##### 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, 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(State or other jurisdiction of 
incorporation or organization)
    
    94-3133088(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
  Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ o þ
  (Class)
    
    (Outstanding at April 30, 2008)Common
    
    54,923,839




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##### 



ARADIGM CORPORATION
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Balance Sheets at March 31, 2008 and December 31, 2007 (unaudited)
    
    
    3Condensed Statements of Operations for the three months ended March 31, 2008 and 2007 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the three months ended March 31, 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
    
    
    28Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATION
    
    
    28Item 1A. Risk Factors
    
    
    28Item 6. Exhibits
    
    
    39Signatures
    
    
    40EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 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 31,2008
    
    
    2007(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    30,702
    
    
    $
    29,964Short-term investments
    
    
    3,591
    
    
    
    10,546Receivables
    
    
    77
    
    
    
    500Restricted cash
    
    
    155
    
    
    
    152Prepaid and other current assets
    
    
    868
    
    
    
    971Total current assets
    
    
    35,393
    
    
    
    42,133Property and equipment, net
    
    
    4,007
    
    
    
    3,223Notes receivable from officers and employees
    
    
    33
    
    
    
    33Restricted cash
    
    
    153
    
    
    
    153Other assets
    
    
    265
    
    
    
    271Total assets
    
    $
    39,851
    
    
    $
    45,813LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,702
    
    
    $
    1,658Accrued clinical and cost of other studies
    
    
    411
    
    
    
    789Accrued compensation
    
    
    1,085
    
    
    
    1,252Deferred revenue
    
    
    930
    
    
    
    880Facility lease exit obligation
    
    
    376
    
    
    
    376Other accrued liabilities
    
    
    513
    
    
    
    584Total current liabilities
    
    
    5,017
    
    
    
    5,539Deferred rent
    
    
    264
    
    
    
    283Facility lease exit obligation
    
    
    1,278
    
    
    
    1,373Other non-current liabilities
    
    
    245
    
    
    
    248Note payable and accrued interest to related party
    
    
    8,167
    
    
    
    8,071Total liabilities
    
    
    14,971
    
    
    
    15,514Commitments and contingenciesShareholders equity:Preferred stock, 2,950,000 shares authorized, none outstanding
Common stock, no par value; authorized shares: 100,000,000 at
March 31, 2008 and December 31, 2007; issued and outstanding
shares: 54,776,455 at March 31, 2008; 54,772,705 at December
31, 2007
    
    
    342,568
    
    
    
    342,355Accumulated other comprehensive income
    
    
    16
    
    
    
    10Accumulated deficit
    
    
    (317,704
    )
    
    
    (312,066
    )Total shareholders equity
    
    
    24,880
    
    
    
    30,299Total liabilities and shareholders equity
    
    $
    39,851
    
    
    $
    45,813
  3




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ARADIGM CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 Three months endedMarch 31,2008
    
    
    2007Revenues (including amounts from related parties $0 - 2008; $15 - 2007)
    
    $
    
    
    
    $
    416Operating expenses:Research and development
    
    
    4,329
    
    
    
    3,407General and administrative
    
    
    1,549
    
    
    
    1,987Restructuring and lease exit activities
    
    
    22
    
    
    
    98Total operating expenses
    
    
    5,900
    
    
    
    5,492Loss from operations
    
    
    (5,900
    )
    
    
    (5,076
    )Interest income
    
    
    361
    
    
    
    637Interest expense
    
    
    (98
    )
    
    
    (96
    )Other expense
    
    
    (1
    )
    
    
    (31
    )Net loss
    
    $
    (5,638
    )
    
    $
    (4,566
    )Basic and diluted net loss per common share
    
    $
    (0.10
    )
    
    $
    (0.11
    )Shares used in computing basic and diluted net loss per common share
    
    
    54,007
    
    
    
    40,820
  4




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ARADIGM CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Three months endedMarch 31,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (5,638
    )
    
    $
    (4,566
    )Adjustments to reconcile net loss to cash used in operating activities:Amortization and accretion of investments
    
    
    (3
    )
    
    
    (3
    )Depreciation and amortization
    
    
    190
    
    
    
    195Stock-based compensation
    
    
    208
    
    
    
    310Loss on retirement and sale of property and equipment
    
    
    
    
    
    
    11Changes in operating assets and liabilities:Receivables
    
    
    423
    
    
    
    515Prepaid and other current assets
    
    
    103
    
    
    
    404Restricted cash
    
    
    (3
    )
    
    
    Other assets
    
    
    6
    
    
    
    156Accounts payable
    
    
    (79
    )
    
    
    (576
    )Accrued compensation
    
    
    (167
    )
    
    
    (164
    )Other accrued liabilities
    
    
    (400
    )
    
    
    (330
    )Deferred rent
    
    
    (19
    )
    
    
    (42
    )Deferred revenue
    
    
    50
    
    
    
    5Facility lease exit obligation
    
    
    (95
    )
    
    
    Net cash used in operating activities
    
    
    (5,424
    )
    
    
    (4,085
    )Cash flows from investing activities:Capital expenditures
    
    
    (807
    )
    
    
    (317
    )Purchases of available-for-sale investments
    
    
    
    
    
    
    (2,969
    )Proceeds from sales and maturities of available-for-sale investments
    
    
    6,964
    
    
    
    503Net cash provided (used) by investing activities
    
    
    6,157
    
    
    
    (2,783
    )Cash flows from financing activities:Proceeds from public offering of common stock, net
    
    
    
    
    
    
    33,178Proceeds from issuance of common stock, net
    
    
    5
    
    
    
    55Net cash provided by financing activities
    
    
    5
    
    
    
    33,233Net increase in cash and cash equivalents
    
    
    738
    
    
    
    26,365Cash and cash equivalents at beginning of period
    
    
    29,964
    
    
    
    27,013Cash and cash equivalents at end of period
    
    $
    30,702
    
    
    $
    53,378Supplemental 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
    
    $
    167
    
    
    $
    
  5




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ARADIGM CORPORATION
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
March 31, 2008
 1. Organization and Basis of Presentation
 Organization
  Basis of Presentation
   Reclassifications
  2. Summary of Significant Accounting Policies
 Use of Estimates
  Revenue Recognition
 Revenue
 6




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Recognition 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
   7




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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 .
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Disclosures about Derivative Instruments and
Hedging Activities  an Amendment of FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
 8




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3. Stock-Based Compensation
  March 31,
    
    
    March 31,2008
    
    
    2007Costs and expenses:Research and development
    
    $
    174
    
    
    $
    94General and administrative
    
    
    (43
    )
    
    
    160Total stock-based compensation expense
    
    $
    131
    
    
    $
    254Impact on basic and diluted net loss per common share
    
    $
    (0.002
    )
    
    $
    (0.006
    )
     2005 Equity Incentive Plan
  Valuation Assumptions
  9




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Three months ended March 31,2008
    
    2007Employee Stock OptionsDividend yield
    
    
    0.0
    %
    
    
    0.0
    %Volatility factor
    
    
    70.6
    %
    
    
    85.2
    %Risk-free interest rate
    
    
    2.9
    %
    
    
    5.1
    %Expected life (years)
    
    
    2.4
    
    
    
    4.0Weighted-average fair value of options granted during the periods
    
    $
    0.6
    8
    
    $
    0.7
    9Employee Stock Purchase PlanDividend yield
    
    
    0.0
    %
    
    
    0.0
    %Volatility factor
    
    
    68.9
    %
    
    
    86.4
    %Risk-free interest rate
    
    
    4.1
    %
    
    
    4.9
    %Expected life (years)
    
    
    1.0
    
    
    
    0.5Weighted-average fair value of employee stock purchases during
the periods
    
    $
    0.5
    7
    
    $
    0.5
    9
 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
    
    
    $
    167Options granted
    
    
    180,500
    
    
    
    1.57
    
    
    
    
    
    
    
    Options exercised
    
    
    (3,750
    )
    
    
    1.15
    
    
    
    
    
    
    
    Options cancelled
    
    
    (21,086
    )
    
    
    46.45
    
    
    
    
    
    
    
    Options outstanding at March 31, 2008
    
    
    3,648,818
    
    
    
    4.95
    
    
    
    8.21
    
    
    
    3Options exercisable at March 31, 2008
    
    
    1,807,169
    
    
    $
    8.29
    
    
    
    7.33
    
    
    $
    3
  4. Net Loss Per Share
   Three months endedMarch 31,2008
    
    2007Outstanding stock options
    
    
    3,649
    
    
    
    3,288Unvested restricted stock
    
    
    766
    
    
    
    60Warrants to purchase common stock
    
    
    421
    
    
    
    836Performance bonus stock award
    
    
    100
    
    
    
    100
 10




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5. Comprehensive Loss
  Three months endedMarch 31,2008
    
    
    2007Net loss
    
    $
    (5,638
    )
    
    $
    (4,566
    )Other comprehensive income:Change in unrealized gain on available-for-sale securities
    
    
    6
    
    
    
    3Comprehensive loss
    
    $
    (5,632
    )
    
    $
    (4,563
    )
 6. Cash, Cash Equivalents and Short-Term Investments
  March 31, 2008
    
    
    December31, 2007Cash and cash equivalents:Cash and money market fund
    
    $
    4,717
    
    
    $
    1,345Commercial paper
    
    
    25,985
    
    
    
    28,619$
    30,702
    
    
    $
    29,964Short-term investments:Corporate and government notes
    
    $
    3,591
    
    
    $
    10,546
  Fair Value Measurements
 7. Equity
   11




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8. Related Parties
 CyDex
   Novo Nordisk
     12




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##### Table of Contents



9. Revenue and Deferred Revenue:
  March 31,2008Deferred revenue  December 31, 2007
    
    $
    880Payments/amounts billed for collaborator funded programs
    
    
    50Subtotal
    
    
    930Contract revenues recognized from collaborator-funded programs
    
    
    Deferred revenue  March 31, 2008
    
    
    930Less: non-current portion of deferred revenue
    
    
    Current portion of deferred revenue
    
    $
    930
  10. Sublease Agreement and Lease Exit Liability:
  Loss on sublease upon subleasing 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
    
    $
    1,654
  11. 2006 Restructuring
  13




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12. Tekmira License Agreement
  13. Feasibility Study
  14. Manufacturing and Supply Agreement
  
 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.
 14




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Overview
    15




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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 2 in preparationARD-1100 (Liposomal ciprofloxacin)
    
    Inhalation Anthrax
    
    PreclinicalARD-1600 (Nicotine)
    
    Tobacco Smoking Cessation
    
    Phase 2 in preparationCollaborative Programs Under DevelopmentARD-1550 (Inhaled treprostinil) (1)
    
    Pulmonary Arterial Hypertension
    
    Bridging studyARD-1500 (Inhaled liposomal treprostinil)
    
    Pulmonary Arterial Hypertension
    
    PreclinicalARD-1300 (Hydroxychloroquine) (2)
    
    Asthma
    
    Phase 2ARD-1700 (combination products) (3)
    
    Asthma, COPD
    
    Preclinical
 
 (1)
    
    A bridging clinical study began in April 2008 to compare
delivery with the AERx
Essence(R) system
against the nebulizer used in the completed Phase 3 TRIUMPH
(TReprostinil Sodium Inhalation Used in the Management of Pulmonary
Arterial Hypertention) study with our partner Lung
Rx, Inc., a wholly owned subsidiary of United Therapeutics Corporation.(2)
    
    A Phase 2a clinical study did not meet pre-specified clinical endpoints. The program is
currently under review by APT, a privately held biotechnology company.(3)
    
    The Asthma program is being conducted pursuant to the Collaboration Agreement with CyDex.  16




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Proprietary Programs Under Development:
 Liposomal Ciprofloxacin
  ARD-3100 and ARD 3150  Liposomal Ciprofloxacin for the Treatment of Infections in Cystic
Fibrosis and Non-CF Bronchiectasis Patients
  Pseudomonas aeruginosa,
   Development
  17




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Pseudomonas aeruginosa
 ARD-1100  Liposomal Ciprofloxacin for the Treatment of Inhalation Anthrax
   Development
 Francisella tularensis, F. tularensis
 18




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Smoking Cessation Therapy
 ARD-1600 (Nicotine) Tobacco Smoking Cessation Therapy
  Development
    Collaborative Programs Under Development:
 ARD-1550  Treprostinil for the Treatment of Pulmonary Arterial Hypertension
  19




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Development
  ARD-1300  Hydroxychloroquine for the Treatment of Asthma
  Development
  20




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ARD-1700 (combination products) and Other Potential Applications
  
    
    Cyclodextrin Combination Products for Asthma, Cystic Fibrosis and other Chronic Obstructive
Pulmonary Disease (COPD). Asthma is a common chronic disorder of the lungs characterized by airway
inflammation, airway hyper-responsiveness or airway narrowing due to certain stimuli. Despite
several treatment options, asthma remains a major medical problem associated with high morbidity
and large economic costs to the society. According to the American Lung Association, asthma
accounted for $14.7 billion in direct healthcare costs each year in the United States, of which the
largest single expenditure, at $6.2 billion, was prescription drugs. Primary symptoms of asthma
include coughing, wheezing, shortness of breath and tightness of the chest with symptoms varying in
frequency and degree. According to Datamonitor, in 2005 asthma affected 41.5 million people in
developed countries, with 9.5 million of those affected being children. The highest prevalence of
asthma occurs in the United States and the United Kingdom. According to the American Lung
Association, non-asthma COPD was the fourth leading cause of death in America, claiming the lives
of 118,171 Americans in 2004. In 2005, an estimated 8.9 million Americans reported a physician
diagnosis of chronic bronchitis, an obstructive disease of the lung. In August 2007, we and CyDex
began to collaborate on the development and commercialization of products that utilize our AERx
pulmonary delivery technology and CyDexs solubilization and stabilization technologies to deliver
inhaled corticosteroids, anticholinergics and beta-2 agonists for the treatment of asthma and COPD.
    
    Pain Management System. Based on our internal work and a currently dormant collaboration
with GlaxoSmithKline, we have developed a significant body of preclinical and Phase 1 clinical data
on the use of inhaled morphine and fentanyl, and Phase 2 clinical data on inhaled morphine, with
our proprietary AERx delivery system for the treatment of breakthrough pain in cancer and
postsurgical patients.
    
    Other Programs.We are currently examining our previously conducted preclinical and
clinical programs to identify molecules that may be suitable for further development consistent
with our current business strategy. In most cases, we have previously demonstrated the feasibility
of delivering these compounds via our proprietary AERx delivery system, but we have not been able
to continue development due to a variety of reasons, most notably the lack of funding provided from
collaborators. If we identify any such programs during this review, we will consider continuing the
development of such compounds on our own.
 21




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Critical Accounting Policies and Estimates
  Revenue Recognition
 Revenue Recognition 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
  22




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Income Taxes
   Stock-Based Compensation Expense
   Results of Operations
 Three months ended March 31, 2008 and 2007
 Revenue
 Three months endedMarch 31,2008
    
    
    2007
    
    
    Decrease(in thousands)Revenue:Related parties
    
    $
    
    
    
    $
    15
    
    
    $
    (15
    )
    
    
    (100
    )%Unrelated parties
    
    
    
    
    
    
    401
    
    
    
    (401
    )
    
    
    (100
    )%Total revenue
    
    $
    
    
    
    $
    416
    
    
    $
    (416
    )
    
    
    (100
    )%
  23




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Research and Development
 Three months endedMarch 31,2008
    
    
    2007
    
    
    Increase (Decrease)(In thousands)Research and development expenses:Collaborative
    
    $
    336
    
    
    $
    419
    
    
    $
    (83
    )
    
    
    (20
    )%Self-initiated
    
    
    3,993
    
    
    
    2,988
    
    
    
    1,005
    
    
    
    34
    %Total research and development expenses
    
    $
    4,329
    
    
    $
    3,407
    
    
    $
    922
    
    
    
    27
    %
  General and Administrative
 Three months endedMarch 31,2008
    
    2007
    
    Decrease(in thousands)General and administrative expenses
    
    $
    1,549
    
    
    $
    1,987
    
    
    $
    (438
    )
    
    
    (22
    )%
  24




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Restructuring and lease exit activities
 Three months endedMarch 31,2008
    
    2007
    
    Decrease(in thousands)Restructuring and lease exit activities expense
    
    $
    22
    
    
    $
    98
    
    
    $
    (76
    )
    
    
    (78
    )%
  Interest income, interest expense and other expense
 Three months endedMarch 31,2008
    
    
    2007
    
    
    Increase (decrease)(in thousands)Interest income, interest expense and other expense:Interest income
    
    $
    361
    
    
    $
    637
    
    
    $
    (276
    )
    
    
    43
    %Interest expense
    
    
    (98
    )
    
    
    (96
    )
    
    
    2
    
    
    
    2
    %Other expense, net
    
    
    (1
    )
    
    
    (31
    )
    
    
    (30
    )
    
    
    (97
    )%Total interest income, interest expense and other expense
    
    $
    262
    
    
    $
    510
    
    
    $
    (248
    )
    
    
    (49
    )%
  Liquidity and Capital Resources
   25




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Off-Balance Sheet Financings and Liabilities
  Contractual Obligations
  Payment Due by Period2013 andTotal
    
    
    2008 (1)
    
    
    2009-2010
    
    
    2011-2012
    
    
    later(In thousands)Operating lease obligations
    
    $
    18,247
    
    
    $
    1,783
    
    
    $
    4,532
    
    
    $
    4,060
    
    
    $
    7,872Promissory note (2)
    
    
    10,543
    
    
    
    
    
    
    
    
    
    
    
    3,514
    
    
    
    7,029Unconditional capital purchase obligations
    
    
    804
    
    
    
    804
    
    
    
    
    
    
    
    
    
    
    
    Unconditional purchase obligations
    
    
    4,482
    
    
    
    4,482
    
    
    
    
    
    
    
    
    
    
    
    Total contractual commitments
    
    
    34,076
    
    
    
    7,069
    
    
    
    4,532
    
    
    
    7,574
    
    
    
    14,901Less-sublease payments from Mendel (3)
    
    
    (4,315
    )
    
    
    (657
    )
    
    
    (1,828
    )
    
    
    (1,830
    )
    
    
    Total contractual commitments, net (3)
    
    $
    29,761
    
    
    $
    6,412
    
    
    $
    2,704
    
    
    $
    5,744
    
    
    $
    14,901
 
 (1)
    
    For nine months ending December 31, 2008(2)
    
    Represents repayments of principal and interest on the Novo Nordisk promissory note. The Novo Nordisk promissory 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 on July 18, 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
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Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property .
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Disclosures about Derivative Instruments and
Hedging Activities  an Amendment of FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Market Risk Disclosures
   
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   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.
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We changed our product development strategy, and if we do not successfully implement this
strategy our business and reputation will be damaged.
  We will need additional capital, and we may not be able to obtain it.
  
    
    our progress in the application of our delivery and formulation technologies, which may
require further refinement of these
technologies;
    
    the number of product development programs we pursue and the pace of each program;
    
    our progress with formulation development;
    
    the scope, rate of progress, results and costs of preclinical testing and clinical trials;
    
    the time and costs associated with seeking regulatory approvals;
    
    our ability to outsource the manufacture of our product candidates and the costs of doing
so;
    
    the time and costs associated with establishing in-house resources to market and sell
certain of our products;
    
    our ability to establish and maintain collaborative arrangements with others and the terms
of those arrangements;
    
    the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims, and
    
    our need to acquire licenses, or other rights for our product candidates.
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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 may delay or terminate certain of our programs, and any such delay
or termination would harm our business prospects and stock price.
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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.
  Since one of our key proprietary programs, the ARD-3100 liposomal ciprofloxacin program, relies 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.
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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;
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
    
    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.
  Acquisition of complementary businesses or technologies could result in operating difficulties and
harm our results of operations.
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
    
    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.
  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.
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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.
  
    
    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;
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
    
    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.
  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.
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Item 6. EXHIBITS


ExhibitNumber
    
    Description31.1
    
    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.






| |  | 
| |  | 
| |  | 

*
    
    Other names and brands may be claimed as the property of others. 39




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SIGNATURES
  ARADIGM CORPORATION
(Registrant)/s/ Igor GondaDr. Igor GondaPresident and Chief Executive Officer /s/ Norman HalleenNorman HalleenDated: May 13, 2008
    Interim Chief Financial Officer 40




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INDEX TO EXHIBITS
 ExhibitNumber
    
    Description31.1
    
    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.
 41