##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission File Number: 000-28402
 Aradigm Corporation
 (Exact name of registrant as specified in its charter)
 California
    
    94-3133088(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 3929 Point Eden Way
Hayward, CA 94545  (Address of principal executive offices including zip code)
 (510) 265-9000  (Registrants telephone number, including area code)
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
  o þ
  (Class)
    
    (Outstanding at July 30, 2010)Common
    
    137,778,964




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##### 



ARADIGM CORPORATION
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Balance Sheets at June 30, 2010 and December 31, 2009 (unaudited)
    
    
    3Condensed Statements of Operations for the three and six months ended June 30, 2010 and 2009 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (unaudited)
    
    
    5Notes to the Unaudited Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 1A. Risk Factors
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults Upon Senior Securities
    
    
    32Item 4. (Removed and Reserved)
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    33Signatures
    
    
    34EX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 ARADIGM CORPORATION
 
 CONDENSED BALANCE SHEETS
 (In thousands, except share data)
 June 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    9,608
    
    
    $
    3,903Short-term investments
    
    
    
    
    
    
    5,228Receivables
    
    
    394
    
    
    
    155Prepaid and other current assets
    
    
    499
    
    
    
    328Total current assets
    
    
    10,501
    
    
    
    9,614Property and equipment, net
    
    
    1,849
    
    
    
    2,166Notes receivable
    
    
    53
    
    
    
    52Other assets
    
    
    129
    
    
    
    133Total assets
    
    $
    12,532
    
    
    $
    11,965LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    948
    
    
    $
    572Accrued clinical and cost of other studies
    
    
    664
    
    
    
    670Accrued compensation
    
    
    652
    
    
    
    341Facility lease exit obligation
    
    
    182
    
    
    
    263Other accrued liabilities
    
    
    284
    
    
    
    357Total current liabilities
    
    
    2,730
    
    
    
    2,203Deferred rent
    
    
    123
    
    
    
    136Facility lease exit obligation, non-current
    
    
    785
    
    
    
    828Other non-current liabilities
    
    
    75
    
    
    
    75Note payable and accrued interest
    
    
    9,113
    
    
    
    8,896Total liabilities
    
    
    12,826
    
    
    
    12,138Commitments and contingenciesShareholders deficit:Preferred stock, 5,000,000 shares authorized, none outstandingCommon stock, no par value; authorized shares: 150,000,000 at
June 30, 2010 and December 31, 2009; issued and outstanding
shares: 137,561,464 at June 30, 2010; 102,381,116 at December
31, 2009
    
    
    352,484
    
    
    
    348,271Accumulated other comprehensive income
    
    
    
    
    
    
    2Accumulated deficit
    
    
    (352,778
    )
    
    
    (348,446
    )Total shareholders deficit
    
    
    (294
    )
    
    
    (173
    )Total liabilities and shareholders deficit
    
    $
    12,532
    
    
    $
    11,965
  3




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ARADIGM CORPORATION
 
 CONDENSED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue:Contract revenue
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Royalty revenue
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    Total revenue
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    Operating expenses:Research and development
    
    
    2,736
    
    
    
    2,927
    
    
    
    5,573
    
    
    
    6,653General and administrative
    
    
    1,382
    
    
    
    1,368
    
    
    
    2,635
    
    
    
    2,766Restructuring and asset impairment
    
    
    13
    
    
    
    205
    
    
    
    26
    
    
    
    223Total operating expenses
    
    
    4,131
    
    
    
    4,500
    
    
    
    8,234
    
    
    
    9,642Loss from operations
    
    
    (4,131
    )
    
    
    (4,500
    )
    
    
    (4,234
    )
    
    
    (9,642
    )Interest income
    
    
    4
    
    
    
    14
    
    
    
    14
    
    
    
    42Interest expense
    
    
    (109
    )
    
    
    (105
    )
    
    
    (218
    )
    
    
    (209
    )Other income (expense), net
    
    
    108
    
    
    
    (3
    )
    
    
    106
    
    
    
    (4
    )Net loss
    
    $
    (4,128
    )
    
    $
    (4,594
    )
    
    $
    (4,332
    )
    
    $
    (9,813
    )Basic and diluted net loss per common share
    
    $
    (0.04
    )
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    $
    (0.12
    )Shares used in computing basic and diluted net loss per common share
    
    
    104,891
    
    
    
    99,298
    
    
    
    102,396
    
    
    
    85,080
  4




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ARADIGM CORPORATION
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six months endedJune 30,2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (4,332
    )
    
    $
    (9,813
    )Adjustments to reconcile net loss to cash used in operating activities:Impairment loss on property and equipment
    
    
    
    
    
    
    31Amortization and accretion of investments
    
    
    26
    
    
    
    (5
    )Depreciation and amortization
    
    
    322
    
    
    
    600Stock-based compensation expense
    
    
    451
    
    
    
    384Loss on retirement and sale of property and equipment
    
    
    
    
    
    
    3Facility lease exit cost .
    
    
    
    
    
    
    158Changes in operating assets and liabilities:Receivables
    
    
    (239
    )
    
    
    163Prepaid and other current assets
    
    
    (171
    )
    
    
    (243
    )Other assets
    
    
    3
    
    
    
    27Accounts payable
    
    
    376
    
    
    
    724Accrued compensation
    
    
    311
    
    
    
    139Other liabilities
    
    
    138
    
    
    
    51Deferred rent
    
    
    (13
    )
    
    
    (47
    )Deferred revenue
    
    
    
    
    
    
    710Facility lease exit obligation
    
    
    (124
    )
    
    
    (195
    )Net cash used in operating activities
    
    
    (3,252
    )
    
    
    (7,313
    )Cash flows from investing activities:Capital expenditures
    
    
    (5
    )
    
    
    (6
    )Purchases of short-term investments
    
    
    
    
    
    
    (8,669
    )Proceeds from sales and maturities of short-term investments
    
    
    5,200
    
    
    
    2,400Note receivable payments
    
    
    
    
    
    
    (16
    )Net cash provided by (used in) investing activities
    
    
    5,195
    
    
    
    (6,291
    )Cash flows from financing activities:Proceeds from public offering of common stock, net
    
    
    
    
    
    
    3,927Proceeds from private placement of common stock, net
    
    
    3,719
    
    
    
    Proceeds from issuance of common stock
    
    
    43
    
    
    
    37Net cash provided by financing activities
    
    
    3,762
    
    
    
    3,964Net increase (decrease) in cash and cash equivalents
    
    
    5,705
    
    
    
    (9,640
    )Cash and cash equivalents at beginning of period
    
    
    3,903
    
    
    
    16,741Cash and cash equivalents at end of period
    
    $
    9,608
    
    
    $
    7,101
  5




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ARADIGM CORPORATION
 
 NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
 June 30, 2010
 1. Organization, Basis of Presentation and Liquidity
 Organization
  Basis of Presentation
   Liquidity
    6




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2. Summary of Significant Accounting Policies
 Use of Estimates
  Cash and Cash Equivalents
  Investments
  Property and Equipment
  Impairment of Long-Lived Assets
 Property, Plant, and
Equipment  Overall
 Accounting for Costs Associated with Exit or Disposal Activities
 Exit or Disposal Cost Obligations
 Revenue Recognition
 Revenue Recognition Revised and Updated , Revenue
Recognition.
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, Revenue Recognition-Multiple Element Arrangements.
 Contract Revenue.
  Royalty Revenue.
 Research and Development
  Stock-Based Compensation
 Compensation-Stock Compensation Equity-Equity Based Payments to Non-Employees
 Income Taxes
   8




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Net Loss Per Common Share
  Recently Issued Accounting Pronouncements
 Milestone Method of Revenue Recognition a consensus of the FASB Emerging
Issues Task Force.
 Improving Disclosures About Fair Value
Measurements
 Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements
 3. Cash, Cash Equivalents and Short-Term Investments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gain
    
    
    (Loss)
    
    
    Fair ValueJune 30, 2010Cash and cash equivalents
    
    $
    9,608
    
    
    $
    
    
    
    $
    
    
    
    $
    9,608Short-term investments:Commercial paper
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Certificates of deposit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    U.S. treasury and agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    December 31, 2009Cash and cash equivalents
    
    $
    3,903
    
    
    $
    
    
    
    $
    
    
    
    $
    3,903Short-term investments:Commercial paper
    
    $
    500
    
    
    $
    
    
    
    $
    
    
    
    $
    500Certificates of deposit
    
    
    3,183
    
    
    
    2
    
    
    
    
    
    
    
    3,185U.S. treasury and agencies
    
    
    1,543
    
    
    
    
    
    
    
    
    
    
    
    1,543Total
    
    $
    5,226
    
    
    $
    2
    
    
    $
    
    
    
    $
    5,228
 9




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4. Fair Value Measurements
  Fair Value MeasurementsQuoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantBalance
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsDescription
    
    June 30, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash and cash equivalents
    
    $
    9,608
    
    
    $
    5,609
    
    
    $
    3,999
    
    
    $
    Short-term investments:Commercial paper
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Certificates of deposit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    U.S. treasury and agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
  5. Sublease Agreement and Lease Exit Liability
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Six Months EndedJune 30,  2010Balance at January 1, 2010
    
    $
    1,091Accretion expense
    
    
    26Lease payments
    
    
    (150
    )Balance at June 30, 2010
    
    $
    967
  6. Collaborations and Royalty Agreements
 Zogenix
    7. Stock-Based Compensation and Stock Options, Awards and Units
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Costs and expenses:Research and development
    
    $
    41
    
    
    $
    44
    
    
    $
    92
    
    
    $
    160General and administrative
    
    
    149
    
    
    
    127
    
    
    
    359
    
    
    
    224Total stock based compensation expense
    
    $
    190
    
    
    $
    171
    
    
    $
    451
    
    
    $
    384
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Stock Option Plans: 1996 Equity Incentive Plan, 2005 Equity Incentive Plan and 1996 Non-Employee
Directors Plan
  Stock Option Activity
  Options OutstandingShares Available
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weightedfor Grant of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AverageOption, Award or
    
    
    Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ExerciseUnit
    
    
    Shares
    
    
    Exercise Price Range
    
    
    PriceBalance at January 1, 2010
    
    
    763,185
    
    
    
    5,088,443
    
    
    $
    0.15
    
    
    
    
    
    
    $
    120.63
    
    
    $
    2.49Options authorized
    
    
    4,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options granted
    
    
    (400,000
    )
    
    
    400,000
    
    
    
    0.12
    
    
    
    
    
    
    
    0.13
    
    
    
    0.12Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options cancelled
    
    
    526,515
    
    
    
    (526,515
    )
    
    $
    0.25
    
    
    
    
    
    
    $
    120.63
    
    
    $
    6.42Restricted share awards granted
    
    
    (350,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted share awards cancelled
    
    
    229,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted share units awarded
    
    
    (333,333
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plan shares cancelled and not reauthorized
    
    
    (4,136
    )
    
    
    
    
    
    $
    120.63
    
    
    
    
    
    
    $
    120.63
    
    
    $
    120.63Balance at June 30, 2010
    
    
    4,431,231
    
    
    
    4,961,928
    
    
    $
    0.12
    
    
    
    
    
    
    $
    115.00
    
    
    $
    2.45
    12




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Number
    
    
    Weighted Averageof
    
    
    Grant Date FairShares
    
    
    ValueBalance at December 31, 2009
    
    
    2,668,006
    
    
    $
    0.41Restricted share awards issued
    
    
    350,000
    
    
    
    0.12Restricted share awards vested
    
    
    (291,756
    )
    
    
    0.23Restricted share awards cancelled
    
    
    (229,000
    
    
    
    0.20Balance at June 30, 2010
    
    
    2,497,250
    
    
    $
    0.41
  8. Private Placement
  9. Net Loss Per Common Share
   Six months endedJune 30,2010
    
    
    2009Outstanding stock options
    
    
    4,962
    
    
    
    5,377Unvested restricted stock
    
    
    2,497
    
    
    
    1,423Unvested restricted stock units
    
    
    333
    
    
    
    Outstanding common stock warrants
    
    
    7,527
    
    
    
    
 10. Comprehensive Loss
  13




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Six months endedJune 30,2010
    
    
    2009Net loss
    
    $
    (4,332
    )
    
    $
    (9,813
    )Other comprehensive income:Change in unrealized gain (loss) on available-for-sale securities
    
    
    (2
    )
    
    
    (8
    )Comprehensive loss
    
    $
    (4,334
    )
    
    $
    (9,821
    )
 11. Subsequent Events
   
 Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Cautionary Note Regarding Forward-Looking Statements
 This Quarterly Report on Form 10-Q contains forward-looking statements that are based on the
current beliefs of management, as well as current assumptions made by, and information currently
available to, management. All statements contained in this Quarterly Report on Form 10-Q , other
than statements that are purely historical, are forward-looking statements. Words such as
anticipate, expect, intend, plan, believe, may, will, could, continue, seek,
estimate, or the negative thereof and similar expressions also identify forward-looking
statements. Forward looking statements include our anticipation of recording recurring royalty
revenue beginning with the three months ending September 30, 2010, our belief that our cash and
cash equivalents as of June 30, 2010 and the Zogenix quarterly royalty payments will be sufficient
to enable us to fund our operations at least through the fourth quarter of 2010, our statements
regarding the closing of the June 2010 Private Placement and the transactions contemplated by our
Stock Purchase Agreement with Novo Nordisk A/S and our statements regarding our intent with respect
to the related special meeting and proxy statement. These forward-looking statements are subject to
risks and uncertainties that could cause our future actual results, performance or achievements to
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, the risk that the conditions to the
closing of the June 2010 Private Placement and the transactions contemplated by our Stock Purchase
Agreement with Novo Nordisk A/S might not be satisfied and the risk of any difficulties or delays
in obtaining the required shareholder approval to increase the number of authorized shares of our
common stock and those risks and uncertainties discussed in this section, as well as in the
section entitled Risk Factors in this Quarterly Report on Form 10-Q and other reports filed with
the United States Securities and Exchange Commission (the SEC).
 These forward-looking statements and 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, 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
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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.
 You are cautioned not to place undue reliance on the forward-looking statements contained
herein, which speak only as of the date of the filing of this Quarterly Report on Form 10-Q . We
undertake no obligation to update these forward-looking statements in light of events or
circumstances occurring after the date of the filing of this Quarterly Report on Form 10-Q or to
reflect the occurrence of unanticipated events.
 Overview
 ®
  Pseudomonas aeruginosa
  15




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Pseudomonas aeruginosa
  Pseudomonas aeruginosa
  Pseudomonas aeruginosa
      16




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17




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Critical Accounting Policies and Estimates
  Revenue Recognition
 Revenue Recognition Revised and Updated Revenue Recognition. ASC Revenue Recognition-Multiple Element
Arrangements.
 Contract Revenue.
 Royalty Revenue.
 Impairment of Long-Lived Assets
 Property Plant and Equipment  Overall
 Accounting for Costs Associated with Exit or Disposal Activities
 Exit or Disposal Cost Obligations
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Research and Development
  Income Taxes
   Employee Stock-Based Compensation
 Compensation  Stock Compensation
  Recent Accounting Pronouncements
  Results of Operations
 Three and six months ended June 30, 2010 and 2009
  19




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Liquidity and Capital Resources
    Six months ended June 30, 2010
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Six months ended June 30, 2009
   Off-Balance Sheet Financings and Liabilities
  
 Item 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4.
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  21




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PART II: OTHER INFORMATION
 
 Item 1.
    
    LEGAL PROCEEDINGS
 Arbitration Proceedings against Lung Rx, Inc.
    
 Item 1A.
    
    RISK FACTORS
 In addition to the other information contained in this Quarterly Report on Form 10-Q , and risk
factors set forth in the 2009 Annual Report on Form 10-K and our other filings with the SEC, the
following risk factors should be considered carefully before you decide whether to buy, hold or
sell our common stock. Our business, financial condition, results of operations and stock price
could be materially adversely affected by any of these risks. Additional risks not presently known
to us or that we currently deem immaterial may also impair our business, financial conditions,
results of operations and stock price.
 The risk factors included herein include any material changes to and supersede the risk
factors associated with our business previously disclosed in Part I, Item 1A, Risk Factors of the
2009 Annual Report on Form 10-K . We have marked with a double asterisk (**) those risk factors that
reflect substantive changes from the risk factors included in the 2009 Annual Report on Form 10-K .
 Risks Related to Our Business
 We are an early-stage company.
  We will need additional capital, and we may not be able to obtain it on a timely basis, or at all.
  
    
    our progress in the application of our delivery and formulation technologies, which may
require further refinement of these technologies;
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
    
    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 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.
  
    
    continue 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
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
    
    establish a sales and marketing force to commercialize certain of our proprietary
products if these products obtain regulatory approval.
  We are dependent upon Zogenix and its partners to successfully market and sell the SUMAVEL DosePro
needle-free delivery system in order to realize value from this asset.
  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 delay 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.
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Regulatory authorities may delay or 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 and European Medicines
Agency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 in the US for up to seven
years or European Union for up to ten years.
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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.
   Our dependence on future 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.
    In order to market our proprietary products, we are likely to establish our own sales, marketing
and distribution capabilities. We have no experience in these areas, and if we have problems
establishing these capabilities, the commercialization of our products would be impaired.
  If any products that we or our future collaborators may develop do not attain adequate market
acceptance by healthcare professionals and patients our business prospects and results of
operations will suffer.
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
    
    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.
   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.
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We are in a highly competitive market, and our competitors have developed or may develop
alternative therapies for our target indications, which would limit the revenue potential of any
product we may develop.
  If we do not continue to attract and retain key employees, our product development efforts will be
delayed and impaired.
  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.
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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.
  Risks Related to Our Common Stock
 Our stock price is likely to remain volatile.
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
    
    investor perception of us;
 
    
    market conditions relating to our segment of the industry or the securities markets in
general;
 
    
    investor perception of the value of the royalty stream from Zogenix;
 
    
    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 establish new collaborative relationships, specifically those related to our
inhaled liposomal ciprofloxacin program;
 
    
    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.
  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.
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We have never paid dividends on our capital stock, and we do not anticipate paying cash dividends
for at least the foreseeable future.
  **A small number of shareholders own a large percentage of our common stock and can influence the
outcome of matters submitted to our shareholders for approval.
  **You may experience significant dilution of your ownership interests because of the future
issuance of additional shares of our common stock.
  **Our common stock may be considered a penny stock.
  
 Item 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  31




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Item 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 Item 4 (REMOVED AND RESERVED)
 
 Item 5.
    
    OTHER INFORMATION
  32




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Item 6.
    
    EXHIBITS
 ExhibitNumber
    
    Description10.1 (1)
    
    Securities Purchase Agreement, June 18, 2010, by and among Aradigm Corporation and
the investors listed on the Schedule of Buyers attached thereto.10.2 (2)
    
    Form of Registration Rights Agreement by and among Aradigm Corporation and the
investors listed on the signature pages thereto.10.3 (3)
    
    Form of Warrant to be issued to the Buyers under the Securities Purchase Agreement.31.1
    
    Certification of the Principal Executive Officer required by Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Principal Financial Officer required by Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Principal Executive Officer and Principal Financial Officer
required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
 
 (1)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on June 21, 2010.(2)
    
    Incorporated by reference to Exhibit 10.2 to the Companys Current Report on
Form 8-K filed on June 21, 2010.(3)
    
    Incorporated by reference to Exhibit 10.3 to the Companys Current Report on
Form 8-K filed on June 21, 2010.Aradigm and AERx are registered trademarks of Aradigm Corporation.*
    
    Other names and brands may be claimed as the property of others. 33




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SIGNATURES
  ARADIGM CORPORATION/s/ Igor GondaIgor GondaPresident and Chief Executive Officer
(Principal Executive Officer)/s/ Nancy E. PecotaNancy E. PecotaVice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)  34




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INDEX TO EXHIBITS
 ExhibitNumber
    
    Description10.1 (1)
    
    Securities Purchase Agreement, June 18, 2010, by and among Aradigm Corporation and the
investors listed on the Schedule of Buyers attached thereto.10.2 (2)
    
    Form of Registration Rights Agreement by and among Aradigm Corporation and the
investors listed on the signature pages thereto.10.3 (3)
    
    Form of Warrant to be issued to the Buyers under the Securities Purchase Agreement.31.1
    
    Certification of the Principal Executive Officer required by Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of the Principal Financial Officer required by Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of the Principal Executive Officer and Principal Financial Officer
required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United
States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on June 21, 2010.(2)
    
    Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form
8-K filed on June 21, 2010.(3)
    
    Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form
8-K filed on June 21, 2010. 35