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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington 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, 2008oro

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
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  12b-2
  Large
    accelerated
    filer o
    Accelerated
    filer o
    Non-accelerated
    filer o
    Smaller
    reporting
    company þ   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




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TABLE OF
    CONTENTS
   
 PagePART IItem 1.

Business


1Item 1A.

Risk Factors


21Item 1B.

Unresolved Staff Comments


32Item 2.

Properties


32Item 3.

Legal Proceedings


33Item 4.

Submission of Matters to a Vote of Security
    Holders


33PART IIItem 5.

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


33Item 6.

Selected Financial Data


34Item 7.

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


35Item 7A.

Quantitative and Qualitative Disclosure About
    Market Risk


43Item 8.

Financial Statements and Supplementary Data


44Item 9.

Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


72Item 9A.

Controls and Procedures


72Item 9B.

Other Information


72PART IIIItem 10.

Directors, Executive Officers and Corporate
    Governance


73Item 11.

Executive Compensation


73Item 12.

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


73Item 13.

Certain Relationships and Related Transactions
    and Director Independence


73Item 14.

Principal Accountant Fees and Services


73PART IVItem 15.

Exhibits and Financial Statement Schedules


74SIGNATURES


77EX-23.1EX-31.1EX-31.2EX-32.1




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




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®
       2




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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 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.
    Accelerate the regulatory approval process.  We
    believe our management teams 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 most of
    our current 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.It is our longer term strategy 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 product development collaborations.We
    continue to believe that companies can benefit by collaborating
    with us when our proprietary delivery technologies create new
    pharmaceutical and biologics products. 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. 3




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
    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 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 2ARD-1100 (Liposomal ciprofloxacin)

Inhalation Anthrax

PreclinicalARD-1600 (Nicotine)

Tobacco Smoking Cessation

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

Pulmonary Arterial Hypertension

Phase 1ARD-1500 (Inhaled liposomal treprostinil)

Pulmonary Arterial Hypertension

PreclinicalARD-1700 (combination products)

Asthma, COPD

Preclinical     Proprietary
    Programs Under Development
  Liposomal
    Ciprofloxacin
   4




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ARD-3100 
    Liposomal Ciprofloxacin for the Treatment of Infections in
    Cystic Fibrosis (CF) Patients
    Pseudomonas
    aeruginosa,
    Development
    14-day 14-day
 5




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ARD
    3150  Liposomal Ciprofloxacin for the Treatment of
    Infections in Non-Cystic Fibrosis Bronchiectasis (BE)
    Patients
    Development
    once-a-day Pseudomonas aeruginosa Pseudomonas aeruginosa 28-day
         6




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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
   7




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Development
        Collaborative
    Programs Under Development:
  ARD-1550
    and 1500  Treprostinil for the Treatment of Pulmonary
    Arterial Hypertension
     8




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Development
  once-a-day TR I U M P H
          ARD-1700
    (Combination Products) and Other Prior and Potential
    Applications
     9




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tm
    
    Cyclodextrin Combination Products for Asthma, Cystic Fibrosis
    and 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 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
    Pharmaceuticals, Inc. (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.    Pulmonary
    Drug Delivery Background
   10




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
    emitted dose;
    particle size distribution; and
    breathing maneuver.      i.e.
    The AERx
    Delivery Technology
   11




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
    Liquid Formulation.  Most drugs being
    considered by us for pulmonary delivery, especially biologics,
    are currently marketed in stable water formulations for
    parenteral delivery. 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. The liquid drug formulations used in
    the AERx delivery system are expected to have the similar
    stability profile as the currently marketed parenteral 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 inhalation delivery devices employ
    breath control methods and technologies to guide the patient
    into the proper breathing maneuver. As a result, a high degree
    of consistency of the dose of medication delivered each time to
    the patient was demonstrated in several clinical trials. The
    characteristics of the breath control can be customized for
    different patient groups, such as young children or other
    patients with small lung volumes.  ®
   12




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Formulation
    Technologies
    Intellectual
    Property and Other Proprietary Rights
         13




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Competition
      
    ARD-3100.  Currently marketed products include
    TOBI* marketed by Novartis, Pulmozyme* marketed by Genentech,
    Levaquin* marketed by Ortho-McNeil-Janssen Pharmaceuticals,
    Doribax* marketed by Johnson & Johnson and Cipro*
    marketed by Bayer. Products under development to treat
    respiratory infections in diseases such as CF and non-CF BE
    include inhaled aztreonam* under development by Gilead, inhaled
    liposomal amikacin under development by Transave, inhaled
    levofloxacin by Mpex Pharmaceuticalsand inhaled ciprofloxacin
    under development by Bayer. Bayer was 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, Symbicort* marketed by 14




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AstraZeneca, Alvesco* marketed by Sepracor, Asmanex* marketed by
    Schering-Plough and Pulmicort* marketed by AstraZeneca
    International.  
    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;
    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.   15




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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.
    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.     16




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Section 505(b)(2)
    Applications
  e.g.
  and/or
   17




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Orphan
    Drug Designation
      International
    Regulation
    Scientific
    Advisory Board
   18




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Name

Affiliation

Area of ExpertisePeter R. Byron, Ph.D.

Medical College of Virginia, Virginia Commonwealth University

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

The Johns Hopkins University School of Medicine

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

Zogenix, Inc.

Pulmonary Delivery/PharmaceuticsMichael Konstan, M.D.

Rainbow Babies and Childrens Hospital

Pulmonary Diseases/Cystic FibrosisBabatunde Otulana, M.D.

Aerovance, Inc.

Pulmonary Diseases/Cystic Fibrosis/RegulatoryAdam Wanner, M.D.

University of Miami

Chronic Obstructive Pulmonary Diseases (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
   19




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Executive
    Officers and Directors
    Name

Age

PositionIgor Gonda, Ph.D.


61


President, Chief Executive Officer and DirectorNancy E. Pecota


49


Vice President, Finance and Chief Financial OfficerD. Jeffery Grimes


45


Vice President, Legal Affairs, General CounselFrank H. Barker(1)(2)(3)


78


DirectorJohn M. Siebert, Ph.D.(1)(2)(3)


68


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


69


Chairman of the Board and Director     (1)
    
    Member of the Audit Committee.(2)
    
    Member of the Compensation Committee.(3)
    
    Member of the Nominating and Corporate Governance Committee.  Igor Gonda, Ph.D.
  Nancy E. Pecota
  D. Jeffery Grimes J.D./M.B.A.
  Frank H. Barker
  John M. Siebert, Ph.D.
 20




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Virgil D. Thompson
  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.
   21




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We
    changed our product development strategy, and if we do not
    successfully implement this 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;
    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.
   22




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
    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 and other contracting parties may
    delay or terminate certain of our programs, and any such delay
    or termination would harm our business prospects and stock
    price.
  120-day and/or
   23




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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 costs 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.
     24




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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.
    Because
    our proprietary liposomal ciprofloxacin programs rely on the
    FDAs grant 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.
   25




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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.
    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.
   26




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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.
     27




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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.
    and/or
      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.
   28




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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.    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.
   29




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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.
    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.
   30




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Form 10-K
  Risks
    Related to Our Common Stock
  Our
    stock price is likely to remain volatile.
    
    investor perception of us;
    market conditions relating to our segment of the industry or the
    securities markets in general;
    sales of our stock by certain large institutional shareholders
    to meet liquidity concerns during the current economic climate;
    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;
    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;
    future sales or expected sales of substantial amounts of common
    stock by shareholders;
    our ability to raise financing; and
    economic and other external factors.   31




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Our
    common stock is quoted on the OTC Bulletin Board, which may
    provide less liquidity for our shareholders than the national
    exchanges.
    We
    have implemented certain anti-takeover provisions, which may
    make an acquisition less likely or might result in costly
    litigation or proxy battles.
        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  Form 10-K).
 32




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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


Low2007First Quarter

$
1.46


$
0.90Second Quarter


1.69



1.18Third Quarter


1.40



1.12Fourth Quarter


1.81



1.272008First Quarter

$
1.58


$
1.11Second Quarter


1.09



0.62Third Quarter


0.80



0.39Fourth Quarter


0.40



0.202009First Quarter (through February 27, 2009)

$
0.29


$
0.11     Dividend
    Policy
   33




---



##### Table of Contents



Item 6.
    Selected
    Financial Data  Form 10-K.
  Years Ended December 31,2008


2007


2006


2005


2004(In thousands, except share data)Statements of operations data:Contract and license revenues

$
251


$
961


$
4,814


$
10,507


$
28,045Operating expenses:Research and development


16,499



16,770



22,198



30,174



46,477General and administrative


6,679



8,401



10,717



10,895



11,934Restructuring and asset impairment


79



2,182



6,003







Total operating expenses


23,257



27,353



38,918



41,069



58,411Loss from operations


(23,006
)


(26,392
)


(34,104
)


(30,562
)


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










20,000







Interest income


781



2,573



1,251



1,317



194Interest expense


(408
)


(393
)


(197
)


(6
)


(16
)Other income (expense)






11



23



36



(1
)Income tax benefit


25















Net loss

$
(22,608
)

$
(24,201
)

$
(13,027
)

$
(29,215
)

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

$
(0.42
)

$
(0.48
)

$
(0.89
)

$
(2.01
)

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


54,162



50,721



14,642



14,513



12,741   As of December 31,2008


2007


2006


2005


2004(In thousands)Balance sheet data:Cash, cash equivalents and short-term investments

$
19,140


$
40,510


$
27,514


$
27,694


$
16,763Working capital


17,313



36,594



25,405



21,087



4,122Total assets


25,519



45,813



32,226



39,497



79,741Note payable and accrued interest to former related party


8,472



8,071



7,686







Convertible preferred stock










23,669



23,669



23,669Accumulated deficit


(334,674
)


(312,066
)


(287,865
)


(274,838
)


(245,623
)Total shareholders equity (deficit)


8,756



30,299



(3,947
)


7,171



35,754  34




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##### Table of Contents



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 our filings with the Securities and Exchange
    Commission.
  Our business is subject to significant risks including, but
    not limited to, our ability to obtain additional financing, our
    ability to implement our product development strategy, the
    success of product development efforts, our dependence on
    collaborators for certain programs, obtaining and enforcing
    patents important to our business, clearing the lengthy and
    expensive regulatory approval process and possible competition
    from other products. Even if product candidates appear promising
    at various stages of development, they may not reach the market
    or may not be commercially successful for a number of reasons.
    Such reasons include, but are not limited to, the possibilities
    that the potential products may be found to be ineffective
    during clinical trials, may fail to receive necessary regulatory
    approvals, may be difficult to manufacture on a large scale, are
    uneconomical to market, may be precluded from commercialization
    by proprietary rights of third parties or may not gain
    acceptance from health care professionals and patients. Further,
    even if our product candidates appear promising at various
    stages of development, our share price may decrease such that we
    are unable to raise additional capital without dilution that may
    be unacceptable to our shareholders.
  Investors are cautioned not to place undue reliance on the
    forward-looking statements contained herein. We undertake no
    obligation to update these forward-looking statements in light
    of events or circumstances occurring after the date hereof or to
    reflect the occurrence of unanticipated events.
  Overview
     35




---



##### Table of Contents



14-day Pseudomonas aeruginosa 14-day
  once-a-day Pseudomonas aeruginosa 28-day
     36




---



##### Table of Contents



once-a-day
          tm tm
 37




---



##### 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, EITF 00-21
 38




---



##### Table of Contents



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 ,
  Research
    and Development
    Income
    Taxes
     39




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##### Table of Contents



Accounting for Uncertainty in Income Taxes an
    interpretation of FAS 109, Accounting for Income Taxes Form 10-K
  Stock
    Based Compensation
  Share-Based Payment
    Form 10-K.
  Recent
    Accounting Pronouncements
  Form 10-K
  Results
    of Operations
  Years
    Ended December 31, 2008 and 2007
  Revenue
  Years Ended December 31,2008


2007


Decrease(In thousands)Revenue:Related parties

$



$
23


$
(23
)


Unrelated parties


251



938



(687
)


(73
)%Total revenue

$
251


$
961


$
(710
)


(74
)%  40




---



##### Table of Contents



Research
    and Development Expenses
  Years Ended December 31,


Increase /2008


2007


(Decrease)(In thousands)Research and development expenses:Collaborative

$
2,111


$
862


$
1,249



145
%Self-initiated


14,388



15,908



(1,520
)


(10
)%Total research and development expenses

$
16,499


$
16,770


$
(271
)


(2
)%     General
    and Administrative Expenses
  Years Ended December 31,2008

2007

Decrease(In thousands)General and administrative expenses

$
6,679


$
8,401


$
(1,722
)


(20
)%    41




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##### Table of Contents



Restructuring
    and Asset Impairment
  Years Ended December 31,2008

2007

Decrease(In thousands)Restructuring and impairment expenses

$
79


$
2,182


$
(2,103
)


(96
)%     Interest
    Income, Interest Expense and Other Income (Expense)
  Years Ended December 31,


Increase2008


2007


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

$
781


$
2,573


$
(1,792
)


(70
)%Interest expense


(408
)


(393
)


(15
)


( 4
)%Other income (expense)






11



(11
)


Total interest income, interest expense and other income
    (expense)

$
373


$
2,191


$
(1,818
)


(83
)%   Form 10-K.
  Liquidity
    and Capital Resources
           42




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##### Table of Contents



scale-up
        Off-Balance
    Sheet Financings and Liabilities
    Item 7A.
    Quantitative
    and Qualitative Disclosure About Market Risk   43




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##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM          Fair Value Measurement Accounting for
    Uncertainty in Income Taxes an Interpretation of
    FAS 109
      44




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##### Table of Contents



ARADIGM
    CORPORATION
  BALANCE
    SHEETS
  December 31,2008


2007(In thousands, exceptshare data)ASSETSCurrent assets:Cash and cash equivalents

$
16,741


$
29,964Short-term investments


2,399



10,546Receivables


393



500Restricted cash


225



152Prepaid and other current assets


387



971Total current assets


20,145



42,133Property and equipment, net


5,093



3,223Notes receivable


34



33Restricted cash






153Other assets


247



271Total assets

$
25,519


$
45,813LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
739


$
1,658Accrued clinical and cost of other studies


94



789Accrued compensation


1,051



1,252Deferred revenue






880Facility lease exit obligation


318



376Other accrued liabilities


630



584Total current liabilities


2,832



5,539Deferred rent, non-current


199



283Facility lease exit obligation, non-current


1,056



1,373Deferred revenue, non-current


4,122



Other non-current liabilities


82



248Note payable and accrued interest


8,472



8,071Commitments and contingencies Shareholders equity:Preferred stock, 2,950,000 shares authorized, none
    outstanding Common stock, no par value; authorized shares:
    150,000,000 at December 31, 2008 and 100,000,000 at
    December 31, 2007; issued and outstanding shares:
    55,029,384 at December 31, 2008; 54,772,705 at
    December 31, 2007


343,426



342,355Accumulated other comprehensive income


4



10Accumulated deficit


(334,674
)


(312,066
)Total shareholders equity


8,756



30,299Total liabilities and shareholders equity

$
25,519


$
45,813    45




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##### Table of Contents



ARADIGM
    CORPORATION
  STATEMENTS
    OF OPERATIONS
  Years Ended December 31,2008


2007(In thousands, exceptshare data)Contract and license revenues:Related parties

$



$
23Unrelated parties


251



938Total revenues


251



961Operating expenses:Research and development


16,499



16,770General and administrative


6,679



8,401Restructuring and asset impairment


79



2,182Total expenses


23,257



27,353Loss from operations


(23,006
)


(26,392
)Interest income


781



2,573Interest expense


(408
)


(393
)Other income, net






11Loss before income taxes


(22,633
)


(24,201
)Income tax benefit


25



Net loss

$
(22,608
)

$
(24,201
)Basic and diluted net loss per common share

$
(0.42
)

$
(0.48
)Shares used in computing basic and diluted net loss per common
    share


54,162



50,721    46




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##### Table of Contents



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





TotalConvertible








Other





ShareholdersPreferred Stock


Common Stock


Comprehensive


Accumulated


EquityShares


Amount


Shares


Amount


Income (Loss)


Deficit


(Deficit)(In thousands, except share data)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














1,491











1,491Reversal of restricted stock award due to forfeiture










(4,875
)














Comprehensive loss:Net loss






















(24,201
)


(24,201
)Unrealized gain on available-for-sale investments


















6







6Total comprehensive loss


























(24,195
)Balances at December 31, 2007










54,772,705



342,355



10



(312,066
)


30,299Issuance of common stock under the employee stock purchase plan










300,524



190











190Issuance of common stock upon exercise of common stock options










3,750



4











4Stock-based compensation














877











877Reversal of restricted stock award due to forfeiture










(47,595
)














Comprehensive loss:Net loss






















(22,608
)


(22,608
)Unrealized (loss) on available-for-sale investments


















(6
)






(6
)Total comprehensive loss


























(22,614
)Balances at December 31, 2008





$




55,029,384


$
343,426


$
4


$
(334,674
)

$
8,756    47




---



##### Table of Contents



ARADIGM
    CORPORATION
  STATEMENTS
    OF CASH FLOWS
  Years Ended December 31,2008


2007(In thousands)Cash flows from operating activities:Net loss

$
(22,608
)

$
(24,201
)Adjustments to reconcile net loss to net cash used in operating
    activities:Non-cash asset impairment on property and equipment






182Facility lease exit costs






1,443Amortization and accretion of investments


26



(26
)Depreciation and amortization


871



730Stock-based compensation expense


877



1,491Loss on disposition of property and equipment


1



33Changes in operating assets and liabilities:Receivables


106



141Prepaid and other current assets


584



31Restricted cash


80



(305
)Other assets


24



173Accounts payable


(1,113
)


36Accrued compensation


(201
)


(562
)Accrued liabilities


(414
)


1,188Deferred rent


(84
)


(132
)Deferred revenue


3,242



880Facility lease exit obligation


(375
)


(314
)Net cash used in operating activities


(18,984
)


(19,212
)Cash flows from investing activities:Capital expenditures


(2,548
)


(1,115
)Disposition of property and equipment






10Purchases of available-for-sale investments


(3,629
)


(17,013
)Proceeds from maturities of available-for-sale investments


11,744



7,000Net cash provided (used) by investing activities


5,567



(11,118
)Cash flows from financing activities:Proceeds from public offering of common stock, net






33,178Proceeds from issuance of common stock to Employee Stock
    Purchase Plan


190



103Proceeds from exercise of common stock options


4



Net cash provided by financing activities


194



33,281Net increase (decrease) in cash and cash equivalents


(13,223
)


2,951Cash and cash equivalents at beginning of year


29,964



27,013Cash and cash equivalents at end of year

$
16,741


$
29,964Supplemental disclosure of cash flow information:Cash paid for interest

$
7


$
9Supplemental disclosure of non-cash financing activities:Conversion of convertible preferred stock to common stock

$



$
23,669Supplemental disclosure of non-cash investing activities:Purchase of property and equipment in trade accounts payable

$
194


$
471    48




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##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS
  1.
    Organization
    and Summary of Significant Accounting Policies  Organization
    Liquidity
    and Financial Condition
  and/or
  Use of
    Estimates
    Cash
    and Cash Equivalents
    Investments
   49




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Notes
    Receivable
    Property
    and Equipment
      Computer equipment and software

3 to 5 yearsFurniture and fixtures

5 to 7 yearsLab equipment

5 to 7 yearsMachinery and equipment

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,
 50




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    EITF 00-21. EITF 00-21,
  Research
    and Development
    Advertising
    Stock-Based
    Compensation
  Share-Based Payment
  Income
    Taxes
   51




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      Accounting for Uncertainty in Income Taxes  an
    interpretation of FASB Statement No. 109
  Net
    Loss Per Common Share
      Years Ended December 31,2008


2007Outstanding stock options


4,185



3,493Unvested restricted stock


704



771Performance bonus stock award






100Warrants to purchase common stock






427   Significant
    Concentrations
   52




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Comprehensive
    Income (Loss)
  Reporting Comprehensive Income
  Recently
    Issued Accounting Pronouncements
  No. FAS 157-2, Effective Date of FASB Statement No. 157 FAS 157-2), FAS 157-2. FAS 157-2
  Business Combinations
  No. 07-1, Accounting for Collaborative Arrangements Related to the
    Development and Commercialization of Intellectual Property (EITF 07-1). EITF 07-1 EITF 07-1
  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 EITF 07-3
  The
    Fair Value Option for Financial Assets and Financial Liabilities
 53




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Fair Value Measurements
  2.
    Cash and
    Cash Equivalents and Short-term Investments    Gross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gain


(Loss)


Fair ValueDecember 31, 2008Cash and cash equivalents

$
16,741


$



$



$
16,741Short-term investments:Commercial paper

$
2,395


$
4


$



$
2,399U.S. Treasury and agencies














Total

$
2,395


$
4


$



$
2,399December 31, 2007Cash and cash equivalents

$
29,960


$
4


$



$
29,964Short-term investments:Commercial paper

$
1,496


$



$



$
1,496Corporate bonds


8,213



4



(1
)


8,216U.S. Treasury and agencies


831



3







834Total

$
10,540


$
7


$
(1
)

$
10,546     3.
    Fair
    Value Measurements  Fair Value Measurements.
 54




---



##### Table of Contents



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

2008


Level 1


Level 2


Level 3(In thousands)Cash and cash equivalents

$
16 ,741


$
13,542


$
3,199


$
Short-term investments


2,399







2,399



Total

$
19,140


$
13,542


$
5,598


$
     4.
    Property
    and Equipment    December 31,2008


2007Machinery and equipment

$
5,282


$
4,049Furniture and fixtures


1,142



993Lab equipment


2,488



2,472Computer equipment and software


2,636



3,876Leasehold improvements


1,901



577Property and equipment at cost


13,449



11,967Less accumulated depreciation and amortization


(9,512
)


(10,033
)Net depreciable assets


3,937



1,934Construction in progress


1,156



1,289Property and equipment, net

$
5,093


$
3,223    55




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  5.
    Other
    Liabilities    December 31,2008


2007Other accrued liabilities:Accrued expense for services

$
389


$
308Payroll withholding liabilities


76



120Deposits


153



147Other short term obligations


12



9Total other accrued liabilities

$
630


$
584Other non-current liabilities:Deposits

$
75


$
228Other long term obligations


7



20Total other non-current liabilities

$
82


$
248   6.
    Leases,
    Commitments and Contingencies    Operating


Mendel


Net OperatingLeases


Sub-Lease


Lease PaymentsYear ending December 31:2009

$
2,312


$
(900
)

$
1,4122010


2,220



(928
)


1,2922011


1,992



(955
)


1,0372012


2,068



(875
)


1,1932013


2,148







2,1482014 and thereafter


5,724







5,724Total minimum lease payments

$
16,464


$
(3,658
)

$
12,806      56




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      Property
    Tax Assessment
    Indemnification
    Legal
    Matters
    7.
    Shareholders
    Equity   57




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Reserved
    Shares
    Shareholder
    Rights Plan
    Other
    Common Stock Warrants
    Stock
    Option Plans: 1996 Equity Incentive Plan, 2005 Equity Incentive
    Plan and 1996 Non-Employee Directors Plan
     58




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
           59




---



##### 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, 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 cancelled 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


$
5.37Options authorized


2,700,000











-







Options granted


(898,000
)


898,000


$
.39



-


$
1.57


$
.80Options exercised






(3,750
)

$
1.15






$
1.15


$
1.15Options cancelled


202,343



(202,343
)

$
1.23



-


$
71.25


$
10.65Restricted share awards cancelled


147,595











-







Plan shares cancelled and not reauthorized


(1,500
)





$
71.25



-


$
71.25


$
71.25Balance at December 31, 2008


3,987,599



4,185,061


$
.39



-


$
120.63


$
6.45  60




---



##### Table of Contents



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


Options ExercisableWeightedAverage


Weighted





WeightedNumber


Remaining


Average





Averageof


Contractual


Exercise


Number of


ExerciseExercise Price Range

Shares


Life (In Years)


Price


Shares


Price$.39 - $1.02


747,500



9.54


$
.63



101,967


$
.87$1.03 - $1.52


669,510



7.85



1.32



400,604



1.31$1.53 - $1.70


1,150,500



8.38



1.62



428,937



1.65$1.71 - $4.20


1,067,760



6.94



1.97



837,810



1.95$4.21 - $5.95


231,302



4.87



5.48



226,712



5.47$5.96 - $10.80


41,500



4.68



8.18



41,500



8.18$10.81 - $20.05


110,994



3.66



15.33



110,994



15.33$20.06 - $98.13


138,260



2.10



40.32



138,260



40.32$98.14 - $120.63


27,735



1.30



112.48



27,735



112.484,185,061



7.52


$
4.14



2,314,519


$
6.45       Number of


Weighted AverageShares


Grant Date Fair ValueBalance at December 31, 2006


169,849


$
2.40Restricted stock awards granted


726,000



1.54Restricted share awards vested


(20,250
)


3.60Restricted share awards cancelled


(4,875
)


1.80Balance at December 31, 2007


870,724



1.66Restricted share awards vested


(19,594
)


3.63Restricted share awards cancelled


(47,595
)


1.70Performance bonus award cancelled


(100,000
)


1.64Balance at December 31, 2008


703,535



1.60    61




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##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Performance
    Bonus Stock Award
    Employee
    Stock Purchase Plan
      Years Ended December 31,2008


2007Employee Stock Purchase PlanDividend yield


0.0
%


0.0
%Volatility factor


64.8
%


78.1
%Risk-free interest rate


1.7
%


4.6
%Expected life (years)


0.52



1.18Weighted-average fair value of purchase rights granted during
    the period

$
0.15


$
0.59   Share-Based
    Compensation Expense
  Share-based
    Payment
 62




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##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      2008


2007Costs and expenses:Research and development

$
530


$
664General and administrative


281



718Total stock-based employee compensation expense

$
811


$
1,382Impact on basic and diluted net loss per common share

$
(0.01
)

$
(0.03
)     Valuation
    Assumptions
    Years Ended December 312008


2007Employee Stock OptionsDividend yield


0.0
%


0.0
%Volatility factor


67.7
%


76.7
%Risk-free interest rate


2.8
%


4.0
%Expected life (years)


3.8



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

$
0.33


$
0.86   Stock-Based
    Compensation for Non-Employees
  EITF 96-18, Accounting for Equity Instruments that are Issued to Other
    than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services,
 63




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##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  8.
    Convertible
    Preferred Stock    9.
    Employee
    Benefit Plans    10.
    Related
    Parties  CyDex
      Novo
    Nordisk
   64




---



##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    All rights to the inhaled insulin
    program.
  
    Supply the Company with insulin for use in continuing
    development of inhaled insulin.
    Identify in writing the patent claims that describe the insulin
    formulation used by Novo Nordisk in its development of inhaled
    insulin so that the Company can make such formulation (and
    permitted alternatives).
    Provide the Company full access to the data generated in the
    development of inhaled insulin, including data from all the
    clinical trials, as well as relevant sections of applicable
    regulating filings.  Transfer of technology.
  Intellectual Property transfer.
    120-day
     65




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##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  11.
    Revenue
    and Deferred Revenue:    2008


2007Deferred revenue at beginning of the year

$
880


$
Amounts billed or received from collaborator funded programs:Lung Rx


3,242



880Other collaborator-funded programs


251



961Total


3,493



1,841Contract revenues recognized:Lung Rx






Other collaborator-funded programs


251



961Total


251



961Deferred revenue at end of the year


4,122



880Less: non-current portion of deferred revenue


4,122



Current portion of deferred revenue

$



$
880     12.
    Promissory
    Note      13.
    Income
    Taxes   66




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##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    December 31,2008


2007Net operating loss carryforwards

$
2,600


$
102,700Research and development credits


6,300



20,300Capitalized research and development






3,100Other


3,000



1,400Total deferred tax assets


11,900



127,500Valuation allowance


(11,900
)


(127,500
)Net deferred tax assets

$



$
       Year Ended December 31,2008


2007Income tax benefit at federal statutory rate

$
(7,921
)

$
(8,471
)Expired net operating losses


554



1,407State taxes (net of federal)


(1,461
)


(1,339
)Credits


(289
)


( 951
)Other






748Reduction in deferred tax assets due to Section 382
    limitations


124,743



Change in valuation allowance


(115,651
)


8,606Total

$
(25
)

$
      67




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##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        14.
    Sublease
    Agreement and Lease Exit Liability:      Year Ended December 31,2008


2007Balance at beginning of year

$
1,749


$
Loss on sublease upon subleasing to Mendel in July 2007






2,063Accretion expense


79



39Lease payments


(454
)


(353
)Balance at end of the year

$
1,374


$
1,749    68




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##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Year Ended December 31,2008


2007Loss on sublease upon subleasing to Mendel in July 2007

$



$
2,063Lease commission






420Accretion expense


79



39Reversal of deferred rent liability related to sublease space






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






182Total expense

$
79


$
2,084   15.
    Restricted
    Cash    16.
    2006
    Restructuring and Asset Impairment    Balance at








Balance atDecember 31,


Restructuring





December 31,Type of Liability

2006


Charges


Payments


2007Severance and related benefits

$
716


$
98


$
(814
)

$
Out-placement services


36







(36
)


$
752


$
98


$
(850
)

$
   17.
    Collaborations
    and Licensing Agreements  Lung
    Rx
     69




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##### Table of Contents



ARADIGM
    CORPORATION
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  country-by-country
    EITF 00-21
  Zogenix
  tm
  18.
    Manufacturing
    and Supply Agreement   70




---



##### Table of Contents



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


June 30,


September 30,


December 31,2008


2008


2008


2008Contract and license revenues

$



$
54


$
197


$
Operating expenses:Research and development


4,329



5,364



3,199



3,607General and administrative


1,549



1,825



1,615



1,690Restructuring and asset impairment


22



20



19



18Total expenses


5,900



7,209



4,833



5,315Loss from operations


(5,900
)


(7,155
)


(4,636
)


(5,315
)Interest income


361



202



146



72Interest expense


(98
)


(100
)


(105
)


(105
)Other income (expense)


(1
)


1



(1
)


1Loss before income taxes


(5,638
)


(7,052
)


(4,596
)


(5,347
)Income tax benefit














25Net loss

$
(5,638
)

$
(7,052
)

$
(4,596
)

$
(5,322
)Basic and diluted net loss per common share

$
(0.10
)

$
(0.13
)

$
(0.08
)

$
(0.10
)Shares used in computing basic and diluted net loss per common
    share


54,007



54,159



54,165



54,317   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   20.
    Subsequent
    Events   71




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##### 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   72




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##### 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   73




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##### Table of Contents



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


44Balance Sheets  December 31, 2008
    and 2007


45Statements of Operations  Years ended
    December 31, 2008 and 2007


46Statements of Convertible Preferred Stock and
    Shareholders Equity (Deficit)  Years ended
    December 31, 2008 and 2007


47Statements of Cash Flows  Years ended
    December 31, 2008 and 2007


48Notes to Financial Statements


49   Financial Statement Schedules.
    Exhibits.
  ExhibitNo.

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.3
.10(17)

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, 3.9 and 3.10.4
.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(1)+

Form of the Companys Incentive Stock Option Agreement
    under the 2005 Equity Incentive Plan.10
.3(1)+

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

1996 Non-Employee Directors Stock Option Plan.10
.5(1)+

Form of the Companys Non-statutory Stock Option Agreement
    under the 1996 Non-Employee Directors Stock Option Plan.10
.6(1)+

Form of the Companys Employee Stock Purchase Plan Offering
    Document.10
.7(6)+

Form of the Companys Restricted Stock Bonus Agreement
    under the 2005 Equity Incentive Plan.10
.8(7)

Promissory Note and Security Agreement, dated July 3, 2006,
    by and between the Company and Novo Nordisk A/S. 74




---



##### Table of Contents



ExhibitNo.

Description10
.9(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
.10(7)#

Asset Purchase Agreement, dated as of August 25, 2006, by
    and between the Company and Zogenix, Inc.10
.11(7)+

Employment Agreement, dated as of August 10, 2006, with
    Dr. Igor Gonda.10
.12(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
.13(9)#

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(10)

Securities Purchase Agreement, dated as of December 17,
    2004, by and among the Company and the purchasers named therein.10
.15(11)#

Second Amended and Restated License Agreement, dated as of
    July 3, 2006, by and between the Company and Novo Nordisk
    A/S.10
.16(12)

Consulting Agreement effective as of July 2, 2007 by and
    between the Company and Norman Halleen.10
.17(13)

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
.18(14)

Manufacturing Agreement between the Company and Enzon
    Pharmaceuticals, Inc. dated August 8, 2007.10
.19(15)#

Exclusive License, Development and Commercialization Agreement,
    dated as of August 30, 2007, by and between the Company and
    Lung Rx, Inc.10
.20(15)#

Collaboration Agreement, dated as of August 31, 2007, by
    and between the Company and CyDex, Inc.10
.21(16)+

2005 Equity Incentive Plan, as amended10
.22(17)+

Employee Stock Purchase Plan, as amended.10
.23(18)

Amended and Restated Rights Agreement, dated as of
    September 5, 2008 by and between the Company and
    ComputerShare Trust Company, N.A.10
.24(19)

Separation Agreement between the Company and Dr. Babatunde
    Otulana, dated as of December 12, 2008.10
.25(19)

Consulting Agreement for Independent Contractors between the
    Company and Dr. Babatunde Otulana, effective as of
    January 1, 2009.10
.26(19)

International Scientific Advisory Agreement between the Company
    and Dr. Babatunde Otulana, effective as of January 1,
    2009.10
.27(20)+

Amended and Restated form of Change of Control Agreement entered
    into between the Company and certain of the Companys
    senior officers.10
.28(20)+

Amended and Restated Executive Officer Severance Benefit Plan.23
.1

Consent of Odenberg Ullakko Muranishi & Co 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.     +
    
    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. 75




---



##### Table of Contents



(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 December 23, 2004.(10)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on August 14, 2006.(11)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on October 13, 2005.(12)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on July 11, 2007.(13)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on July 24, 2007.(14)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on August 14, 2007.(15)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on November 14, 2007.(16)
    
    Incorporated by reference to the Companys definitive proxy
    statement filed on April 7, 2008.(17)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on August 8, 2008.(18)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on November 12, 2008.(19)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on December 19, 2008.(20)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on January 8, 2009.  Index to Exhibits.
    Financial Statement Schedules.
       76




---



##### 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, 2009/s/  Nancy
    E. PecotaNancy
    E. Pecota

Vice President, Finance and Chief Financial Officer (Principal
    Financial and Accounting Officer)

March 26, 2009/s/  Virgil
    D. ThompsonVirgil
    D. Thompson

Chairman of the Board and Director

March 26, 2009/s/  Frank
    H. BarkerFrank
    H. Barker

Director

March 26, 2009/s/  John
    M. SiebertJohn
    M. Siebert

Director

March 26, 2009  77




---



##### Table of Contents



EXHIBIT INDEX
  ExhibitNo.

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.3
.10(17)

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, 3.9 and 3.10.4
.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(1)+

Form of the Companys Incentive Stock Option Agreement
    under the 2005 Equity Incentive Plan.10
.3(1)+

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

1996 Non-Employee Directors Stock Option Plan.10
.5(1)+

Form of the Companys Non-statutory Stock Option Agreement
    under the 1996 Non-Employee Directors Stock Option Plan.10
.6(1)+

Form of the Companys Employee Stock Purchase Plan Offering
    Document.10
.7(6)+

Form of the Companys Restricted Stock Bonus Agreement
    under the 2005 Equity Incentive Plan.10
.8(7)

Promissory Note and Security Agreement, dated July 3, 2006,
    by and between the Company and Novo Nordisk AS10
.9(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
.10(7)#

Asset Purchase Agreement, dated as of August 25, 2006, by
    and between the Company and Zogenix, Inc.10
.11(7)+

Employment Agreement, dated as of August 10, 2006, with
    Dr. Igor Gonda.10
.12(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
.13(9)#

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(10)

Securities Purchase Agreement, dated as of December 17,
    2004, by and among the Company and the purchasers named therein.10
.15(11)#

Second Amended and Restated License Agreement, dated as of
    July 3, 2006, by and between the Company and Novo Nordisk
    A/S.10
.16(12)

Consulting Agreement effective as of July 2, 2007 by and
    between the Company and Norman Halleen.10
.17(13)

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
.18(14)

Manufacturing Agreement between the Company and Enzon
    Pharmaceuticals, Inc. dated August 8, 2007.10
.19(15)#

Exclusive License, Development and Commercialization Agreement,
    dated as of August 30, 2007, by and between the Company and
    Lung Rx, Inc.10
.20(15)#

Collaboration Agreement, dated as of August 31, 2007, by
    and between the Company and CyDex, Inc.10
.21 (16)+

2005 Equity Incentive Plan, as amended 78




---



##### Table of Contents



ExhibitNo.

Description10
.22(16)+

Employee Stock Purchase Plan, as amended.10
.23(18)

Amended and Restated Rights Agreement, dated as of
    September 5, 2008 by and between the Company and
    ComputerShare Trust Company, N.A.10
.24(19)

Separation Agreement between the Company and Dr. Babatunde
    Otulana, dated as of December 12, 2008.10
.25(19)

Consulting Agreement for Independent Contractors between the
    Company and Dr. Babatunde Otulana, effective as of
    January 1, 2009.10
.26(19)

International Scientific Advisory Agreement between the Company
    and Dr. Babatunde Otulana, effective as of January 1,
    2009.10
.27(20)+

Amended and Restated form of Change of Control Agreement entered
    into between the Company and certain of the Companys
    senior officers.10
.28(20)+

Amended and Restated Executive Officer Severance Benefit Plan.23
.1

Consent of Odenberg Ullakko Muranishi & Co 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 December 23, 2004.(10)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on August 14, 2006.(11)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on October 13, 2005.(12)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on July 11, 2007.(13)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on July 24, 2007.(14)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on August 14, 2007.(15)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on November 14, 2007.(16)
    
    Incorporated by reference to the Companys definitive proxy
    statement filed on April 7, 2008.(17)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on August 8, 2008.(18)
    
    Incorporated by reference to the Companys
    Form 10-Q
    filed on November 12, 2008.(19)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on December 19, 2008.(20)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed on January 8, 2009. 79