##### 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, 2008
 Or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from
                     to                     .
 Commission File Number 0-28402
 Aradigm Corporation
 (Exact name of registrant as specified in its charter)
 California
    
    94-3133088(State or other jurisdiction of
    
    (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
  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)
Common
    
    (Outstanding at July 31, 2008)
54,923,839




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##### 



ARADIGM CORPORATION
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    3Condensed Balance Sheets at June 30, 2008 (unaudited) and December 31, 2007
    
       3Condensed Statements of Operations for the three and six months ended June 30, 2008 and 2007 (unaudited)
    
       4Condensed Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (unaudited)
    
       5Notes to Unaudited Condensed Financial Statements
    
       6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
       14Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
       24Item 4. Controls and Procedures
    
       24PART II. OTHER INFORMATIONItem 1A. Risk Factors
    
       25Item 4. Submission of Matters to a Vote of Security Holders
    
       35Item 6. Exhibits
    
       36Signatures
    
       37EXHIBIT 3.1EXHIBIT 10.29EXHIBIT 10.30EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  p 2 of 38




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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 31,2008
    
    
    2007(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    26,200
    
    
    $
    29,964Short-term investments
    
    
    1,231
    
    
    
    10,546Receivables
    
    
    218
    
    
    
    500Restricted cash
    
    
    232
    
    
    
    152Prepaid and other current assets
    
    
    512
    
    
    
    971Total current assets
    
    
    28,393
    
    
    
    42,133Property and equipment, net
    
    
    5,219
    
    
    
    3,223Notes receivable from officers and employees
    
    
    33
    
    
    
    33Restricted cash
    
    
    79
    
    
    
    153Other assets
    
    
    259
    
    
    
    271Total assets
    
    $
    33,983
    
    
    $
    45,813LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,347
    
    
    $
    1,658Accrued clinical and cost of other studies
    
    
    1,252
    
    
    
    789Accrued compensation
    
    
    1,255
    
    
    
    1,252Deferred revenue
    
    
    1,168
    
    
    
    880Facility lease exit obligation
    
    
    384
    
    
    
    376Other accrued liabilities
    
    
    491
    
    
    
    584Total current liabilities
    
    
    5,897
    
    
    
    5,539Deferred rent
    
    
    246
    
    
    
    283Facility lease exit obligation
    
    
    1,181
    
    
    
    1,373Other non-current liabilities
    
    
    169
    
    
    
    248Note payable and accrued interest to related party
    
    
    8,265
    
    
    
    8,071Total liabilities
    
    
    15,758
    
    
    
    15,514Commitments and contingenciesShareholders equity:Preferred
stock, 2,950,000 shares authorized, none outstanding
Common stock, no par value; authorized shares: 150,000,000 at
June 30, 2008 and 100,000,000 at December 2007; issued and
outstanding shares: 54,923,839 at June 30, 2008 and
54,772,705 at December 31, 2007
    
    
    342,980
    
    
    
    342,355Accumulated other comprehensive income
    
    
    1
    
    
    
    10Accumulated deficit
    
    
    (324,756
    )
    
    
    (312,066
    )Total shareholders equity
    
    
    18,225
    
    
    
    30,299Total liabilities and shareholders equity
    
    $
    33,983
    
    
    $
    45,813
  p 3 of 38




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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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Contract revenues from related parties
    
    $
    
    
    
    $
    8
    
    
    $
    
    
    
    $
    23Contract revenues from unrelated parties
    
    
    54
    
    
    
    289
    
    
    
    54
    
    
    
    690Total revenues
    
    
    54
    
    
    
    297
    
    
    $
    54
    
    
    
    713Operating expenses:Research and development
    
    
    5,364
    
    
    
    3,841
    
    
    
    9,693
    
    
    
    7,248General and administrative
    
    
    1,825
    
    
    
    2,628
    
    
    
    3,374
    
    
    
    4,615Restructuring and lease exit activities
    
    
    20
    
    
    
    
    
    
    
    42
    
    
    
    98Total operating expenses
    
    
    7,209
    
    
    
    6,469
    
    
    
    13,109
    
    
    
    11,961Loss from operations
    
    
    (7,155
    )
    
    
    (6,172
    )
    
    
    (13,055
    )
    
    
    (11,248
    )Interest income
    
    
    202
    
    
    
    699
    
    
    
    563
    
    
    
    1,336Interest expense
    
    
    (100
    )
    
    
    (96
    )
    
    
    (198
    )
    
    
    (193
    )Other income, net
    
    
    1
    
    
    
    46
    
    
    
    
    
    
    
    16Net loss
    
    $
    (7,052
    )
    
    $
    (5,523
    )
    
    $
    (12,690
    )
    
    $
    (10,089
    )Basic and diluted net loss per common share
    
    $
    (0.13
    )
    
    $
    (0.10
    )
    
    $
    (0.23
    )
    
    $
    (0.21
    )Shares used in computing basic and diluted net loss per common share
    
    
    54,159
    
    
    
    53,942
    
    
    
    54,083
    
    
    
    47,417
  p 4 of 38




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ARADIGM CORPORATION
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months EndedJune 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (12,690
    )
    
    $
    (10,089
    )Adjustments to reconcile net loss to cash used in operating activities:Amortization and accretion of investments
    
    
    (6
    )
    
    
    (5
    )Depreciation and amortization
    
    
    375
    
    
    
    393Stock-based compensation
    
    
    482
    
    
    
    689Loss on retirement and sale of property and equipment
    
    
    
    
    
    
    11Changes in operating assets and liabilities:Receivables
    
    
    282
    
    
    
    598Prepaid and other current assets
    
    
    459
    
    
    
    420Restricted cash
    
    
    (6
    )
    
    
    Other assets
    
    
    12
    
    
    
    162Accounts payable
    
    
    (267
    )
    
    
    (549
    )Accrued compensation
    
    
    3
    
    
    
    156Other accrued liabilities
    
    
    83
    
    
    
    43Deferred rent
    
    
    (37
    )
    
    
    (84
    )Deferred revenue
    
    
    288
    
    
    
    Facility lease exit obligation
    
    
    (184
    )
    
    
    Net cash used in operating activities
    
    
    (11,206
    )
    
    
    (8,255
    )Cash flows from investing activities:Capital expenditures
    
    
    (2,013
    )
    
    
    (817
    )Purchases of available-for-sale investments
    
    
    (1,235
    )
    
    
    (8,289
    )Proceeds from sales and maturities of available-for-sale investments
    
    
    10,547
    
    
    
    496Net cash provided by (used in) investing activities
    
    
    7,299
    
    
    
    (8,610
    )Cash flows from financing activities:Proceeds from public offering of common stock, net
    
    
    
    
    
    
    33,178Proceeds from issuance of common stock, net
    
    
    143
    
    
    
    56Payments to officers and employees on notes receivable
    
    
    
    
    
    
    (1
    )Net cash provided by financing activities
    
    
    143
    
    
    
    33,233Net increase (decrease) in cash and cash equivalents
    
    
    (3,764
    )
    
    
    16,368Cash and cash equivalents at beginning of period
    
    
    29,964
    
    
    
    27,013Cash and cash equivalents at end of period
    
    $
    26,200
    
    
    $
    43,381Supplemental 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
    
    $
    828
    
    
    $
    
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ARADIGM CORPORATION
 
 NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
 June 30, 2008
 1. Organization and Basis of Presentation
 Organization
  Basis of Presentation
   Reclassifications
  2. Summary of Significant Accounting Policies
 Use of Estimates
  Revenue Recognition
 Revenue Recognition
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Revenue Arrangements with Multiple Deliverables
  Accounting for Costs Associated with Exit or Disposal Activities
 Accounting for Costs Associated with Exit or Disposal Activities ,
 Research and Development
  Income Taxes
 Accounting for Income Taxes
 Stock-Based Compensation Expense
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Recently Issued Accounting Pronouncements
 Effective Date of FASB Statement No. 157
 Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property .
 3. Stock-Based Compensation
 Share Based Payment
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Research and development expense
    
    $
    162
    
    
    $
    161
    
    
    $
    361
    
    
    $
    254General and administrative expense
    
    
    112
    
    
    
    218
    
    
    
    121
    
    
    
    435Total stock-based compensation expense under SFAS 123R
    
    $
    274
    
    
    $
    379
    
    
    $
    482
    
    
    $
    689Total stock-based compensation without the adoption of SFAS 123R
    
    $
    (12
    )
    
    $
    13
    
    
    $
    65
    
    
    $
    70Impact on basic and diluted net loss per common share
    
    $
    (0.01
    )
    
    $
    
    
    
    $
    
    
    
    $
    (0.01
    )
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Employee stock option plans and employee stock purchase plan (ESPP)
    
    $
    230
    
    
    $
    348
    
    
    $
    326
    
    
    $
    583Restricted stock awards to employees
    
    
    56
    
    
    
    18
    
    
    
    91
    
    
    
    36Total stock-based compensation expense under SFAS 123R
    
    
    286
    
    
    
    366
    
    
    
    417
    
    
    
    619Stock options and restricted stock awarded to consultants
    
    
    (12
    )
    
    
    13
    
    
    
    65
    
    
    
    70Total stock-based compensation
    
    $
    274
    
    
    $
    379
    
    
    $
    482
    
    
    $
    689
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Valuation Assumptions
  Three Months Ended June 30,
    
    Six Months ended June 30,2008
    
    2007
    
    2008
    
    2007Employee Stock OptionsDividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility factor
    
    
    70.2
    %
    
    
    78.2
    %
    
    
    70.3
    %
    
    
    81.2
    %Risk-free interest rate
    
    
    2.5
    %
    
    
    5.0
    %
    
    
    2.6
    %
    
    
    4.9
    %Expected life (years)
    
    
    2.5
    
    
    
    4.0
    
    
    
    2.5
    
    
    
    4.0Weighted-average fair value of options granted during the periods
    
    $
    0.38
    
    
    $
    0.80
    
    
    $
    0.45
    
    
    $
    0.80ESPPDividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility factor
    
    
    59.9
    %
    
    
    82.8
    %
    
    
    59.9
    %
    
    
    82.8
    %Risk-free interest rate
    
    
    1.6
    %
    
    
    4.8
    %
    
    
    1.6
    %
    
    
    4.8
    %Expected life (years)
    
    
    0.8
    
    
    
    1.3
    
    
    
    0.8
    
    
    
    1.3Weighted-average fair value of employee stock purchases during
the periods
    
    $
    0.39
    
    
    $
    0.60
    
    
    $
    0.39
    
    
    $
    0.60
 Stock Option Activity
  Weighted-Weighted-
    
    averageNumber
    
    average
    
    remaining
    
    Aggregateof
    
    exercise
    
    contractual
    
    intrinsicshares
    
    price
    
    life in years
    
    valueOptions outstanding at December 31, 2007
    
    
    3,493,154
    
    
    $
    5.37
    
    
    
    8.34
    
    
    $
    167,000Options granted
    
    
    280,000
    
    
    
    1.32Options exercised
    
    
    (3,750
    )
    
    
    1.15Options cancelled
    
    
    (105,125
    )
    
    
    11.81Options outstanding at June 30, 2008
    
    
    3,664,279
    
    
    
    4.88
    
    
    
    7.88
    
    
    
    Options exercisable at June 30, 2008
    
    
    2,036.012
    
    
    $
    7.49
    
    
    
    7.04
    
    
    
    
 4. Net Loss Per Share
   June 30,2008
    
    2007Outstanding stock options
    
    
    3,664
    
    
    
    3,053Unvested restricted stock
    
    
    761
    
    
    
    55Warrants to purchase common stock
    
    
    421
    
    
    
    836Performance bonus stock award
    
    
    100
    
    
    
    100
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5. Comprehensive Loss
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (7,052
    )
    
    $
    (5,523
    )
    
    $
    (12,690
    )
    
    $
    (10,089
    )Other comprehensive loss:Change in unrealized gain (loss) on available-for-sale securities
    
    
    (15
    )
    
    
    (7
    )
    
    
    (9
    )
    
    
    (4
    )Comprehensive loss
    
    $
    (7,067
    )
    
    $
    (5,530
    )
    
    $
    (12,699
    )
    
    $
    (10,093
    )
 6. Cash, Cash Equivalents and Short-Term Investments
  June 30,
    
    
    December 31,2008
    
    
    2007Cash and cash equivalents:Cash and money market fund
    
    $
    1,323
    
    
    $
    1,345Commercial paper
    
    
    1,799
    
    
    
    28,619US government agency notes
    
    
    23,078
    
    
    
    $
    26,200
    
    
    $
    29,964Short-term investments:Corporate and US government agency notes
    
    $
    1,231
    
    
    $
    10,546
  Fair Value Measurements
 7. Related Parties
 CyDex
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Novo Nordisk
  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.
 Intellectual
Property transfer
 Transfer of technology
   8. Revenue and Deferred Revenue:
  Deferred revenue  December 31, 2007
    
    $
    880Amounts billed or received for collaborator funded programs  three months
ended March 31, 2008
    
    
    50Deferred
revenue  March 31, 2008
    
    
    930Amounts
billed or received for collaborator funded programs  three months
ended June 30, 2008
    
    
    292Revenues recognized for collaborator funded programs  three months
ended June 30, 2008
    
    
    (54
    )Deferred revenue  June 30, 2008
    
    
    1,168Less: non-current portion of deferred revenue
    
    
    Current portion of deferred revenue
    
    $
    1,168
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9. Property Tax Assessment
  10. Sublease Agreement and Lease Exit Liability:
  Loss on sublease to Mendel in July 2007
    
    $
    2,063Accretion of imputed interest expense
    
    
    39Lease payments
    
    
    (353
    )Balance at December 31, 2007
    
    
    1,749Accretion of imputed interest expense
    
    
    22Lease payments
    
    
    (117
    )Balance at March 31, 2008
    
    
    1,654Accretion of imputed interest expense
    
    
    20Lease payments
    
    
    (109
    )Balance at June 30, 2008
    
    $
    1,565
  11. 2006 Restructuring
  p 12 of 38




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12. Tekmira License Agreement
  13. Feasibility Study
  14. Manufacturing and Supply Agreement
  15. Shareholders Equity
     p 13 of 38




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The discussion below contains forward-looking statements that are based on the beliefs of
management, as well as assumptions made by, and information currently available to, management. Our
future results, performance or achievements could differ materially from those expressed in, or
implied by, any such forward-looking statements as a result of certain factors, including, but not
limited to, those discussed in this section as well as in the section entitled Risk Factors and
elsewhere in our filings with the Securities and Exchange Commission.
 Our business is subject to significant risks including, but not limited to, our ability to
obtain additional financing, our ability to implement our new 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.
 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
    p 14 of 38




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Product Candidates
  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 1 CompletedCollaborative Programs Under DevelopmentARD-1550 (Inhaled treprostinil) (1)
    
    Pulmonary Arterial Hypertension
    
    Bridging studyARD-1500 (Inhaled liposomal treprostinil)
    
    Pulmonary Arterial Hypertension
    
    PreclinicalARD-1700 (combination products) (2)
    
    Asthma, COPD
    
    Preclinical
 
 (1)
    
    A bridging clinical study began in April 2008 to compare delivery with the AERx Essence® system
against the nebulizer used in the completed Phase 3 TRIUMPH
(TReprostinil Sodium Inhalation Used
in the Management of Pulmonary Arterial
Hypertension) study with our partner Lung Rx.(2)
    
    The Asthma and COPD program is being conducted pursuant to the Collaboration Agreement with CyDex.  Proprietary Programs Under Development:
 Liposomal Ciprofloxacin
  p 15 of 38




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ARD-3100 and ARD 3150  Liposomal Ciprofloxacin for the Treatment of Infections in Cystic
Fibrosis and Non-CF Bronchiectasis Patients
   Pseudomonas aeruginosa,
   Development
    p 16 of 38




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ARD-1100  Liposomal Ciprofloxacin for the Treatment of Inhalation Anthrax
   Development
 Francisella tularensis, F. tularensis
  p 17 of 38




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Smoking Cessation Therapy
 ARD-1600 (Nicotine) Tobacco Smoking Cessation Therapy
  Development
   Collaborative Programs Under Development:
 ARD-1550 and 1500  Treprostinil for the Treatment of Pulmonary Arterial Hypertension
   p 18 of 38




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Development
  ARD-1300  Hydroxychloroquine for the Treatment of Asthma
  Development
  ARD-1700 (combination products) and Other Potential Applications
  Cyclodextrin Combination Products for Asthma, Cystic Fibrosis and other Chronic Obstructive
Pulmonary Disease (COPD)
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Pain Management System
 Other Programs .
 Critical Accounting Policies and Estimates
  Revenue Recognition
 Revenue Recognition Revenue Arrangements with Multiple Deliverables
  Accounting for Costs Associated with Exit or Disposal Activities
  p 20 of 38




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Research and Development
  Income Taxes
   Stock-Based Compensation Expense
   Results of Operations
 Revenue
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    Increase (Decrease)2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    Three Months
    
    
    Six Months($s in thousands)
    
    ($s in thousands)Revenues from related parties
    
    $
    
    
    
    $
    8
    
    
    $
    
    
    
    $
    23
    
    $
    (8
    )
    
    
    (100
    )%
    
    $
    (23
    )
    
    
    (100
    )%Revenues from unrelated parties
    
    
    54
    
    
    
    289
    
    
    
    54
    
    
    
    690
    
    
    (235
    )
    
    
    (81
    )%
    
    
    (636
    )
    
    
    (92
    )%Total revenues
    
    $
    54
    
    
    $
    297
    
    
    $
    54
    
    
    $
    713
    
    $
    (243
    )
    
    
    (82
    )%
    
    $
    (659
    )
    
    
    (92
    )%
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Research and Development Expenses
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    Increase (Decrease)2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    Three Months
    
    
    Six Months($s in thousands)
    
    
    
    
    
    
    
    
    
    
    ($s in thousands)Collaborative
    
    $
    810
    
    
    $
    386
    
    
    $
    1,347
    
    
    $
    805
    
    
    $
    424
    
    
    
    110
    %
    
    $
    542
    
    
    
    67
    %Self-initiated
    
    
    4,554
    
    
    
    3,455
    
    
    
    8,346
    
    
    
    6,443
    
    
    
    1,099
    
    
    
    32
    %
    
    
    1,903
    
    
    
    30
    %Total research and development expenses
    
    $
    5,364
    
    
    $
    3,841
    
    
    $
    9,693
    
    
    $
    7,248
    
    
    $
    1,523
    
    
    
    40
    %
    
    $
    2,445
    
    
    
    34
    %
  General and Administrative Expenses
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    Increase (Decrease)2008
    
    2007
    
    2008
    
    2007
    
    Three Months
    
    Six Months(in thousands)
    
    
    
    
    
    ($s in thousands)General and administrative expenses
    
    $
    1,825
    
    
    $
    2,628
    
    
    $
    3,374
    
    
    $
    4,615
    
    
    $
    (803
    )
    
    
    (31
    )%
    
    $
    (1,241
    )


(27
    )%
  Restructuring and lease exit activities
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    Increase (Decrease)2008
    
    2007
    
    2008
    
    2007
    
    Three Months


    Six Months(in thousands)
    
    
    
    
    
    
    ($s in thousands)Restructuring and
lease exit
activities expense
    
    $
    20
    
    
    $
    
    
    
    $
    42
    
    
    $
    98
    
    
    $
    20
    

    



    
    $
    (56
    )
    
    (57
    )%
  Interest income, interest expense and other income
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    Increase (Decrease)2008
    
    2007
    
    2008
    
    2007
    
    Three Months
    
    Six Months(in thousands)
    
    
    
    
    

    ($s in thousands)Interest income
    
    $
    202
    
    
    $
    699
    
    
    $
    563
    
    
    $
    1,336
    
    
    $
    (497
    )
    
    
    (71
    )%
    
    $
    (773
    )
    
    
    (58
    )%Interest expense
    
    
    (100
    )
    
    
    (96
    )
    
    
    (198
    )
    
    
    (193
    )
    
    
    4
    
    
    
    4
    %
    
    
    5
    
    
    
    3
    %Other income (expense), net
   
    1
    
    
    
    46
    
    
    
    
    
    
    
    16
    
    
    
    (45
    )
    
    
    (98
    )%
    
    
    (16
    )
    
    
    (100
    )%
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Liquidity and Capital Resources
     Off-Balance Sheet Financings and Liabilities
  Contractual Obligations
  2013 andTotal
    
    
    2008 (1)
    
    
    2009-2010
    
    
    2011-2012
    
    
    later(In thousands)Operating lease obligations
    
    $
    17,664
    
    
    $
    1,200
    
    
    $
    4,532
    
    
    $
    4,060
    
    
    $
    7,872Promissory note (2)
    
    
    10,543
    
    
    
    
    
    
    
    
    
    
    
    3,514
    
    
    
    7,029Unconditional capital purchase obligations
    
    
    862
    
    
    
    862
    
    
    
    
    
    
    
    
    
    
    
    Unconditional purchase obligations
    
    
    3,016
    
    
    
    3,016
    
    
    
    
    
    
    
    
    
    
    
    Total contractual commitments
    
    
    32,085
    
    
    
    5,078
    
    
    
    4,532
    
    
    
    7,574
    
    
    
    14,901Less-sublease payments from Mendel (3)
    
    
    (4,098
    )
    
    
    (440
    )
    
    
    (1,828
    )
    
    
    (1,830
    )
    
    
    Total contractual commitments, net (3)
    
    $
    27,987
    
    
    $
    4,638
    
    
    $
    2,704
    
    
    $
    5,744
    
    
    $
    14,901
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(1)
    
    For the six months ending December 31, 2008.(2)
    
    Represents total principal and interest payments due on the Novo Nordisk promissory note through the 2014 maturity date.
As of June 30, 2008, the balance outstanding on the note was $8.3 million. The note contains a number of covenants that
include restrictions in the event of changes to corporate structure, change in control and certain asset transactions.(3)
    
    Included to demonstrate the effect of the sublease with Mendel entered into in July 2007. Mendel has the option to
terminate the sublease early on September 1, 2012 for a termination fee of $225,000. In the event that the sublease is not
terminated early in 2012, $4.0 million in additional payments will be received through August 2016. Recently Issued Accounting Pronouncements
 Effective Date of FASB Statement No. 157
 Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property .
 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Market Risk Disclosures
   
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
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Changes in Internal Controls over Financial Reporting
  
 PART II: OTHER INFORMATION
 
 Item 1A. RISK FACTORS
 In addition to the other information contained in this Form 10-Q , and risk factors set forth
in our most recent SEC filings, the following risk factors should be considered carefully in
evaluating our business. Our business, financial condition, or results of operations could be
materially adversely affected by any of these risks. Additional risks not presently known to us or
that we currently deem immaterial may also impair our business and operations.
 The risk factors included herein include any material changes to and supersede the risk
factors associated with our business previously disclosed in Item 1A to Part I of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2007. We have marked with an asterisk (*) those
risk factors that reflect substantive changes from the risk factors included in our Annual Report
Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31,
2007.
 Risks Related to Our Business
 We are an early-stage company.
  We changed our product development strategy, and if we do not successfully implement this
strategy our business and reputation will be damaged.
  p 25 of 38




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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.
  
    
    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
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
    
    establish a sales and marketing force to commercialize certain of our proprietary
products if these products obtain regulatory approval.
  * Our dependence on collaborators may delay or terminate certain of our programs, and any such
delay or termination would harm our business prospects and stock price.
    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.
  p 27 of 38




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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.
   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.
  p 28 of 38




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* Because two of our key proprietary programs, the ARD-3100 and ARD-3150 liposomal ciprofloxacin
programs, rely on the FDAs granting of orphan drug designation for potential market exclusivity,
the product may not be able to obtain market exclusivity and could be barred from the market for
up to seven years.
  We have limited manufacturing capacity and will have to depend on contract manufacturers and
collaborators; if they do not perform as expected, our revenues and customer relations will
suffer.
     We rely on a small number of vendors and contract manufacturers to supply us with specialized
equipment, tools and components; if they do not perform as we need them to, we will not be able to
develop or commercialize products.
  p 29 of 38




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In order to market our proprietary products, we are likely to establish our own sales, marketing
and distribution capabilities. We have no experience in these areas, and if we have problems
establishing these capabilities, the commercialization of our products would be impaired.
  If any products that we or our collaborators may develop do not attain adequate market acceptance
by healthcare professionals and patients, our business prospects and results of operations will
suffer.
  
    
    the demonstration of efficacy and safety in clinical trials;
    
    the existence, prevalence and severity of any side effects;
    
    the potential or perceived advantages or disadvantages compared to alternative treatments;
    
    the timing of market entry relative to competitive treatments;
    
    the relative cost, convenience, product dependability and ease of administration;
    
    the strength of marketing and distribution support;
    
    the sufficiency of coverage and reimbursement of our product candidates by governmental and
other third-party payors; and
    
    the product labeling or product insert required by the FDA or regulatory authorities in
other countries.
  We depend upon our proprietary technologies, and we may not be able to protect our potential
competitive proprietary advantage.
  p 30 of 38




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.
  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.
     p 31 of 38




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We are in a highly competitive market, and our competitors have developed or may develop
alternative therapies for our target indications, which would limit the revenue potential of any
product we may develop.
  If we do not continue to attract and retain key employees, our product development efforts will be
delayed and impaired.
  Acquisition of complementary businesses or technologies could result in operating difficulties and
harm our results of operations.
  
    
    diversion of our management from the development and commercialization of our pipeline
product candidates;
    
    difficulty in assimilating and efficiently using the acquired assets or personnel; and
    
    inability to retain key personnel.
  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.
  p 32 of 38




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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.
 .
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Risks Related to Our Common Stock
 Our stock price is likely to remain volatile.
  
    
    investor perception of us;
    
    research analyst recommendations and our ability to meet or exceed quarterly performance
expectations of analysts or investors;
    
    failure to maintain existing or establish new collaborative relationships;
    
    fluctuations in our operating results;
    
    market conditions relating to our segment of the industry or the securities markets in
general;
    
    announcements of technological innovations or new commercial products by us or our
competitors;
    
    publicity regarding actual or potential developments relating to products under development
by us or our competitors;
    
    developments or disputes concerning patents or proprietary rights;
    
    delays in the development or approval of our product candidates;
    
    regulatory developments in both the United States and foreign countries;
    
    concern of the public or the medical community as to the safety or efficacy of our
products, or products deemed to have similar safety risk factors or other similar
characteristics to our products;
    
    period-to-period fluctuations in financial results;
    
    future sales or expected sales of substantial amounts of common stock by shareholders;
    
    our ability to raise financing; and
    
    economic and other external factors.
  Our common stock was delisted from the Nasdaq Capital Market; this delisting may reduce the
liquidity of our common stock and the price may decline.
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We have implemented certain anti-takeover provisions, which make it less likely that we would be
acquired and that you would receive a premium price for your shares.
   We have never paid dividends on our capital stock, and we do not anticipate paying cash dividends
for at least the foreseeable future.
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1.
    
    Five directors were elected to hold offices until the next annual meeting of
shareholders and until their successors are elected:
 Nominee
    
    For
    
    WithheldFrank H. Barker
    
    
    45,695,272
    
    
    
    202,319Igor Gonda
    
    
    45,720,076
    
    
    
    177,515Timothy Lynch
    
    
    45,687,166
    
    
    
    210,425John M. Siebert
    
    
    45,707,556
    
    
    
    190,035Virgil D. Thompson
    
    
    45,707,090
    
    
    
    190,501
 2.
    
    The shareholders approved an amendment to Aradigms 2005 Equity Incentive Plan to
increase the aggregate number of shares of common stock authorized for issuance under such
plan by 2,700,000 shares:
 For
    
    Against
    
    Abstain26,308,399
    
    2,000,025
    
    741,055
 3.
    
    The shareholders approved an amendment to Aradigms Employee Stock Purchase Plan to
increase the aggregate number of shares of common stock authorized for issuance under such
plan by 1,000,000 shares:
 For
    
    Against
    
    Abstain26,538,276
    
    1,930,262
    
    580,941
 4.
    
    The shareholders approved an amendment to Aradigms Amended and Restated Articles of
Incorporation to increase the authorized number of shares of common stock from 100,000,000
to 150,000,000 shares:
 For
    
    Against
    
    Abstain37,505,000
    
    6,729,712
    
    1,662,879
 5.
    
    The shareholders ratified the selection of Odenberg, Ullakko, Muranishi & Co. LLP as
the Companys independent registered public accounting firm for the fiscal year ending
December 31, 2008:
 p 35 of 38




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For
    
    Against
    
    Abstain45,704,721
    
    103,882
    
    88,988
 
 Item 6. EXHIBITS
 ExhibitNumber
    
    Description3.1
    
    Amended and Restated Articles of Incorporation of the Company.10.29 #
    
    Development and License Agreement, dated June 2, 1998, by and between the Company and Novo Nordisk A/S.10.30 *
    
    First Amendment to Development and License Agreement, dated October 22, 2001, by and between the Company and Novo Nordisk A/S.10.31 + (1)
    
    2005 Equity Incentive Plan, as amended10.32 + (1)
    
    Employee Stock Purchase Plan, as amended31.1
    
    Certification by the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by the Companys Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 
 #
    
    The Commission has granted the Companys request for an extension to the
confidential treatment with respect to portions of this exhibit.*
    
    The Company has requested an extension to the confidential treatment with
respect to portions of this exhibit+
    
    Represents a management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference to the Companys definitive proxy statement filed
on April 7, 2008.     *
    
    Other names and brands may be claimed as the property of others.
 p 36 of 38




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##### Table of Contents



SIGNATURES
  ARADIGM CORPORATION(Registrant)/s/ Igor Gonda

Dr. Igor GondaPresident and Chief Executive Officer/s/ Norman Halleen

Norman HalleenDated: August 8, 2008
    
    Interim Chief Financial Officer
 p 37 of 38




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INDEX TO EXHIBITS
 ExhibitNumber
    
    Description3.1
    
    Amended and Restated Articles of Incorporation of the Company.10.29 #
    
    Development and License Agreement, dated June 2, 1998, by and between the Company and Novo Nordisk A/S.10.30 *
    
    First Amendment to Development and License Agreement, dated October 22, 2001, by and between the Company and Novo Nordisk A/S.10.31 +(1)
    
    2005 Equity Incentive Plan, as amended10.32 +(1)
    
    Employee Stock Purchase Plan, as amended31.1
    
    Certification by the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by the Companys Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 
 #
    
    The Commission has granted the Companys request for an extension to the
confidential treatment with respect to portions of this exhibit.*
    
    The Company has requested an extension to the confidential treatment with
respect to portions of this exhibit.+
    
    Represents a management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference to the Companys definitive proxy statement filed
on April 7, 2008. p 38 of 38