENSED BALANCE SHEETS
 (In thousands, except share data)
 September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    34,512
    
    
    $
    27,013Short-term investments
    
    
    12,509
    
    
    
    501Restricted cash
    
    
    74
    
    
    
    Receivables
    
    
    302
    
    
    
    643Prepaid expenses and other current assets
    
    
    812
    
    
    
    1,002Total current assets
    
    
    48,209
    
    
    
    29,159Property and equipment, net
    
    
    3,055
    
    
    
    2,592Notes receivable from officers and employees
    
    
    32
    
    
    
    31Restricted cash
    
    
    228
    
    
    
    Other assets
    
    
    276
    
    
    
    444Total assets
    
    $
    51,800
    
    
    $
    32,226LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS EQUITY (DEFCIT)Current liabilities:Accounts payable
    
    $
    1,080
    
    
    $
    1,151Accrued cost of clinical and other studies
    
    
    734
    
    
    
    278Accrued compensation
    
    
    1,639
    
    
    
    1,814Facility lease exit obligation
    
    
    377
    
    
    
    Other accrued liabilities
    
    
    366
    
    
    
    511Total current liabilities
    
    
    4,196
    
    
    
    3,754Deferred revenue
    
    
    440
    
    
    
    Deferred rent
    
    
    301
    
    
    
    1,035Facility lease exit obligation
    
    
    1,467
    
    
    
    Other non-current liabilities
    
    
    325
    
    
    
    29Note payable and accrued interest to related party
    
    
    7,973
    
    
    
    7,686Commitments and contingenciesConvertible preferred stock, no par value; 2,050,000 shares authorized; issued
and outstanding shares: none outstanding at September 30, 2007 and 1,544,626 at
December 31, 2006; liquidation preference of $0 at September 30, 2007 and
$41,866 at December 31, 2006
    
    
    
    
    
    
    23,669Shareholders equity (deficit):Preferred stock, 2,950,000 shares authorized, none issued and outstandingCommon stock, no par value, 100,000,000 shares authorized; issued and
outstanding shares: 54,046,705 at September 30, 2007 and 14,765,474 at December
31, 2006
    
    
    341,961
    
    
    
    283,914Accumulated other comprehensive income (loss)
    
    
    (8
    )
    
    
    4Accumulated deficit
    
    
    (304,855
    )
    
    
    (287,865
    )Total shareholders equity (deficit)
    
    
    37,098
    
    
    
    (3,947
    )Total liabilities, convertible preferred stock and shareholders equity (deficit)
    
    $
    51,800
    
    
    $
    32,226
  3




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##### Table of Contents



ARADIGM CORPORATION
 
 CONDENSED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 (unaudited)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Contract and
milestone  revenues:Related parties
    
    $
    
    
    
    $
    9
    
    
    $
    23
    
    
    $
    59Unrelated parties
    
    
    230
    
    
    
    1,117
    
    
    
    920
    
    
    
    3,947Total revenues
    
    
    230
    
    
    
    1,126
    
    
    
    943
    
    
    
    4,006Operating expenses:Research and development
    
    
    3,899
    
    
    
    4,547
    
    
    
    11,147
    
    
    
    17,645General and administrative
    
    
    1,757
    
    
    
    3,514
    
    
    
    6,470
    
    
    
    9,051Restructuring and asset impairment
    
    
    2,059
    
    
    
    347
    
    
    
    2,059
    
    
    
    5,717Total operating expenses
    
    
    7,715
    
    
    
    8,408
    
    
    
    19,676
    
    
    
    32,413Loss from operations
    
    
    (7,485
    )
    
    
    (7,282
    )
    
    
    (18,733
    )
    
    
    (28,407
    )Gain on sale of patent and royalty interest to related party
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    20,000Interest income
    
    
    684
    
    
    
    459
    
    
    
    2,020
    
    
    
    839Interest expense
    
    
    (101
    )
    
    
    (95
    )
    
    
    (293
    )
    
    
    (101
    )Other income (expense)
    
    
    
    
    
    
    (7
    )
    
    
    16
    
    
    
    26Net income
(loss)
    
    $
    (6,902
    )
    
    $
    13,075
    
    
    $
    (16,990
    )
    
    $
    (7,643
    )Basic net income (loss) per common share
    
    $
    (0.13
    )
    
    $
    0.89
    
    
    $
    (0.34
    )
    
    $
    (0.52
    )Diluted net income (loss) per common share
    
    $
    (0.13
    )
    
    $
    0.82
    
    
    $
    (0.34
    )
    
    $
    (0.52
    )Shares used in computing basic net income (loss) per common share
    
    
    53,948
    
    
    
    14,660
    
    
    
    49,617
    
    
    
    14,625Shares used in computing diluted net income (loss) per common share
    
    
    53,948
    
    
    
    15,982
    
    
    
    49,617
    
    
    
    14,625
  4




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##### Table of Contents



ARADIGM CORPORATION
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (In thousands)
 (unaudited)
 Nine Months EndedSeptember 30,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (16,990
    )
    
    $
    (7,643
    )Adjustments to reconcile net loss to cash used in operating activities:Impairment
loss on property and equipment
    
    
    180
    
    
    
    4,014Amortization and accretion of investments
    
    
    (26
    )
    
    
    Depreciation and amortization
    
    
    589
    
    
    
    698Stock-based compensation
    
    
    1,097
    
    
    
    1,286Loss on retirement and sale of property and equipment
    
    
    10
    
    
    
    21Facility lease exit cost
    
    
    1,459
    
    
    
    Gain on sale of patents and royalty interest
    
    
    
    
    
    
    (20,000
    )Changes in operating assets and liabilities:Receivables
    
    
    341
    
    
    
    (222
    )Prepaid expenses and other current assets
    
    
    190
    
    
    
    84Restricted cash
    
    
    (302
    )
    
    
    Other assets
    
    
    168
    
    
    
    12Accounts payable
    
    
    (378
    )
    
    
    (2,329
    )Accrued compensation
    
    
    (175
    )
    
    
    (1,344
    )Other accrued liabilities
    
    
    894
    
    
    
    (79
    )Deferred revenue
    
    
    440
    
    
    
    (118
    )Deferred rent
    
    
    (114
    )
    
    
    214Facility lease exit obligation
    
    
    (235
    )
    
    
    Net cash used in operating activities
    
    
    (12,852
    )
    
    
    (25,406
    )Cash flows from investing activities:Capital expenditures
    
    
    (946
    )
    
    
    (1,329
    )Purchases of available-for-sale investments
    
    
    (13,494
    )
    
    
    (507
    )Proceeds from sales and maturities of available-for-sale investments
    
    
    1,500
    
    
    
    Proceeds from sales of property and equipment
    
    
    11
    
    
    
    4,000Proceeds from sale of patents and royalty interest
    
    
    
    
    
    
    20,000Net cash provided by (used in) investing activities
    
    
    (12,929
    )
    
    
    22,164Cash flows from financing activities:Proceeds from public offering of common stock, net
    
    
    33,178
    
    
    
    Proceeds from issuance of common stock
    
    
    103
    
    
    
    286Proceeds from exercise of options and warrants from common stock
    
    
    
    
    
    
    2Proceeds from issuance of note payable to related party
    
    
    
    
    
    
    7,500(Advances) payments received on notes receivable from officers and employees
    
    
    (1
    )
    
    
    40Net cash provided by financing activities
    
    
    33,280
    
    
    
    7,828Net increase in cash and cash equivalents
    
    
    7,499
    
    
    
    4,586Cash and cash equivalents at beginning of period
    
    
    27,013
    
    
    
    27,694Cash and cash equivalents at end of period
    
    $
    34,512
    
    
    $
    32,280Supplemental schedule of non-cash financing activities:Conversion of redeemable convertible preferred stock to common stock
    
    $
    23,669
    
    
    $
    Supplemental disclosure of non-cash investing activitiesPurchase
of property and equipment in trade accounts payable
    
    $
    307
    
    
    $
    
  5




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ARADIGM CORPORATION
 
 CONDENSED STATEMENT OF SHAREHOLDERS EQUITY (DEFICIT)
 (In thousands, except share data)
 Series A
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    
    
    
    
    
    TotalConvertible
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    ShareholdersPreferred Stock
    
    
    Common Stock
    
    
    Comprehensive
    
    
    Accumulated
    
    
    EquityShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    

Income (loss)
    
    
    Deficit
    
    
    (Deficit)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 public offering,
net (unaudited)
    
    
    
    
    
    
    
    
    
    
    37,950,000
    
    
    
    33,178
    
    
    
    
    
    
    
    
    
    
    
    33,178Issuance of common stock
upon conversion of
preferred stock
related to public
offering (unaudited)
    
    
    (1,544,626
    )
    
    
    (23,669
    )
    
    
    1,235,699
    
    
    
    23,669
    
    
    
    
    
    
    
    
    
    
    
    23,669Issuance of common stock
under the employee
stock purchase plan
(unaudited)
    
    
    
    
    
    
    
    
    
    
    100,407
    
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    103Reversal of restricted
stock award due to
forfeiture (unaudited)
    
    
    
    
    
    
    
    
    
    
    (4,875
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
related to issuance of
stock option grants
(unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,097
    
    
    
    
    
    
    
    
    
    
    
    1,097Comprehensive loss:Net loss (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,990
    )
    
    
    (16,990
    )Net change in unrealized
gain (loss) on
available-for-sale
investments (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    (12
    )Total comprehensive loss
(unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,002
    )Balances at September
30, 2007 (unaudited)
    
    
    
    
    
    $
    
    
    
    
    54,046,705
    
    
    $
    341,961
    
    
    $
    (8
    )
    
    $
    (304,855
    )
    
    $
    37,098
  6




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##### Table of Contents



ARADIGM CORPORATION
 
 NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
 September 30, 2007
 1. Organization and Basis of Presentation
 Organization
  Basis of Presentation
   2. Summary of Significant Accounting Policies
 Use of Estimates
  Revenue Recognition
  7




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##### Table of Contents



Revenue Arrangements with Multiple Deliverables
 Impairment or Disposal 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 ,
 Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109
 Fair Value Measurement .
 8




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##### Table of Contents



The Fair Value Option for Financial
Assets and Financial Liabilities
 Accounting for Non-Refundable Advance
Payments for Goods or Services to Be Used in Future Research and Development Activities
 3. Stock-Based Compensation
  Three months
    
    
    Nine monthsended September 30,
    
    
    ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Costs and expenses:Research and development
    
    $
    183
    
    
    $
    196
    
    
    $
    438
    
    
    $
    666General and administrative
    
    
    211
    
    
    
    236
    
    
    
    575
    
    
    
    620Total stock-based compensation expense
    
    $
    394
    
    
    $
    432
    
    
    $
    1,013
    
    
    $
    1,286Impact on
basic and diluted net income (loss) per common share
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (0.09
    )
     9




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##### Table of Contents



2005 Equity Incentive Plan
  1996 Non-Employee Directors Plan
  Employee Stock Purchase Plan
  Valuation Assumptions
  Three months
    
    Nine monthsended September 30,
    
    ended September 30,2007
    
    2006
    
    2007
    
    2006The 2005 PlanDividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility factor
    
    
    72.8
    %
    
    
    87.4
    %
    
    
    81.2
    %
    
    
    86.7
    %Risk-free interest rate
    
    
    4.0
    %
    
    
    4.8
    %
    
    
    4.9
    %
    
    
    4.9
    %Expected life (years)
    
    
    4.0
    
    
    
    4.2
    
    
    
    4.0
    
    
    
    4.2Weighted-average fair value of options granted during the periods
    
    $
    0.76
    
    
    $
    1.22
    
    
    $
    0.82
    
    
    $
    1.42The Purchase PlanDividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility factor
    
    
    82.7
    %
    
    
    85.7
    %
    
    
    82.7
    %
    
    
    85.7
    %Risk-free interest rate
    
    
    4.8
    %
    
    
    4.8
    %
    
    
    4.8
    %
    
    
    4.8
    %Expected life (years)
    
    
    1.3
    
    
    
    0.7
    
    
    
    1.3
    
    
    
    0.7Weighted-average fair value of employee stock purchases during the periods
    
    $
    0.61
    
    
    $
    1.33
    
    
    $
    0.61
    
    
    $
    1.33
 10




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##### Table of Contents



Stock Option Activity
  Weighted-Weighted-
    
    averageNumber
    
    average
    
    remaining
    
    Aggregateof
    
    exercise
    
    contractual
    
    intrinsicshares
    
    price
    
    life in years
    
    valueOptions outstanding at January 1, 2007
    
    
    3,064
    
    
    $
    8.90
    
    
    
    8.28
    
    
    $
    Options granted
    
    
    728
    
    
    
    1.30
    
    
    
    9.56
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options cancelled
    
    
    (943
    )
    
    
    10.33
    
    
    
    
    
    
    
    Options outstanding at September 30, 2007
    
    
    2,849
    
    
    
    6.49
    
    
    
    8.20
    
    
    
    44Options exercisable at September 30, 2007
    
    
    1,368
    
    
    
    11.57
    
    
    
    7.26
    
    
    
    15
   Options Outstanding
    
    Options ExercisableWeighted-averageremaining
    
    Weighted-
    
    
    
    
    
    Weighted-Number
    
    contractual
    
    average
    
    Number
    
    AverageRange of
    
    outstanding
    
    life
    
    exercise
    
    exercisable
    
    ExerciseExercise Price
    
    (in thousands)
    
    (in years)
    
    price
    
    (in thousands)
    
    Price$1.02-$1.15
    
    
    47
    
    
    
    9.12
    
    
    $
    1.07
    
    
    
    23
    
    
    $
    1.02$1.23-$1.23
    
    
    316
    
    
    
    9.37
    
    
    $
    1.23
    
    
    
    77
    
    
    $
    1.23$1.37-$1.37
    
    
    370
    
    
    
    9.72
    
    
    $
    1.37
    
    
    
    37
    
    
    $
    1.37$1.41-$1.64
    
    
    90
    
    
    
    8.71
    
    
    $
    1.61
    
    
    
    69
    
    
    $
    1.61$1.70-$1.70
    
    
    300
    
    
    
    8.69
    
    
    $
    1.70
    
    
    
    94
    
    
    $
    1.70$1.80-$1.80
    
    
    544
    
    
    
    8.91
    
    
    $
    1.80
    
    
    
    339
    
    
    $
    1.80$1.87-$1.87
    
    
    500
    
    
    
    8.86
    
    
    $
    1.87
    
    
    
    135
    
    
    $
    1.87$3.14-$5.95
    
    
    317
    
    
    
    7.18
    
    
    $
    5.04
    
    
    
    235
    
    
    $
    5.22$6.25-$61.25
    
    
    297
    
    
    
    4.32
    
    
    $
    24.06
    
    
    
    291
    
    
    $
    24.30$62.81-$120.63
    
    
    68
    
    
    
    2.15
    
    
    $
    91.27
    
    
    
    68
    
    
    $
    91.272,849
    
    
    
    
    
    
    
    
    
    
    
    1,368
 4. Net Income (Loss) Per Share
   11




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##### Table of Contents



Three months ended September
    
    
    Nine months ended September30,
    
    
    30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Net income (loss)
    
    $
    (6,902
    )
    
    $
    13,075
    
    
    $
    (16,990
    )
    
    $
    (7,643
    )Denominator:Basic weighted average number of common
shares outstanding
    
    
    53,948
    
    
    
    14,660
    
    
    
    49,617
    
    
    
    14,625Effect of dilutive securities:Restricted stock awards
    
    
    
    
    
    
    86
    
    
    
    
    
    
    
    Convertible preferred stock
    
    
    
    
    
    
    1,236
    
    
    
    
    
    
    
    Shares used in calculating diluted net
income (loss) per share
    
    
    53,948
    
    
    
    15,982
    
    
    
    49,617
    
    
    
    14,625Basic net income (loss) per common share
    
    
    (0.13
    )
    
    
    0.89
    
    
    
    (0.34
    )
    
    
    (0.52
    )Diluted net income (loss) per common share
    
    
    (0.13
    )
    
    
    0.82
    
    
    
    (0.34
    )
    
    
    (0.52
    )
  Three
months ended September 30,
    
    

Nine
months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Outstanding stock options
    
    
    2,849
    
    
    
    2,919
    
    
    
    2,849
    
    
    
    2,232Convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,236Unvested restricted stock
    
    
    50
    
    
    
    
    
    
    
    50
    
    
    
    86Warrants to purchase common shares
    
    
    836
    
    
    
    2,120
    
    
    
    836
    
    
    
    2,1203,735
    
    
    
    5,039
    
    
    
    3,735
    
    
    
    5,674
 5. Comprehensive Income (Loss)
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (6,902
    )
    
    $
    13,075
    
    
    $
    (16,990
    )
    
    $
    (7,643
    )Other comprehensive income (loss):
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in unrealized gain (loss)
on available-for-sale securities
    
    
    (8
    )
    
    
    4
    
    
    
    (12
    )
    
    
    (2
    )Comprehensive income (loss)
    
    $
    (6,910
    )
    
    $
    13,079
    
    
    $
    (17,002
    )
    
    $
    (7,645
    )
 12




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##### Table of Contents



6. Cash, Cash Equivalents and Short-Term Investments
  September
    
    
    December30, 2007
    
    
    31, 2006Cash and cash equivalents:Cash and money market fund
    
    $
    353
    
    
    $
    1,248Commercial paper
    
    
    34,159
    
    
    
    25,765$
    34,512
    
    
    $
    27,013Short-term investments:Corporate and government notes
    
    $
    12,509
    
    
    $
    501
  7. Restricted Cash
 th th th th
 8. Restructuring and Asset Impairment
 Accounting for Costs
Associated with Exit or Disposal
   9. Related Party Transactions
 ®
  13




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®
   10. Sale of Intraject-Related Assets
  11. Exclusive License, Development and Commercialization Agreement
 ®
  14




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##### Table of Contents



12.
Manufacturing and Supply Agreement
  13. Income Taxes
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109,
    14. Public Offering of Common Shares
  15. CFO Departure
  15




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##### Table of Contents



16. Sublease Agreement
     Loss on sublease
    
    $
    2,063Accretion expense
    
    
    16Lease payments
    
    
    (235
    )Balance at September 30, 2007
    
    $
    1,844
   Loss on sublease
    
    $
    2,063Lease commission
    
    
    420Accretion expense
    
    
    16Reversal of deferred rent liability related to sublease space
    
    
    (620
    )Write-off of leasehold improvements and equipment related to
sublease space, net
    
    
    180Total restructuring and asset impairment expense
    
    $
    2,059
 16




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##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The discussion below contains forward-looking statements that are based on the beliefs of
management, as well as assumptions made by, and information currently available to, management. Our
future results, performance or achievements could differ materially from those expressed in, or
implied by, any such forward-looking statements as a result of certain factors, including, but not
limited to, those discussed in this section as well as in the section entitled Risk Factors and
elsewhere in our filings with the Securities and Exchange Commission.
 Our business is subject to significant risks including, but not limited to,
our ability to 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
   Restructured Relationship with Novo Nordisk
  17




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##### 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. As a result, we will receive royalty
rates, should commercialization occur, under our agreement with Novo
Nordisk that will rise to an average of five percent or higher
(instead of six percent or higher) by the fifth year after
commercialization.
    
    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.
  18




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Purchase and Sale of Intraject Technology
   Product Candidates
  Stage ofProduct Candidate
    
    Indication
    
    DevelopmentProprietary Programs Under DevelopmentARD-3100 (Liposomal ciprofloxacin)
    
    Cystic Fibrosis
    
    PreclinicalARD-1100 (Liposomal ciprofloxacin)
    
    Inhalation Anthrax
    
    PreclinicalARD-1600 (Nicotine)
    
    Tobacco Smoking Cessation
    
    Phase 1Collaborative Programs Under DevelopmentAERx iDMS (Insulin)
    
    Type 1 and Type 2 Diabetes
    
    Phase 3ARD-1300 (Hydroxychloroquine)
    
    Asthma
    
    Phase 2 (1)ARD-1550 (Treprostinil)
    
    Pulmonary Arterial Hypertension
    
    PreclinicalARD-1700 (combination products)
    
    Asthma
    
    Preclinical
 
 (1)
    
    A Phase 2a clinical study did not meet pre-specified clinical
endpoints. The program is currently under review by APT
Pharmaceuticals (APT), and is in our view, unlikely to continue. 19




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##### Table of Contents



Liposomal Ciprofloxacin
  ARD-3100  Liposomal Ciprofloxacin for the Treatment of Cystic Fibrosis and
Bronchiectasis
  Pseudomonas aeruginosa,
  Development
  20




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##### Table of Contents



ARD-1100  Liposomal Ciprofloxacin for the Treatment of Inhalation Anthrax
   Development
 Francisella tularensis, F. tularensis
  21




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##### Table of Contents



AERx iDMS  Inhaled Insulin for the Treatment of Diabetes
   Development
  22




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
    
    HbAlc levels, a key marker of blood glucose control, are statistically
the same in patients using AERx iDMS and patients using subcutaneous
insulin injections.
    
    The onset of action of inhaled insulin via AERx iDMS is not
significantly different from subcutaneous injection of rapid-acting
insulin, but significantly faster than subcutaneous injection of human
regular insulin.
    
    The duration of action of inhaled insulin via AERx iDMS is not
significantly different from subcutaneous injection of human regular
insulin, but significantly longer than subcutaneous injection of
rapid-acting insulin.
    
    Although small declines were seen on some pulmonary function
parameters following 12-24 months of dosing on AERx iDMS, these
declines were not considered to be of clinical significance, and the
findings are not expected to have an impact on overall pulmonary
safety of the product.
   ARD-1300
 Hydroxychloroquine for the Treatment of Asthma
  Development
  ARD-1550
 Treprostinil for the Treatment of Pulmonary Arterial
Hypertension
  23




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##### Table of Contents



Development
  ARD-1600
(Nicotine) Tobacco Smoking Cessation Therapy
  Development
   24




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##### Table of Contents



Additional Potential Product Applications
  
    
    Cyclodextrin Combination Products for Asthma and other Chronic
Obstructive Pulmonary Disease.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 accounts
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, asthma
affected 41.5 million people in developed countries in 2005, 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. We and CyDex began in August 2007 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 post-surgical patients.
  25




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##### Table of Contents



Critical Accounting Policies and Estimates
  Revenue Recognition
  Revenue Arrangements with Multiple Deliverables
 Impairment of Long-Lived Assets
  Accounting for Costs Associated with Exit or Disposal Activities
  26




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Stock-Based Compensation Expense
    Results of Operations
 Three months ended September 30, 2007 and 2006
 Revenues
 Three months endedSeptember 30,
    
    
    Change in2007
    
    
    2006
    
    
    Percent(in thousands)Revenues:Related parties
    
    $
    
    
    
    $
    9
    
    
    
    (100
    )%Percentage of total revenues
    
    
    0
    %
    
    
    1
    %Unrelated parties
    
    
    230
    
    
    
    1,117
    
    
    
    (79
    )%Percentage of total revenues
    
    
    100
    %
    
    
    99
    %Total Revenues
    
    $
    230
    
    
    $
    1,126
    
    
    
    (80
    )%
  Research and Development Expenses
 Three months endedSeptember 30,
    
    
    Change in2007
    
    
    2006
    
    
    Percent(in thousands)Research and development expenses:Collaborative
    
    $
    (46
    )
    
    $
    999
    
    
    
    (105
    )%Self-funded
    
    
    3,945
    
    
    
    3,548
    
    
    
    11
    %Total research and development expenses
    
    $
    3,899
    
    
    $
    4,547
    
    
    
    (14
    )%
 27




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##### Table of Contents



General and Administrative Expenses
 Three months endedSeptember 30,
    
    
    Change in2007
    
    
    2006
    
    
    Percent(in thousands)General and administrative expenses
    
    $
    1,757
    
    
    $
    3,514
    
    
    
    (50
    )%
   Restructuring and Asset Impairment
 Three months endedSeptember 30,
    
    
    Change in2007
    
    
    2006
    
    
    Percent(in thousands)Restructuring and asset impairment expenses
    
    $
    2,059
    
    
    $
    347
    
    
    
    493
    %
  28




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##### Table of Contents



Gain on Sale of Patents and Royalty Interest
 Three months endedSeptember 30,
    
    
    Change in2007
    
    
    2006
    
    
    Percent(in thousands)Gain on sale of patents and royalty interest
    
    $
    
    
    
    $
    20,000
    
    
    
    (100)%
   Interest
Income, Interest Expense and Other Expense
 Three months endedSeptember 30,
    
    
    Change in2007
    
    
    2006
    
    
    Percent(in thousands)Interest
income, interest expense and other expense:Interest income
    
    $
    684
    
    
    $
    459
    
    
    
    49
    %Interest expense
    
    
    (101
    )
    
    
    (95
    )
    
    
    6
    %Other  expense
    
    
    
    
    
    
    (7
    )
    
    
    (100)
    %Total
interest income, interest expense and other expense
    
    $
    583
    
    
    $
    357
    
    
    
    63
    %
  Nine Months Ended September 30, 2007 and 2006
 Revenues
 Nine months endedSeptember 30,
    
    
    Change in2007
    
    
    2006
    
    
    Percent(in thousands)Revenue:Related parties
    
    $
    23
    
    
    $
    59
    
    
    
    (61
    )%Percentage of Total Revenue
    
    
    2
    %
    
    
    1
    %Unrelated parties
    
    
    920
    
    
    
    3,947
    
    
    
    (77
    )%Percentage of Total Revenue
    
    
    98
    %
    
    
    99
    %Total Revenue
    
    $
    943
    
    
    $
    4,006
    
    
    
    (76
    )%
 29




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##### Table of Contents



Research and Development Expenses
 Nine months endedSeptember 30,
    
    
    Change in2007
    
    
    2006
    
    
    Percent(in thousands)Research and development expenses:Collaborative
    
    $
    759
    
    
    $
    4,107
    
    
    
    (82)
    %Self-funded
    
    
    10,388
    
    
    
    13,538
    
    
    
    (23)
    %Total research and development expenses
    
    $
    11,147
    
    
    $
    17,645
    
    
    
    (37)
    %
   General and Administrative Expenses
 Nine months endedSeptember 30,
    
    
    Change in2007
    
    
    2006
    
    
    Percent(in thousands)General and administrative expenses
    
    $
    6,470
    
    
    $
    9,051
    
    
    
    (29)
    %
  30




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Restructuring and Asset Impairment
 Nine months endedSeptember 30,
    
    
    Change in2007
    
    
    2006
    
    
    Percent(in thousands)Restructuring and asset impairment expenses
    
    $
    2,059
    
    
    $
    5,717
    
    
    
    (64
    )%
   Gain on Sale of Patents and Royalty Interest
 Nine months endedSeptember 30,
    
    
    Change in2007
    
    
    2006
    
    
    Percent(in thousands)Gain on sale of patents and royalty interest
    
    $
    
    
    
    $
    20,000
    
    
    
    (100)%
   Interest Income, Interest Expense and Other Income
 Nine months endedSeptember 30,
    
    
    Change in2007
    
    
    2006
    
    
    Percent(in thousands)Interest income, interest expense and other income:Interest income
    
    $
    2,020
    
    
    $
    839
    
    
    
    141
    %Interest expense
    
    
    (293
    )
    
    
    (101
    )
    
    
    190
    %Other income
    
    
    16
    
    
    
    26
    
    
    
    (38
    )%Total interest income, interest expense and other income
    
    $
    1,743
    
    
    $
    764
    
    
    
    128
    %
 31




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Liquidity and Capital Resources
       32




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Contractual Obligations
  Payment due by period(amounts in thousands)Total
    
    2007(1)
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012+Contractual obligations:Operating lease obligations
    
    $
    19,565
    
    
    $
    597
    
    
    $
    2,421
    
    
    $
    2,367
    
    
    $
    2,248
    
    
    $
    1,992
    
    
    $
    9,940Unconditional capital purchase obligations
    
    
    669
    
    
    
    669
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unconditional purchase obligations
    
    
    4,879
    
    
    
    4,879
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual commitments
    
    
    25,113
    
    
    
    6,145
    
    
    
    2,421
    
    
    
    2,367
    
    
    
    2,248
    
    
    
    1,992
    
    
    
    9,940Less  sublease payments from Mendel (2)
    
    
    (8,548
    )
    
    
    (207
    )
    
    
    (866
    )
    
    
    (900
    )
    
    
    (927
    )
    
    
    (955
    )
    
    
    (4,693
    )Total contractual commitments  net (2)
    
    $
    16,565
    
    
    $
    5,938
    
    
    $
    1,555
    
    
    $
    1,467
    
    
    $
    1,321
    
    
    $
    1,037
    
    
    $
    5,247
 
 (1)
    
    For three months ending December 31, 2007(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 (see Note
16 of the notes to the condensed financial statements). Off-Balance Sheet Financings and Liabilities
  
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Market Risk Disclosures
   
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures.
 Changes in internal control.
 Limitations on the effectiveness of controls.
 33




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
 In addition to the other information contained in this Form 10-Q , and risk factors set
forth in our most recent SEC filings, the following risk factors should be considered carefully in
evaluating our business. Our business, financial condition, or results of operations could be
materially adversely affected by any of these risks. Additional risks not presently known to us or
that we currently deem immaterial may also impair our business and operations.
 The risk factors included herein include any material changes to and supersede the risk
factors associated with our business previously disclosed in Item 1A to Part I of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2006. We have marked with an asterisk (*) those
risk factors that reflect substantive changes from the risk factors included in our Annual Report
on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December
31, 2006.
 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.
  34




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##### Table of Contents




    
    our progress in the application of our delivery and formulation technologies, which may
require further refinement of these technologies;
    
    the number of product development programs we pursue and the pace of each program;
    
    our progress with formulation development;
    
    the scope, rate of progress, results and costs of preclinical testing and clinical trials;
    
    the time and costs associated with seeking regulatory approvals;
    
    our ability to outsource the manufacture of our product candidates and the costs of doing so;
    
    the time and costs associated with establishing in-house resources to market and sell
certain of our products;
    
    our ability to establish and maintain collaborative arrangements with others and the terms
of those arrangements;
    
    the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims, and
    
    our need to acquire licenses, or other rights for our product candidates.
  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.
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Our dependence on collaborators may delay or prevent the progress of certain of our programs.
    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.
 36




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We are subject to extensive regulation, including the requirement of approval before any of our
product candidates can be marketed. We may not obtain regulatory approval for our product
candidates on a timely basis, or at all.
   Regulatory authorities may not approve our product candidates even if the product candidates meet
safety and efficacy endpoints in clinical trials or the approvals may be too limited for us to earn
sufficient revenues.
  Even if we are granted initial FDA approval for any of our product candidates, we may not be able
to maintain such approval, which would reduce our revenues.
  37




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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.
    38




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We rely on a small number of vendors and contract manufacturers to supply us with specialized
equipment, tools and components; if they do not perform as we need them to, we will not be able to
develop or commercialize products.
  In order to market our proprietary products, we are likely to establish our own sales, marketing
and distribution capabilities. We have no experience in these areas, and if we have problems
establishing these capabilities, the commercialization of our products would be impaired.
  If any products that we or our collaborators may develop do not attain adequate market acceptance
by healthcare professionals and patients, our business prospects and results of operations will
suffer.
  
    
    the demonstration of efficacy and safety in clinical trials;
    
    the existence, prevalence and severity of any side effects;
    
    the potential or perceived advantages or disadvantages compared to alternative treatments;
    
    the timing of market entry relative to competitive treatments;
    
    the relative cost, convenience, product dependability and ease of administration;
    
    the strength of marketing and distribution support;
    
    the sufficiency of coverage and reimbursement of our product candidates by governmental
and other third-party payors; and
 39




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##### Table of Contents




    
    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.
    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.
   40




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##### Table of Contents



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.
  41




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##### Table of Contents




    
    diversion of our management from the development and commercialization of our
pipeline product candidates;
    
    difficulty in assimilating and efficiently using the acquired assets or personnel; and
    
    inability to retain key personnel.
  If we market our products in other countries, we will be subject to different laws and we may not
be able to adapt to those laws, which could increase our costs while reducing our revenues.
  We may be exposed to product liability claims, which would hurt our reputation, market position and
operating results.
  If we cannot arrange for adequate third-party reimbursement for our products, our revenues will
suffer.
  42




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##### Table of Contents



Our use of hazardous materials could subject us to liabilities, fines and sanctions.
  If we are unable to effectively implement or maintain a system of internal controls over financial
reporting, we may not be able to accurately or timely report our financial results and our stock
price could be adversely affected.
  Risks Related to Our Common Stock
 Our stock price is likely to remain volatile.
  
    
    investor perception of us;
    
    research analyst recommendations and our ability to meet or exceed quarterly performance
expectations of analysts or investors;
    
    fluctuations in our operating results;
    
    market conditions relating to our segment of the industry or the securities markets in general;
    
    announcements of technological innovations or new commercial products by us or our competitors;
    
    publicity regarding actual or potential developments relating to products under development by
us or our competitors;
 43




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##### Table of Contents




    
    failure to maintain existing or establish new collaborative relationships;
    
    developments or disputes concerning patents or proprietary rights;
    
    delays in the development or approval of our product candidates;
    
    regulatory developments in both the United States and foreign countries;
    
    concern of the public or the medical community as to the safety or efficacy of our products,
or products deemed to have similar safety risk factors or other similar characteristics to our
products;
    
    period-to-period fluctuations in financial results;
    
    future sales or expected sales of substantial amounts of common stock by shareholders;
    
    our ability to raise financing; and
    
    economic and other external factors.
  Our common stock was delisted from the Nasdaq Capital Market; this delisting may reduce the
liquidity of our common stock and the price may decline.
  We have implemented certain anti-takeover provisions, which make it less likely that we would be
acquired and you would receive a premium price for your shares.
   We have never paid dividends on our capital stock, and we do not anticipate paying cash dividends
for at least the foreseeable future.
  44




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##### Table of Contents



Item 6. EXHIBITS
 ExhibitNumber
    
    Description10.1(1)
    
    Consulting Agreement effective as of July 2, 2007 by and between
the Company and Norman Halleen.10.2(2)
    
    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.10.3(3)
    
    Manufacturing Agreement between the Company and Enzon
Pharmaceuticals, Inc. dated August 8, 2007.10.4#
    
    Exclusive License, Development and Commercialization Agreement,
dated as of August 30, 2007, by and between the Company and Lung
Rx, Inc.10.5#
    
    Collaboration Agreement, dated as of August 31, 2007, by and
between the Company and CyDex, Inc.31.1
    
    Certification by Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by Interim Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by Chief Executive Officer and Interim Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
 
 #
    
    Confidential treatment has been sought for portions of this exhibit.(1)
    
    Incorporated by reference to the Companys Form 8-K filed on July 11, 2007.(2)
    
    Incorporated by reference to the Companys Form 8-K filed on July 24, 2007.(3)
    
    Incorporated by reference to the Companys Form 8-K filed on August 14, 2007.  45




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##### Table of Contents



SIGNATURES
  ARADIGM CORPORATION
(Registrant)/s/ Igor GondaIgor GondaPresident and Chief Executive Officer
(Principal Executive Officer) /s/ Norman HalleenNorman HalleenInterim Chief Financial Officer
(Principal Financial and Accounting Officer)  46




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Description10.1(1)
    
    Consulting Agreement effective as of July 2, 2007 by and between
the Company and Norman Halleen.10.2(2)
    
    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.10.3(3)
    
    Manufacturing Agreement between the Company and Enzon
Pharmaceuticals, Inc. dated August 8, 2007.10.4#
    
    Exclusive License, Development and Commercialization Agreement,
dated as of August 30, 2007, by and between the Company and Lung
Rx, Inc.10.5#
    
    Collaboration Agreement, dated as of August 31, 2007, by and
between the Company and CyDex, Inc.31.1
    
    Certification by Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by Interim Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by Chief Executive Officer and Interim Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
 
 #
    
    Confidential treatment has been sought for portions of this exhibit.(1)
    
    Incorporated by reference to the Companys Form 8-K filed on July 11, 2007.(2)
    
    Incorporated by reference to the Companys Form 8-K filed on July 24, 2007.(3)
    
    Incorporated by reference to the Companys Form 8-K filed on August 14, 2007.