##### 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, 2007
 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 
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 þ
 o þ
  (Class)
    
    (Outstanding at April 30, 2007)Common
    
    53,999,817




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##### 



ARADIGM CORPORATION
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Balance Sheets at March 31, 2007 and December 31, 2006 (unaudited)
    
    
    3Condensed Statements of Operations for the three months ended March 31, 2007 and 2006 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (unaudited)
    
    
    5Condensed
Statements of Shareholders Equity (Deficit) for the three
months ended March 31, 2007 (unaudited)
    
    
    6Notes to Unaudited Condensed Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATION
    
    
    25Item 1A. Risk Factors
    
    
    25Item 6. Exhibits
    
    
    37Signatures
    
    
    38EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
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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 31,2007
    
    
    2006(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    53,378
    
    
    $
    27,013Short-term investments
    
    
    2,973
    
    
    
    501Receivables
    
    
    128
    
    
    
    643Prepaid expenses and other current assets
    
    
    598
    
    
    
    1,002Total current assets
    
    
    57,077
    
    
    
    29,159Property and equipment, net
    
    
    2,703
    
    
    
    2,592Non-current portion of notes receivable from officers and employees
    
    
    31
    
    
    
    31Other assets
    
    
    288
    
    
    
    444Total assets
    
    $
    60,099
    
    
    $
    32,226LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS EQUITY
(DEFCIT)Current liabilities:Accounts payable
    
    $
    575
    
    
    $
    1,151Accrued cost of clinical and other studies
    
    
    163
    
    
    
    278Accrued compensation
    
    
    1,650
    
    
    
    1,814Deferred revenue
    
    
    5
    
    
    
    Other accrued liabilities
    
    
    203
    
    
    
    511Total current liabilities
    
    
    2,596
    
    
    
    3,754Non-current portion of deferred rent
    
    
    993
    
    
    
    1,035Non-current portion of capital lease
    
    
    27
    
    
    
    29Note payable and accrued interest to related party
    
    
    7,780
    
    
    
    7,686Commitments and contingenciesConvertible preferred stock, no par value; 2,050,000 shares
authorized; issued and outstanding shares: none outstanding at
March 31, 2007 and 1,544,626 at December 31, 2006; liquidation
preference of $0 at March 31, 2007 and $41,866 at December 31, 2006
    
    
    
    
    
    
    23,669Shareholders equity (deficit):Preferred stock, 2,950,000 shares authorized but none outstandingCommon stock, no par value, 100,000,000 shares authorized;
issued and outstanding shares: 53,999,817 at March 31, 2007 and
14,765,474 at December 31, 2006
    
    
    341,127
    
    
    
    283,914Accumulated other comprehensive income
    
    
    7
    
    
    
    4Accumulated deficit
    
    
    (292,431
    )
    
    
    (287,865
    )Total shareholders equity (deficit)
    
    
    48,703
    
    
    
    (3,947
    )Total liabilities, convertible preferred stock and
shareholders equity (deficit)
    
    $
    60,099
    
    
    $
    32,226
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ARADIGM CORPORATION
 
 CONDENSED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 (Unaudited)
 Three months endedMarch 31,2007
    
    
    2006Revenues (including amounts from related parties $15 - 2007; $33 - 2006)
    
    $
    416
    
    
    $
    1,073Operating expenses:Research and development
    
    
    3,407
    
    
    
    6,740General and administrative
    
    
    2,085
    
    
    
    2,853Total operating expenses
    
    
    5,492
    
    
    
    9,593Loss from operations
    
    
    (5,076
    )
    
    
    (8,520
    )Interest income
    
    
    637
    
    
    
    245Interest expense
    
    
    (96
    )
    
    
    (3
    )Other expense
    
    
    (31
    )
    
    
    (7
    )Net loss
    
    $
    (4,566
    )
    
    $
    (8,285
    )Basic and diluted net loss per common share
    
    $
    (0.11
    )
    
    $
    (0.57
    )Shares used in computing basic and diluted net loss per common share
    
    
    40,820
    
    
    
    14,563
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ARADIGM CORPORATION
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Three months endedMarch 31,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (4,566
    )
    
    $
    (8,285
    )Adjustments to reconcile net loss to cash used in operating activities:Amortization and accretion of investments
    
    
    (3
    )
    
    
    Depreciation and amortization
    
    
    195
    
    
    
    283Stock-based compensation
    
    
    310
    
    
    
    470Loss on retirement and sale of property and equipment
    
    
    11
    
    
    
    6Cost of warrants and stock options for services
    
    
    
    
    
    
    1Changes in operating assets and liabilities:Receivables
    
    
    515
    
    
    
    (429
    )Prepaid and other current assets
    
    
    404
    
    
    
    (532
    )Other assets
    
    
    156
    
    
    
    1Accounts payable
    
    
    (576
    )
    
    
    (1,695
    )Accrued compensation
    
    
    (164
    )
    
    
    (1,831
    )Other accrued liabilities
    
    
    (330
    )
    
    
    17Deferred rent
    
    
    (42
    )
    
    
    55Deferred revenue
    
    
    5
    
    
    
    77Net cash used in operating activities
    
    
    (4,085
    )
    
    
    (11,862
    )Cash flows from investing activities:Capital expenditures
    
    
    (317
    )
    
    
    (600
    )Purchases of available-for-sale investments
    
    
    (2,969
    )
    
    
    (515
    )Proceeds from sales and maturities of available-for-sale investments
    
    
    503
    
    
    
    Net cash used in investing activities
    
    
    (2,783
    )
    
    
    (1,115
    )Cash flows from financing activities:Proceeds from public offering, net
    
    
    33,178
    
    
    
    Proceeds from issuance of common stock, net
    
    
    55
    
    
    
    249Payments received on notes receivable from officers and employees
    
    
    
    
    
    
    13Net cash provided by financing activities
    
    
    33,233
    
    
    
    262Net increase (decrease) in cash and cash equivalents
    
    
    26,365
    
    
    
    (12,715
    )Cash and cash equivalents at beginning of period
    
    
    27,013
    
    
    
    27,694Cash and cash equivalents at end of period
    
    $
    53,378
    
    
    $
    14,979Supplemental
disclosure of non-cash financing activities:Conversion of mandatorily redeemable convertible preferred stock to
common stock
    
    $
    23,669
    
    
    
    
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STATEMENT OF CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS EQUITY (DEFICIT)
 (In thousands, except per share data)
 (Unaudited)
 Accumulated
    
    
    
    
    
    
    TotalConvertible
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    ShareholdersPreferred Stock
    
    
    Common Stock
    
    
    Comprehensive
    
    
    Accumulated
    
    
    EquityShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Income
    
    
    Deficit
    
    
    (Deficit)Balances at December 31, 2006
    
    
    1,544,626
    
    
    $
    23,669
    
    
    
    14,765,474
    
    
    $
    283,914
    
    
    $
    4
    
    
    $
    (287,865
    )
    
    $
    (3,947
    )Issuance of common stock in public offering
    
    
    
    
    
    
    
    
    
    
    37,950,000
    
    
    
    33,178
    
    
    
    
    
    
    
    
    
    
    
    33,178Issuance of common stock upon
conversion of preferred stock
related to public
offering
    
    
    (1,544,626
    )
    
    
    (23,669
    )
    
    
    1,235,699
    
    
    
    23,669
    
    
    
    
    
    
    
    
    
    
    
    23,669Issuance of common stock under
the employee stock purchase plan
    
    
    
    
    
    
    
    
    
    
    53,519
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    56Reversal of restricted stock
award due to forfeiture
    
    
    
    
    
    
    
    
    
    
    (4,875
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation related
to issuance of stock option
grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    310
    
    
    
    
    
    
    
    
    
    
    
    310Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,566
    )
    
    
    (4,566
    )Net change in unrealized gain
(loss) on available-for-sale
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,563
    )Balances at March 31, 2007
    
    
    
    
    
    $
    
    
    
    
    53,999,817
    
    
    $
    341,127
    
    
    $
    7
    
    
    $
    (292,431
    )
    
    $
    48,703
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ARADIGM CORPORATION
 
 NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
 March 31, 2007
 1. Organization and Basis of Presentation
 Organization
  Basis of Presentation
   2. Summary of Significant Accounting Policies
 Use of Estimates
  Revenue Recognition
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Impairment or Disposal of Long-Lived Assets
 Accounting
for the Impairment or Disposal of Long-Lived Assets
 Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
 Fair Value Measurement, .
 The Fair Value Option for Financial Assets and
Financial Liabilities
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3. Stock-Based Compensation
  March 31,
    
    
    March 31,2007
    
    
    2006Costs and expenses:Research and development
    
    $
    94
    
    
    $
    263General and administrative
    
    
    216
    
    
    
    207Total stock-based compensation expense
    
    $
    310
    
    
    $
    470Impact on basic and diluted net loss per common share
    
    $
    (0.01
    )
    
    $
    (0.03
    )
      2005 Equity Incentive Plan
  1996 Non-Employee Directors Plan
  Employee Stock Purchase Plan
  - 9 -




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Valuation Assumptions
  Three months ended March 31,2007
    
    2006Employee Stock OptionsDividend yield
    
    
    0.0
    %
    
    
    0.0
    %Volatility factor
    
    
    85.2
    %
    
    
    85.9
    %Risk-free interest rate
    
    
    5.1
    %
    
    
    4.8
    %Expected life (years)
    
    
    4.0
    
    
    
    4.2Weighted-average fair value
of options granted during
the periods
    
    $
    0.79
    
    
    $
    2.47Employee Stock Purchase PlanDividend yield
    
    
    0.0
    %
    
    
    0.0
    %Volatility factor
    
    
    86.4
    %
    
    
    87.1
    %Risk-free interest rate
    
    
    4.9
    %
    
    
    3.6
    %Expected life (years)
    
    
    0.5
    
    
    
    1.2Weighted-average fair value
of employee stock purchases
during the periods
    
    $
    0.59
    
    
    $
    2.62
 Stock Option Activity
  Weighted-Weighted-
    
    averageNumber
    
    average
    
    remaining
    
    Aggregateof
    
    exercise
    
    contractual
    
    intrinsicshares
    
    price
    
    life in years
    
    valueOptions outstanding at January 1, 2007
    
    
    3,064
    
    
    $
    8.90
    
    
    
    8.28
    
    
    $
    Options granted
    
    
    356
    
    
    
    1.23
    
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options cancelled
    
    
    (131
    )
    
    
    8.18
    
    
    
    
    
    
    
    Options outstanding at March 31, 2007
    
    
    3,288
    
    
    
    8.10
    
    
    
    7.77
    
    
    
    7Options exercisable at March 31, 2007
    
    
    1,352
    
    
    $
    16.87
    
    
    
    5.56
    
    
    $
    2
  - 10 -




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Options Outstanding
    
    Options ExercisableWeighted-averageremaining
    
    Weighted-
    
    
    
    
    
    Weighted-Number
    
    contractual
    
    average
    
    Number
    
    AverageRange of
    
    outstanding
    
    life
    
    exercise
    
    exercisable
    
    ExerciseExercise Price
    
    (in thousands)
    
    (in years)
    
    price
    
    (in thousands)
    
    Price$1.02-$1.15
    
    
    47
    
    
    
    9.61
    
    
    $
    1.07
    
    
    
    8
    
    
    $
    1.02$1.23-$1.23
    
    
    350
    
    
    
    9.89
    
    
    $
    1.23
    
    
    
    49
    
    
    $
    1.23$1.29-$1.64
    
    
    395
    
    
    
    9.29
    
    
    $
    1.37
    
    
    
    86
    
    
    $
    1.39$1.70-$1.70
    
    
    300
    
    
    
    9.19
    
    
    $
    1.70
    
    
    
    56
    
    
    $
    1.70$1.80-$1.80
    
    
    556
    
    
    
    9.20
    
    
    $
    1.80
    
    
    
    217
    
    
    $
    1.80$1.87-$1.87
    
    
    500
    
    
    
    9.36
    
    
    $
    1.87
    
    
    
    0
    
    
    $
    0$3.14-$5.30
    
    
    343
    
    
    
    6.86
    
    
    $
    4.46
    
    
    
    206
    
    
    $
    4.78$5.35-$12.00
    
    
    336
    
    
    
    5.61
    
    
    $
    8.40
    
    
    
    269
    
    
    $
    8.64$13.00-$53.13
    
    
    329
    
    
    
    2.93
    
    
    $
    24.16
    
    
    
    329
    
    
    $
    24.16$56.88-$120.63
    
    
    132
    
    
    
    1.66
    
    
    $
    82.53
    
    
    
    132
    
    
    $
    82.533,288
    
    
    
    
    
    
    
    
    
    
    
    1,352
  4. Net Income (Loss) Per Share
   Three months endedMarch 31,2007
    
    2006Outstanding stock options
    
    
    3,288
    
    
    
    2,166Convertible
preferred stock
    
    
    
    
    
    
    1,236Unvested restricted stock
    
    
    60
    
    
    
    140Warrants to
purchase common stock
    
    
    836
    
    
    
    2,120
 5. Comprehensive Income (Loss)
  Three months endedMarch 31,2007
    
    
    2006Net loss
    
    $
    (4,566
    )
    
    $
    (8,285
    )Other comprehensive income (loss):Change in unrealized gain (loss) on available-for-sale securities
    
    
    3
    
    
    
    (4
    )Comprehensive loss
    
    $
    (4,563
    )
    
    $
    (8,289
    )
 - 11 -




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6. Cash, Cash Equivalents and Short-Term Investments
  March
    
    
    December31, 2007
    
    
    31, 2006Cash and cash equivalents:Cash and money market fund
    
    $
    140
    
    
    $
    1,248Commercial paper
    
    
    53,238
    
    
    
    25,765$
    53,378
    
    
    $
    27,013Short-term investments:Corporate and government notes
    
    $
    2,973
    
    
    $
    501
  7. Income Taxes
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109,
   8. Public Offering of Common Shares
  - 12 -




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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, 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
   Restructured Relationship with Novo Nordisk
  - 13 -




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##### Table of Contents




    
    an amended and restated license agreement amending the
development and license agreement previously in place with
Novo Nordisk, expanding Novo Nordisks development and
manufacturing rights to the AERx iDMS program and providing
for royalties to us on future AERx iDMS net sales in lieu
of a percentage interest in the gross profits from the
commercialization of the AERx iDMS, which royalties run
until the later of last patent expiry or
last use of our intellectual property and which apply to
future enhancements or generations of our AERx delivery
technology;
    
    a three-year agreement under which NNDT agreed to perform
contract manufacturing of AERx iDMS-identical devices and
dosage forms filled with compounds provided by us in
support of preclinical and initial clinical development of
other products that incorporate our AERx delivery system;
and
    
    an amendment of the common stock purchase agreement in
place with Novo Nordisk prior to the closing of the
restructuring transaction, (i) deleting the provisions
whereby we can require Novo Nordisk to purchase certain
additional amounts of common stock, (ii) imposing certain
restrictions on the ability of Novo Nordisk to sell shares
of our common stock and (iii) providing Novo Nordisk with
certain registration and information rights with respect to
these shares.
   
    
    our transfer to Novo Nordisk of the ownership of 23 issued
United States patents and their corresponding non-United
States counterparts, if any, as well as related pending
applications, in exchange for $12.0 million paid to us in
cash. We retained exclusive, royalty-free control of these
patents outside the field of glucose control and will
continue to be entitled to royalties with respect to any
inhaled insulin products marketed or licensed by Novo
Nordisk.
 - 14 -




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##### Table of Contents




    
    our receipt of a royalty prepayment of $8.0 million in
exchange for a one percent reduction on our average royalty
rate for the commercialized AERx iDMS product. As a result,
we will receive royalty rates under our agreement with Novo
Nordisk that will rise to an average of five percent or
higher (instead of six percent or higher) by the fifth year
after commercialization.
    
    our issuance of an eight-year promissory note to Novo
Nordisk in connection with our receipt from Novo Nordisk of
a loan in the principal amount of $7.5 million with
interest at 5% per year that will be payable to Novo
Nordisk in three equal annual payments commencing in July
2012. Our obligations under the note are secured by royalty
payments upon any commercialization of the AERx iDMS
product.
   Purchase and Sale of Intraject Technology
   Product Candidates
  Product Candidate
    
    Indication
    
    Stage of DevelopmentProprietary Programs Under DevelopmentARD-3100 (Liposomal ciprofloxacin)
    
    Cystic Fibrosis
    
    PreclinicalARD-1100 (Liposomal ciprofloxacin)
    
    Inhalation Anthrax
    
    PreclinicalCollaborative Programs Under DevelopmentAERx iDMS (Insulin)
    
    Type 1 and Type 2 Diabetes
    
    Phase 3ARD-1300 (Hydroxychloroquine)
    
    Asthma
    
    Phase 2 (1)ARD-1500 (Liposomal treprostinil)
    
    Pulmonary Arterial Hypertension
    
    Preclinical
 
 (1)
    
    A Phase 2a clinical study did not meet pre-specified clinical
endpoints. The program is currently under review by APT and is in
our view, unlikely to continue.  - 15 -




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Liposomal Ciprofloxacin
  ARD-3100  Liposomal Ciprofloxacin for the Treatment of Cystic Fibrosis
  Pseudomonas aeruginosa,
  Development
  - 16 -




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




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AERx iDMS  Inhaled Insulin for the Treatment of Diabetes
   Development
  - 18 -




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##### Table of Contents




    
    HbAlc levels, a key marker of blood glucose control, are
statistically the same in patients using AERx iDMS and
patients using subcutaneous insulin injections.
    
    The onset of action of inhaled insulin via AERx iDMS is not
significantly different from subcutaneous injection of
rapid-acting insulin, but significantly faster than
subcutaneous injection of human regular insulin.
    
    The duration of action of inhaled insulin via AERx iDMS is
not significantly different from subcutaneous injection of
human regular insulin, but significantly longer than
subcutaneous injection of rapid-acting insulin.
    
    Although small declines were seen on some pulmonary
function parameters following 12-24 months of dosing on
AERx iDMS, these declines were not considered to be of
clinical significance, and the findings are not expected to
have an impact on overall pulmonary safety of the product.
   ARD-1300  Hydroxychloroquine for the Treatment of Asthma
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Development
   ARD-1500  Treprostinil for the Treatment of Pulmonary Arterial Hypertension
   Development
  Additional Potential Product Applications
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
    
    Smoking Cessation.Based on internal work and work funded under grants from the National
Institutes of Health, we are developing intellectual property in the area of smoking
cessation. To date, we have two issued United States patents containing claims directed
towards the use of titrated nicotine replacement therapy for smoking cessation.
    
    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 post-surgical patients.
  Critical Accounting Policies and Estimates
  Revenue Recognition
  Impairment of Long-Lived Assets
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Stock-Based Compensation Expense
    Results of Operations
 Three months ended March 31, 2007 and 2006
 Revenues
 Three months endedMarch 31,Change in2007
    
    
    2006
    
    
    Percent(in thousands)Revenues:Related parties
    
    $
    15
    
    
    $
    33
    
    
    
    (55
    %)Percentage of total revenues
    
    
    4
    %
    
    
    3
    %Unrelated parties
    
    
    401
    
    
    
    1,040
    
    
    
    (61
    %)Percentage of total revenues
    
    
    96
    %
    
    
    97
    %Total Revenues
    
    $
    416
    
    
    $
    1,073
    
    
    
    (61
    %)
  Research and Development
 Three months endedMarch 31,Change in2007
    
    
    2006
    
    
    Percent(in thousands)Research and development expense:Collaborative
    
    $
    419
    
    
    $
    1,119
    
    
    
    (63
    )%Self-initiated
    
    
    2,988
    
    
    
    5,621
    
    
    
    (47
    )%Total research and development expense
    
    $
    3,407
    
    
    $
    6,740
    
    
    
    (49
    )%
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General and Administrative
 Three months endedMarch 31,Change in2007
    
    2006
    
    Percent(in thousands)General and administrative expenses
    
    $
    2,085
    
    
    $
    2,853
    
    
    
    (27
    )%
  Interest income, interest expense and other expense
 Three months endedMarch 31,Change in2007
    
    
    2006
    
    
    Percent(in thousands)Interest income, interest expense and other expense:Interest income
    
    $
    637
    
    
    $
    245
    
    
    
    160
    %Interest expense
    
    
    (96
    )
    
    
    (3
    )
    
    
    (3,100
    )%Other expense
    
    
    (31
    )
    
    
    (7
    )
    
    
    (343
    )%Total interest income, interest and other expense
    
    $
    510
    
    
    $
    235
    
    
    
    117
    %
  Liquidity and Capital Resources
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Contractual Obligations
  Payment Due by Period(amounts in thousands)Total
    
    
    2007(1)
    
    
    1 - 2 years
    
    
    3-5 years
    
    
    +5 yearsContractual obligations:Operating lease obligations
    
    $
    20,742
    
    
    $
    1,774
    
    
    $
    2,421
    
    
    $
    6,607
    
    
    $
    9,940Unconditional capital purchase obligations
    
    
    730
    
    
    
    730Unconditional purchase obligations
    
    
    1,422
    
    
    
    1,422
    
    
    
    
    
    
    
    
    
    
    
    Total contractual commitments
    
    $
    22,894
    
    
    $
    3,926
    
    
    $
    2,421
    
    
    $
    6,607
    
    
    $
    9,940
 
 (1)
    
    For nine months ending December 31, 2007. Off-Balance Sheet Financings and Liabilities
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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 control.
 Limitations on the effectiveness of controls.
 
 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, 2006. 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,
2006.
 Risks Related to Our Business
 We are an early-stage company.
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* We recently changed our product development strategy, and if we do not successfully
implement this new 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 prevent the progress of certain of our programs.
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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.
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Regulatory authorities may not approve our product candidates even if the product candidates
meet safety and efficacy endpoints in clinical trials or the approvals may be too limited for us to
earn sufficient revenues.
  Even if we are granted initial FDA approval for any of our product candidates, we may not be
able to maintain such approval, which would reduce our revenues.
  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.
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
    
    the demonstration of efficacy and safety in clinical trials;
    
    the existence, prevalence and severity of any side effects;
    
    the potential or perceived advantages or disadvantages compared to alternative treatments;
    
    the timing of market entry relative to competitive treatments;
    
    the relative cost, convenience, product dependability and ease of administration;
    
    the strength of marketing and distribution support;
    
    the sufficiency of coverage and reimbursement of our product candidates by governmental
and other third-party payors; and
    
    the product labeling or product insert required by the FDA or regulatory authorities in
other countries.
  We depend upon our proprietary technologies, and we may not be able to protect our potential
competitive proprietary advantage.
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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.
     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.
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If we do not continue to attract and retain key employees, our product development efforts
will be delayed and impaired.
  Acquisition of complementary businesses or technologies could result in operating difficulties
and harm our results of operations.
  
    
    diversion of our management from the development and commercialization of our
pipeline product candidates;
    
    difficulty in assimilating and efficiently using the acquired assets or personnel; and
    
    inability to retain key personnel.
  If we market our products in other countries, we will be subject to different laws and we may
not be able to adapt to those laws, which could increase our costs while reducing our revenues.
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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 controls 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;
    
    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;
    
    failure to maintain existing or establish new collaborative relationships;
    
    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.
  We have implemented certain anti-takeover provisions, which make it less likely that we would
be acquired and you would receive a premium price for your shares.
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We have never paid dividends on our capital stock, and we do not anticipate paying cash
dividends for at least the foreseeable future.
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Item 6. EXHIBITS
 ExhibitNumber
    
    Description10.10c(10)
    
    Amendment No. 3 to Rights Agreement, dated as of January
24, 2007, by and between the Company and Computershare
Trust Company, N.A.10.16(7)+
    
    Form of Change of Control Agreement entered into between
the Company and certain of the Companys senior officers.31.1
    
    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.
 
 +
    
    Represents a management contract or compensatory plan or arrangement.(10)
    
    Incorporated by reference to the Companys Form 8-K filed on January 30, 2007.(7)
    
    Incorporated by reference to the Companys Form S-1 (No. 333-138169) filed on
October 24, 2006, as amended. - 37 -




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SIGNATURES
  ARADIGM CORPORATION(Registrant)/s/ Igor GondaDr. Igor GondaPresident and Chief Executive Officer/s/ Thomas C. ChestermanThomas C. ChestermanSenior Vice President and Chief Financial Officer
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INDEX TO EXHIBITS
 ExhibitNumber
    
    Description10.10c(10)
    
    Amendment No. 3 to Rights Agreement, dated as of January
24, 2007, by and between the Company and Computershare
Trust Company, N.A.10.16(7)+
    
    Form of Change of Control Agreement entered into between
the Company and certain of the Companys senior officers.31.1
    
    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.
 
 +
    
    Represents a management contract or compensatory plan or arrangement.(10)
    
    Incorporated by reference to the Companys Form 8-K filed on January 30, 2007.(7)
    
    Incorporated by reference to the Companys Form S-1 (No. 333-138169) filed on
October 24, 2006, as amended. - 39 -