##### 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 March 31, 2009
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period fromto.
 Commission File Number: 000-28402
 Aradigm Corporation
 (Exact name of registrant as specified in its charter)
 California
    
    94-3133088(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 3929 Point Eden Way
Hayward, CA 94545  (Address of principal executive offices including zip code)
 (510) 265-9000  (Registrants telephone number, including area code)
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
  o þ
  (Class) 
Common
    
    (Outstanding at April 30, 2009)
100,206,046




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##### 



ARADIGM CORPORATION
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Balance Sheets at March 31, 2009 and December 31, 2008 (unaudited)
    
    
    3Condensed Statements of Operations for the three months ended March 31, 2009 and 2008 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the three months ended March 31, 2009 and 2008 (unaudited)
    
    
    5Notes to the Unaudited Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II. OTHER INFORMATION
    
    
    21Item 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults Upon Senior Securities
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    31Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    32Signatures
    
    
    33EX-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)
 March 31,
    
    
    December 31,2009
    
    
    2008(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    19,784
    
    
    $
    16,741Short-term investments
    
    
    
    
    
    
    2,399Receivables
    
    
    27
    
    
    
    393Restricted cash
    
    
    225
    
    
    
    225Prepaid and other current assets
    
    
    251
    
    
    
    387Total current assets
    
    
    20,287
    
    
    
    20,145Property and equipment, net
    
    
    4,792
    
    
    
    5,093Notes receivable
    
    
    50
    
    
    
    34Other assets
    
    
    241
    
    
    
    247Total assets
    
    $
    25,370
    
    
    $
    25,519LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    773
    
    
    $
    739Accrued clinical and cost of other studies
    
    
    841
    
    
    
    94Accrued compensation
    
    
    922
    
    
    
    1,051Facility lease exit obligation
    
    
    282
    
    
    
    318Other accrued liabilities
    
    
    617
    
    
    
    630Total current liabilities
    
    
    3,435
    
    
    
    2,832Deferred rent
    
    
    175
    
    
    
    199Facility lease exit obligation, non-current
    
    
    996
    
    
    
    1,056Deferred revenue, non-current
    
    
    4,435
    
    
    
    4,122Other non-current liabilities
    
    
    79
    
    
    
    82Note payable and accrued interest
    
    
    8,576
    
    
    
    8,472Total liabilities
    
    
    17,696
    
    
    
    16,763Commitments and contingenciesShareholders equity:Preferred stock, 2,950,000 shares authorized, none outstandingCommon stock, no par value; authorized shares: 150,000,000 at
March 31, 2009 and 
December 31, 2008; issued and outstanding
shares: 99,899,455 at March 31, 2009; 55,029,384 at December 31, 2008
    
    
    347,567
    
    
    
    343,426Accumulated other comprehensive income
    
    
    
    
    
    
    4Accumulated deficit
    
    
    (339,893
    )
    
    
    (334,674
    )Total shareholders equity
    
    
    7,674
    
    
    
    8,756Total liabilities and shareholders equity
    
    $
    25,370
    
    
    $
    25,519
  3




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ARADIGM CORPORATION
 
 CONDENSED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
(Unaudited)
 Three months endedMarch 31,2009
    
    
    2008Revenue
    
    $
    
    
    
    $
    Operating expenses:Research and development
    
    
    3,726
    
    
    
    4,329General and administrative
    
    
    1,398
    
    
    
    1,549Restructuring and asset impairment
    
    
    17
    
    
    
    22Total operating expenses
    
    
    5,141
    
    
    
    5,900Loss from operations
    
    
    (5,141
    )
    
    
    (5,900
    )Interest income
    
    
    28
    
    
    
    361Interest expense
    
    
    (104
    )
    
    
    (98
    )Other expense
    
    
    (1
    )
    
    
    (1
    )Net loss
    
    $
    (5,218
    )
    
    $
    (5,638
    )Basic and diluted net loss per common share
    
    $
    (0.07
    )
    
    $
    (0.10
    )Shares used in computing basic and diluted net loss per common share
    
    
    70,704
    
    
    
    54,007
  4




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ARADIGM CORPORATION
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (In thousands)
(Unaudited)
 Three months endedMarch 31,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (5,218
    )
    
    $
    (5,638
    )Adjustments to reconcile net loss to cash used in operating activities:Amortization and accretion of investments
    
    
    (5
    )
    
    
    (3
    )Depreciation and amortization
    
    
    303
    
    
    
    190Stock-based compensation expense
    
    
    214
    
    
    
    208Changes in operating assets and liabilities:Receivables
    
    
    350
    
    
    
    423Prepaid and other current assets
    
    
    136
    
    
    
    103Restricted cash
    
    
    
    
    
    
    (3
    )Other assets
    
    
    6
    
    
    
    6Accounts payable
    
    
    34
    
    
    
    (79
    )Accrued compensation
    
    
    (129
    )
    
    
    (167
    )Other liabilities
    
    
    835
    
    
    
    (400
    )Deferred rent
    
    
    (24
    )
    
    
    (19
    )Deferred revenue
    
    
    313
    
    
    
    50Facility lease exit obligation
    
    
    (96
    )
    
    
    (95
    )Net cash used in operating activities
    
    
    (3,281
    )
    
    
    (5,424
    )Cash flows from investing activities:Capital expenditures
    
    
    (3
    )
    
    
    (807
    )Purchases of available-for-sale investments
    
    
    
    
    
    
    Proceeds from sales and maturities of available-for-sale investments
    
    
    2,400
    
    
    
    6,964Net cash provided by investing activities
    
    
    2,397
    
    
    
    6,157Cash flows from financing activities:Proceeds from public offering of common stock, net
    
    
    3,927
    
    
    
    Proceeds from issuance of common stock, net
    
    
    
    
    
    
    5Net cash provided by financing activities
    
    
    3,927
    
    
    
    5Net increase in cash and cash equivalents
    
    
    3,043
    
    
    
    738Cash and cash equivalents at beginning of period
    
    
    16,741
    
    
    
    29,964Cash and cash equivalents at end of period
    
    $
    19,784
    
    
    $
    30,702
  5




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ARADIGM CORPORATION
 
 NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
 March 31, 2009
 1. Organization and Basis of Presentation
 Organization
  Basis of Presentation
   2. Summary of Significant Accounting Policies
 Use of Estimates
  Cash and Cash Equivalents
  Investments
  6




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Property and Equipment
  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 Revised and Updated Revenue Arrangements with Multiple Deliverables
  Research and Development
  7




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Stock-Based Compensation
 Share-Based Payment
 Income Taxes
   Net Loss Per Common Share
  Recently Issued Accounting Pronouncements
 Recognition and Presentation of Other-Than-Temporary Impairments (
 Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (
 8




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Interim
Disclosures about Fair Value of Financial Instruments
 Effective Date of
FASB Statement No. 157 Fair
Value Measurements
 Business Combinations Business Combinations
 Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property
 Accounting for Non-Refundable Advance
Payments for Goods or Services to Be Used in Future Research and Development Activities
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Fair Value Measurements
 9




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3. Cash, Cash Equivalents and Short-Term Investments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gain
    
    
    (Loss)
    
    
    Fair ValueMarch 31, 2009Cash and cash equivalents
    
    $
    19,784
    
    
    $
    
    
    
    $
    
    
    
    $
    19,784Short-term investments:Commercial paper
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    U.S. Treasury and agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    December 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
    
    
    $
    
    
    
    $
    2,399
   4. Fair Value Measurements
 Fair Value Measurements.
 Fair Value Measurements at Reporting Date UsingQuotedPrices inActive
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantBalance
    
    
    Identical
    
    
    Observable
    
    
    UnobservableMarch 31,
    
    
    Assets
    
    
    Inputs
    
    
    InputsDescription
    
    2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash and cash equivalents
    
    $
    19,784
    
    
    $
    19,784
    
    
    $
    
    
    
    $
    Short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    19,784
    
    
    $
    19,784
    
    
    $
    
    
    
    $
    
  5. Sublease Agreement and Lease Exit Liability:
   10




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Three Months EndedMarch 31, 2009Balance at January 1, 2009
    
    $
    1,374Accretion expense
    
    
    17Lease payments
    
    
    (113
    )Balance at March 31, 2009
    
    $
    1,278
  6. Shareholders Equity
  7. Related Parties
 Novo Nordisk
     11




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8. Collaborations and Licensing Agreements
 Lung Rx
 ®
     Zogenix
 tm tm
  12




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9. Stock-Based Compensation and Stock Options and Awards
  March 31,
    
    
    March 31,2009
    
    
    2008Costs and expenses:Research and development
    
    $
    116
    
    
    $
    199General and administrative
    
    
    98
    
    
    
    9Total stock-based compensation expense
    
    $
    214
    
    
    $
    208
    Stock Option Plans: 1996 Equity Incentive Plan, 2005 Equity Incentive Plan and 1996
Non-Employee Directors Plan
  Stock Option Activity
  Options OutstandingWeightedShares Available
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Averagefor Grant of
    
    Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    ExerciseOption or Award
    
    Shares
    
    Exercise Price Range
    
    PriceBalance at January 1, 2009
    
    
    3,987,599
    
    
    
    4,185,061
    
    
    $
    .39
    
    
    
    -
    
    
    $
    120.63
    
    
    $
    6.45Options authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    Options granted
    
    
    (1,466,000
    )
    
    
    1,466,000
    
    
    $
    .23
    
    
    
    -
    
    
    $
    .25
    
    
    $
    .25Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    Options cancelled
    
    
    466,764
    
    
    
    (466,764
    )
    
    $
    .25
    
    
    
    -
    
    
    $
    93.75
    
    
    $
    4.16Restricted share awards granted
    
    
    (277,000
    )
    
    
    
    
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    Restricted share awards cancelled
    
    
    70,000
    
    
    
    
    
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    Plan shares cancelled and not reauthorized
    
    
    (1,500
    )
    
    
    
    
    
    $
    41.25
    
    
    
    -
    
    
    $
    41.25
    
    
    $
    41.25Balance at March 31, 2009
    
    
    2,779,863
    
    
    
    5,184,297
    
    
    $
    .23
    
    
    
    -
    
    
    $
    120.63
    
    
    $
    5.73
  13




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Number
    
    Weighted Averageof
    
    Grant Date FairShares
    
    ValueBalance at December 31, 2008
    
    
    703,535
    
    
    
    1.60Restricted share awards issued
    
    
    277,000
    
    
    
    .25Restricted share awards vested
    
    
    (3,910
    )
    
    
    3.63Restricted share awards cancelled
    
    
    (70,000
    )
    
    
    1.06Balance at March 31, 2009
    
    
    906,625
    
    
    
    1.22
 10. Net Loss Per Common Share
   Three months endedMarch 31,2009
    
    2008Outstanding stock options
    
    
    5,184
    
    
    
    3,649Unvested restricted stock
    
    
    907
    
    
    
    766Warrants to purchase common stock
    
    
    
    
    
    
    421Performance bonus stock award
    
    
    
    
    
    
    100
 11. Comprehensive Loss
  Three months endedMarch 31,2009
    
    
    2008Net loss
    
    $
    (5,218
    )
    
    $
    (5,638
    )Other comprehensive income:Change in unrealized gain (loss) on available-for-sale securities
    
    
    (4
    )
    
    
    6Comprehensive loss
    
    $
    (5,222
    )
    
    $
    (5,632
    )
 14




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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
beliefs of management, as well as assumptions made by, and information currently available to,
management. 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. Our future actual 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 in this Quarterly Report on Form 10-Q , and elsewhere in
the 2008 Form 10-K and our other filings with the SEC.
 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.
 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
  ®
  15




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Pseudomonas aeruginosa
 Pseudomonas
aeruginosa
    16




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tm tm
 Critical Accounting Policies and Estimates
  Revenue Recognition
 Revenue Recognition Revised and Updated Revenue Arrangements with Multiple Deliverables
 17




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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
   18




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Stock Based Compensation
 Share-Based Payment
  Recent Accounting Pronouncements
  Results of Operations
 Three months ended March 31, 2009 and 2008
 Revenue
  Research and Development
 Three months endedMarch 31,2009
    
    
    2008
    
    
    Increase (Decrease)(In thousands)Research and development expenses:Collaborative
    
    $
    1,090
    
    
    $
    336
    
    
    $
    754
    
    
    
    224
    %Self-initiated
    
    
    2,636
    
    
    
    3,993
    
    
    
    (1,357
    )
    
    
    (34
    )%Total research and development expenses
    
    $
    3,726
    
    
    $
    4,329
    
    
    $
    (603
    )
    
    
    (14
    )%
    19




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General and Administrative
 Three months endedMarch 31,2009
    
    2008
    
    Decrease(in thousands)General and administrative expenses
    
    $
    1,398
    
    
    $
    1,549
    
    
    $
    (151
    )
    
    
    (10
    )%
  Restructuring and Asset Impairment
 Three months endedMarch 31,2009
    
    2008
    
    Decrease(in thousands)Restructuring and asset impairment expense
    
    $
    17
    
    
    $
    22
    
    
    $
    (5
    )
    
    
    (23
    )%
  Interest income, Interest Expense and Other Expense
 Three months endedMarch 31,2009
    
    
    2008
    
    

Increase (Decrease)(in thousands)Interest income, interest expense and other expense:Interest income
    
    $
    28
    
    
    $
    361
    
    
    $
    (333
    )
    
    
    (92
    )%Interest expense
    
    
    (104
    )
    
    
    (98
    )
    
    
    (6
    )
    
    
    6
    %Other expense, net
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    Total interest income, interest expense and other expense
    
    $
    (77
    )
    
    $
    262
    
    
    $
    (339
    )
    
    
    (129
    )%
  Liquidity and Capital Resources
   20




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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
  
 PART II: OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 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 2008 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.
 21




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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 2008
Form 10-K. We have marked with an asterisk (*) those risk factors that reflect substantive changes
from the risk factors included in the 2008 Form 10-K.
 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.
  * 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.
  22




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We have a history of losses, we expect to incur losses for at least the foreseeable future, and we
may never attain or maintain profitability.
  
    
    expand drug product development efforts;
    
    conduct preclinical testing and clinical trials;
    
    pursue additional applications for our existing delivery technologies;
    
    outsource the commercial-scale production of our products; and
    
    establish a sales and marketing force to commercialize certain of our proprietary
products if these products obtain regulatory approval.
  * 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.
   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.
   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.
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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.
  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.
 ®
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We rely on a small number of vendors and contract manufacturers to supply us with specialized
equipment, tools and components; if they do not perform as we need them to, we will not be able to
develop or commercialize products.
  In order to market our proprietary products, we are likely to establish our own sales, marketing
and distribution capabilities. We have no experience in these areas, and if we have problems
establishing these capabilities, the commercialization of our products would be impaired.
  If any products that we or our collaborators may develop do not attain adequate market acceptance
by healthcare professionals and patients, our business prospects and results of operations will
suffer.
  
    
    the demonstration of efficacy and safety in clinical trials;
    
    the existence, prevalence and severity of any side effects;
    
    the potential or perceived advantages or disadvantages compared to alternative
treatments;
    
    the timing of market entry relative to competitive treatments;
    
    the relative cost, convenience, product dependability and ease of administration;
    
    the strength of marketing and distribution support;
    
    the sufficiency of coverage and reimbursement of our product candidates by governmental
and other third-party payors; and
    
    the product labeling or product insert required by the FDA or regulatory authorities in
other countries.
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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.
  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.
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If we market our products in other countries, we will be subject to different laws and we may not
be able to adapt to those laws, which could increase our costs while reducing our revenues.
  We may be exposed to product liability claims, which would hurt our reputation, market position
and operating results.
  If we cannot arrange for adequate third-party reimbursement for our products, our revenues will
suffer.
  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;
    
    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.
  Our common stock is quoted on the OTC Bulletin Board, which may provide less liquidity for our
shareholders than the national exchanges.
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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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 Item 5. OTHER INFORMATION
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Item 6. EXHIBITS
 ExhibitNumber
    
    Description31.1
    
    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
 
 Aradigm AERx, AERx Essence and AERx Strip are registered trademarks of Aradigm Corporation.*
    
    Other names and brands may be claimed as the property of others. 32




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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)




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INDEX TO EXHIBITS
 ExhibitNumber
    
    Description31.1
    
    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