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     The term Change of Control shall not include a sale of assets, merger or other transaction effectedexclusively for the purpose of changing the domicile of the Company, or any transaction which doesnot constitute a “change in control event” as defined inTreasury Regulation Section1.409A-3(i)(5)(i).     **1.2*“Cause”***shall mean any one or more of the following: (i) the Executive’s commission ofany felony or any crime involving fraud, dishonesty or moral turpitude under the laws of the UnitedStates or any state thereof; (ii) the Executive’s attempted commission of, or participation in, afraud or act of dishonesty against the Company; (iii) the Executive’s intentional, materialviolation of any material contract or agreement between the Executive and the Company or anystatutory duty owed to the Company; (iv) the Executive’s unauthorized use or disclosure of theCompany’s confidential information or trade secrets; or (v) the Executive’s gross misconduct.The determination that a termination is for Cause shall be made by the Company in its solediscretion.     **1.3 “*Constructive Termination”***shall mean the resignation of the Executive due to theoccurrence of any of the following without the Executive’s consent:          **(a)**a material reduction in the Executive’s duties, title, reporting relationships, orresponsibilities relative to the Executive’s duties, title, reportingrelationships, or responsibilities in effect immediately prior to the effective date of theChange of Control; *provided, however,*that a change in the Executive’s title or reportingrelationships shall not in and of themselves (or collectively) constitute a ConstructiveTermination; *provided further,*that this determination will include an analysis of whether theExecutive maintains at least the same level, scope and type of duties, title, reportingrelationships, and responsibilities with respect to the management, strategy, operations andbusiness of the combined entity resulting from such Change of Control, taking the Company, anysuccessor, and their respective parent corporations, subsidiaries and other affiliates, together asa whole;          **(b)**a material reduction by the Company in the Executive’s annual base salary or benefits asin effect on the effective date of the Change of Control or as increased thereafter; *provided,however,*that Constructive Termination shall not be deemed to have occurred in the event of areduction in the Executive’s annual base salary or benefits that is pursuant to a salary reductionprogram or change in Company benefit programs that affects substantially all of the executiveofficers or employees of the Company and that does not adversely affect the Executive to a greaterextent than other similarly situated employees;          **(c)**a relocation of the Executive’s primary business office to a location more than fifty (50)miles from the location at which the Executive performed the Executive’s duties as of the effectivedate of the Change of Control, except for required travel by the Executive with respect to theCompany’s business to an extent substantially consistent with the Executive’s business travelobligations prior to the effective date of the Change of Control; or          **(d)**a material breach by the Company of any material obligations under this Agreement, or afailure of any successor to the Company to assume or continue this Agreement.     **1.4 *“Covered Termination”***shall mean either that an Executive’s employment (a) is terminatedwithout Cause, or (b) terminates as a result of a Constructive Termination, in each
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case, resulting in a “separation from service” with the Company within the meaning of TreasuryRegulation Section 1.409A-l(h) (without regard to any permissible alternative definition of“termination of employment” thereunder).**2.****Change of Control Severance Benefits.**     **2.1 Severance Benefits.**If within eighteen (18) months after the effective date of a Changeof Control, the Executive: (a) has a Covered Termination; and (b) provides the Company with asigned general release of all claims in a form acceptable to the Company (the ***“Release”)***andallows the Release to become effective within sixty (60) days following the date of the CoveredTermination (the ***“Release Deadline”),***then the Executive shall be eligible for the followingseverance benefits:          **(a) Severance Payment.**The Executive shall receive a single lump sum payment equal to 12months of the base salary he received as of the date of the Change of Control, or the date of theCovered Termination (whichever is greater). This Severance Payment shall be subject to requireddeductions and tax withholdings and shall be paid within ten (10) business days of the effectivedate of the Release.          **(b) Bonus Payment.**The Executive shall receive a single lump sum payment equal to thefollowing sum: The Executive’s target bonus for the year in which the Covered Termination occursmultiplied by the average annual percentage achievement of corporate goals over each fiscal yearfor the three complete fiscal years preceding the date of the Covered Termination. This BonusPayment shall be subject to required deductions and tax withholdings and shall be paid within ten(10) business days of the effective date of the Release.          **(c) Health Insurance Payments.**If, following the date of a Covered Termination, theExecutive timely elects continued group health insurance coverage under the federal COBRA law orsimilar state laws, if applicable, the Company will pay the Executive’s COBRA premium costs tocontinue such coverage at the level in effect as of the date of the Covered Termination for aperiod of 12 months after the date of the Covered Termination (the ***“Termination Date”)***or until theExecutive becomes eligible for group health insurance coverage through a new employer (whichevercomes first). The Executive must promptly notify the Company in writing if the Executive becomeseligible for group health insurance coverage through a new employer during the Severance Period.          **(d) Career Transition Assistance (Outplacement Services).**The Company will reimburse theExecutive up to $10,000 for expenses actually incurred by the Executive within six (6) months ofthe date of his Covered Termination for reasonable and customary outplacement services for careertransition assistance expenses. Such payments shall qualify for the exemption provided by TreasuryRegulation Sections 1.409A-1(b)(9)(v)(A) and (C).          **(e) Accelerated Vesting.**The Company will accelerate the vesting of any stock options orrestricted stock awards that remain unvested as of the date of the termination of the Executive’semployment such that all such unvested options or awards shall be deemed vested as of the date ofsuch termination. Except as modified herein, all such options and awards shall continue to begoverned by the applicable agreements and stock option plans.
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     **2.2 Ineligibility for Severance Benefits.**The Executive will not be eligible for any benefitsunder this Agreement if the Company (or its successor) terminates the Executive’s employment forCause or if the Executive resigns for any reason other than a Constructive Termination. Further,the Executive will not be eligible for severance benefits under this Agreement in the event thatthe Executive’s employment ends for any reason more than eighteen (18) months after the effectivedate of a Change of Control, although the Executive may in such instance be eligible for benefitsunder a separate Company severance plan, including, without limitation, the Aradigm CorporationExecutive Officer Severance Benefit Plan. If the Release does not become effective by the ReleaseDeadline, Executive will not have any rights to any benefits under this Agreement.     **2.3 Other Severance Benefits.**Nothing in this Agreement shall affect the right of theExecutive to receive any severance benefits pursuant to any other Company severance plan including,without limitation, the Aradigm Corporation Executive Officer Severance Benefit Plan; *provided,however,*that if the Executive actually receives benefits under this Agreement, he shall not beentitled to receive any other severance benefits of any kind (except for the accelerated vestingset forth in Section 2.1(e) above) pursuant to any other severance benefit plan of the Company(including, without limitation, the Aradigm Corporation Executive Officer Severance Benefit Plan).The Executive acknowledges and agrees that any prior agreement between the Executive and theCompany providing for or relating to severance benefits in connection with a Change of Control (asdefined herein or therein), except for those contained in the Executive’s stock option agreementswith the Company, are hereby expressly superseded and replaced in their entirety by this Agreementand shall have no further force or effect     **2.4 Deferred Compensation.**          **(a)**All payments provided under this Agreement are intended to constitute separate paymentsfor purposes of Treasury Regulation Section 1.409A-2(b)(2).          **(b)**If Executive is a “specified employee” of the Company or any affiliate thereof (or anysuccessor entity thereto) within the meaning of Section 409A(a)(2)(B)(i) of the Internal RevenueCode of 1986, as amended (the ***“Code”)***on the date of a Covered Termination, then, except withrespect to amounts which may be paid sooner pursuant to an “involuntary separation from service” aspermitted by Treasury Regulation Section 1.409A-1(b)(9)(iii), any cash severance payments pursuantto Sections 2.1 (a) and 2.1(b) (the ***“Severance Payments”)***shall be delayed until the earlier of:(i) the date that is six (6) months after the date of the Covered Termination, or (ii) the date ofthe Executive’s death (such date, the ***“Delayed Payment Date”),***and the Company (or the successorentity thereto, as applicable) shall pay to the Executive a lump sum amount equal to the sum of theSeverance Payments that otherwise would have been paid to the Executive on or before the DelayedPayment Date, without any adjustment on account of such delay. Except to the extent that paymentsmay be delayed until the Delayed Payment Date, the Company will pay the Executive the SeverancePayments within eighty (80) days following the date of the Covered Termination, provided that theCompany shall have no obligation to pay any Severance Payments prior to the date the Releasebecomes effective by its terms.          **(c)**Provided that no Covered Termination following a Change of Control has occurred on orprior to December 31, 2009, the following sentence shall apply: notwithstanding
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anything in Section 2.4 to the contrary, payments shall be delayed pursuant to Section 2.4(b) onlyto the extent such payments constitute deferred compensation under Code Section 409A and suchdelay is necessary to prevent any adverse tax consequences under Code Section 409A.          **(d) **Any amounts paid pursuant to Section 2.1(c) are not intended to be delayed pursuant toSection 409A(a)(2)(B)(i) of the Code and are intended to be paid pursuant to the exception providedby Treasury Regulation Section 1.409A-1(b)(9)(v)(B). Amounts paid pursuant to Section 2.1(d) areintended to qualify for the exception provided under Treasury Regulation Sections1.409A-1(b)(9)(v)(A) and (C).**3.****Parachute Payments.**     **3.1 Reduction of Severance Benefits.**Notwithstanding the above, if any payment or benefit thatthe Executive would receive under this Agreement, when combined with any other payment or benefithe receives that is contingent upon a Change in Control ***(“Payment”)***would (i) constitute a“parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence,be subject to the excise tax imposed by Section 4999 of the Code ***(“Excise******Tax”),***then such Paymentshall be either (x) the full amount of such Payment or (y) such lesser amount as would result in noportion of the Payment being subject to the Excise Tax (the ***“Reduced Amount”),***whichever of theforegoing amounts, taking into account the applicable federal, state and local employment taxes,income taxes and the Excise Tax, results in the Executive’s receipt, on an after-tax basis, of thegreater economic benefit notwithstanding that all or some portion of the Payment may be subject tothe Excise Tax. If a reduction in payments or benefits constituting “parachute payments” isnecessary so that the Payment equals the Reduced Amount, reduction shall occur in a mannernecessary to provide the Executive with the greatest economic benefit. If more than one manner ofreduction of payments or benefits necessary to arrive at the Reduced Amount yields the greatesteconomic benefit, the payments and benefits shall be reduced *pro rata.*The Executive shall besolely responsible for the payment of all personal tax liability that is incurred as a result ofthe payments and benefits received under this Agreement, and the Executive will not be reimbursedby the Company for any such payments.     **3.2 Determination of Excise Tax Liability.**The Company shall attempt to cause its accountantsto make all of the determinations required to be made under Section 3.1, or, in the event theCompany’s accountants will not perform such service, the Company may select another professionalservices firm to perform the calculations. The Company shall request that the accountants or firmprovide detailed supporting calculations both to the Company and the Executive prior to the Changein Control if administratively feasible or subsequent to the Change in Control if events occur thatresult in parachute payments to the Executive at that time. For purposes of making thecalculations required by Section 3.1, the accountants or firm may make reasonable assumptions andapproximations concerning applicable taxes and may rely on reasonable, good faith determinationsconcerning the application of the Code. The Company and the Executive shall furnish to theaccountants or firm such information and documents as the accountants or firm may reasonablyrequest in order to make a determination under this Section 3.1. The Company shall bear allcosts the accountants or firm may reasonably incur in connection with any calculations contemplatedby Section 3.1. Any such determination by the Company’s accountants or other firm shall bebinding upon the Company and the Executive, and the Company shall have no liability to theExecutive for the determinations of its accountants or other firm.
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**4.****General Provisions.**     **4.1 At Will Employment.**Nothing in this Agreement alters the Executive’s at-will employmentstatus. Either the Executive or the Company may terminate the Executive’s employmentrelationship at any time, with or without cause or advance notice. In particular, nothingexpressed or implied in this Agreement will create any right or duty on the part of the Company orthe Executive to have the Executive remain in the employment of the Company or any subsidiary priorto or following any Change of Control.     **4.2 Successors and Binding Agreement.**This Agreement will be binding upon and inure to thebenefit of the Company and any successor to the Company, including without limitation any personsacquiring directly or indirectly all or substantially all of the business or assets of the Companywhether or not through a Change of Control (and such successor shall thereafter be deemed the“Company” for the purposes of this Agreement). This Agreement will inure to the benefit of and beenforceable by the Executive’s personal or legal representatives, executors, administrators,successors, heirs, distributees and legatees.     **4.3 Amendments.**No provision of the Agreement may be amended, modified or waived unless suchamendment, modification or waiver shall be agreed to in writing and signed by the Executive and aduly authorized officer of the Company.     **4.4 Severability.**If any provision of the Agreement shall be determined to be invalid orunenforceable by a court of competent jurisdiction, the remaining provisions of the Agreement shallbe unaffected thereby and shall remain in full force and effect to the fullest extent permitted bylaw.     **4.5 Notices.**Any notice or other communication required or permitted under the Agreementshall be in writing and shall be deemed to have been duly given when delivered by hand, electronictransmission (with a copy following by hand or by overnight courier), by registered or certifiedmail, postage prepaid, return receipt requested or by overnight courier addressed to the otherparty. All notices shall be addressed as follows, or to such other address or addresses as may besubstituted by notice in writing:   To the Company: To the Executive:Aradigm Corporation Nancy Pecota3929 Point Eden Way c/o Aradigm CorporationHayward, CA 94545 3929 Point Eden Way  Hayward, CA 94545     **4.6 Governing Law.**The Agreement shall be construed, interpreted and governed in accordancewith the laws of the State of California, without reference to rules relating to conflicts of law.     **4.7 Independent Counsel.**The Executive acknowledges that this Agreement has been prepared onbehalf of the Company by counsel to the Company and that this counsel does not represent, and isnot acting on behalf of, the Executive. The Executive has been provided with an opportunity toconsult with the Executive’s own counsel with respect to this Agreement.
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     **4.8 Amendment and Restatement of Prior Agreement.**This agreement replaces any prior agreementbetween the Company and Executive with respect to the subject matter hereof, and any prioragreement is terminated and of no further force or effect.     **4.9 Counterparts.**This Agreement may be executed in one or more counterparts, each of whichshall be deemed to be an original but all of which together will constitute one and the sameagreement.
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      **In Witness Wherrof,** the parties have executed this Amended and Restated Change ofControl Agreement as of the date first written above.   **Aradigm Corporation** **Executive**         By: /s/ D. Jeffery Grimes Signature: /s/ Nancy E. Pecota       Name: D. Jeffery Grimes Print Name: Nancy PecotaTitle: VP, Legal Affairs, General Counsel & Secretary    Signature Page To Amended And Restated Change of Control Agreement