##### 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 September 30, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission File Number: 000-28402
 Aradigm Corporation
 (Exact name of registrant as specified in its charter)
 California
    
    94-3133088(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 3929 Point Eden Way
Hayward, CA 94545  (Address of principal executive offices including zip code)
 (510) 265-9000  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ
  (Class)
    
    (Outstanding at November 09, 2010)Common
    
    172,462,378




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##### 



ARADIGM CORPORATION
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Balance Sheets at September 30, 2010 and December 31, 2009 (unaudited)
    
    
    3Condensed Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)
    
    
    5Notes to the Unaudited Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. (Removed and Reserved)
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    34Signatures
    
    
    35EX-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)
 September 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,367
    
    
    $
    3,903Short-term investments
    
    
    270
    
    
    
    5,228Receivables
    
    
    111
    
    
    
    155Prepaid and other current assets
    
    
    164
    
    
    
    328Total current assets
    
    
    7,912
    
    
    
    9,614Property and equipment, net
    
    
    1,693
    
    
    
    2,166Notes receivable
    
    
    53
    
    
    
    52Other assets
    
    
    137
    
    
    
    133Total assets
    
    $
    9,795
    
    
    $
    11,965LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    223
    
    
    $
    572Accrued clinical and cost of other studies
    
    
    838
    
    
    
    670Accrued compensation
    
    
    514
    
    
    
    341Facility lease exit obligation
    
    
    141
    
    
    
    263Other accrued liabilities
    
    
    395
    
    
    
    357Total current liabilities
    
    
    2,111
    
    
    
    2,203Deferred rent
    
    
    111
    
    
    
    136Facility lease exit obligation, non-current
    
    
    754
    
    
    
    828Other non-current liabilities
    
    
    75
    
    
    
    75Note payable and accrued interest
    
    
    
    
    
    
    8,896Total liabilities
    
    
    3,051
    
    
    
    12,138Commitments and contingenciesShareholders equity (deficit):Preferred stock, 5,000,000 shares authorized, none outstandingCommon stock, no par value; authorized shares: 213,527,214 at
September 30, 2010; 150,000,000 at December 31, 2009; issued
and outstanding shares: 172,320,344 at September 30, 2010;
102,381,116 at December 31, 2009
    
    
    358,207
    
    
    
    348,271Accumulated other comprehensive income
    
    
    
    
    
    
    2Accumulated deficit
    
    
    (351,463
    )
    
    
    (348,446
    )Total shareholders equity (deficit)
    
    
    6,744
    
    
    
    (173
    )Total liabilities and shareholders equity (deficit)
    
    $
    9,795
    
    
    $
    11,965
  3




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ARADIGM CORPORATION
 
 CONDENSED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue:Contract revenue
    
    $
    
    
    
    $
    4,883
    
    
    $
    
    
    
    $
    4,883Royalty revenue
    
    
    239
    
    
    
    
    
    
    
    4,239
    
    
    
    Total revenue
    
    
    239
    
    
    
    4,883
    
    
    
    4,239
    
    
    
    4,883Operating expenses:Research and development
    
    
    2,403
    
    
    
    2,426
    
    
    
    7,976
    
    
    
    9,079General and administrative
    
    
    895
    
    
    
    1,323
    
    
    
    3,530
    
    
    
    4,089Restructuring and asset impairment
    
    
    11
    
    
    
    1,638
    
    
    
    37
    
    
    
    1,860Total operating expenses
    
    
    3,309
    
    
    
    5,387
    
    
    
    11,543
    
    
    
    15,028Loss from operations
    
    
    (3,070
    )
    
    
    (504
    )
    
    
    (7,304
    )
    
    
    (10,145
    )Interest income
    
    
    3
    
    
    
    16
    
    
    
    17
    
    
    
    58Interest expense
    
    
    (95
    )
    
    
    (109
    )
    
    
    (313
    )
    
    
    (318
    )Other income (expense), net
    
    
    15
    
    
    
    1
    
    
    
    121
    
    
    
    (3
    )Gain from extinguishment of debt
    
    
    4,462
    
    
    
    
    
    
    
    4,462
    
    
    
    Net income/(loss)
    
    $
    1,315
    
    
    $
    (596
    )
    
    $
    (3,017
    )
    
    $
    (10,408
    )Basic and diluted net income/(loss) per common share
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.12
    )Shares used in computing basic net income/(loss) per common share
    
    
    139,167
    
    
    
    99,347
    
    
    
    114,787
    
    
    
    89,888Shares used in computing diluted net income/(loss) per common share
    
    
    140,177
    
    
    
    99,347
    
    
    
    114,787
    
    
    
    89,888
  4




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ARADIGM CORPORATION
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine months endedSeptember 30,2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (3,017
    )
    
    $
    (10,408
    )Adjustments to reconcile net loss to cash used in operating activities:Impairment loss on property and equipment
    
    
    
    
    
    
    1,654Amortization and accretion of investments
    
    
    26
    
    
    
    6Depreciation and amortization
    
    
    471
    
    
    
    899Stock-based compensation expense
    
    
    622
    
    
    
    622Loss on retirement and sale of property and equipment
    
    
    7
    
    
    
    3Gain on debt extinguishment
    
    
    (4,526
    )
    
    
    Facility lease exit cost
    
    
    
    
    
    
    158Changes in operating assets and liabilities:Receivables
    
    
    44
    
    
    
    150Prepaid and other current assets
    
    
    164
    
    
    
    66Other assets
    
    
    (5
    )
    
    
    (5
    )Accounts payable
    
    
    (349
    )
    
    
    (494
    )Accrued compensation
    
    
    173
    
    
    
    (115
    )Other liabilities
    
    
    516
    
    
    
    425Deferred rent
    
    
    (25
    )
    
    
    (56
    )Deferred revenue
    
    
    
    
    
    
    (4,122
    )Facility lease exit obligation
    
    
    (196
    )
    
    
    (263
    )Net cash used in operating activities
    
    
    (6,095
    )
    
    
    (11,480
    )Cash flows from investing activities:Capital expenditures
    
    
    (5
    )
    
    
    185Purchases of short-term investments
    
    
    ( 270
    )
    
    
    (9,649
    )Proceeds from sales and maturities of short-term investments
    
    
    5,200
    
    
    
    3,380Note receivable payments
    
    
    
    
    
    
    (16
    )Net cash provided by (used in) investing activities
    
    
    4,925
    
    
    
    (6,100
    )Cash flows from financing activities:Proceeds from public offering of common stock, net
    
    
    
    
    
    
    3,927Proceeds from private placement of common stock and exercise of warrants, net
    
    
    4,591
    
    
    
    Proceeds from issuance of common stock
    
    
    43
    
    
    
    37Net cash provided by financing activities
    
    
    4,634
    
    
    
    3,964Net increase (decrease) in cash and cash equivalents
    
    
    3,464
    
    
    
    (13,616
    )Cash and cash equivalents at beginning of period
    
    
    3,903
    
    
    
    16,741Cash and cash equivalents at end of period
    
    $
    7,367
    
    
    $
    3,125Supplemental schedule of non-cash financing activities:Non-cash reduction in note payable and accrued interest from issuance of common stock
    
    $
    4,680
    
    
    $
    
  5




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ARADIGM CORPORATION
 
 NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
 September 30, 2010
 1. Organization, Basis of Presentation and Liquidity
 Organization
  Basis of Presentation
   Liquidity
    2. Summary of Significant Accounting Policies
 6




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Use of Estimates
  Cash and Cash Equivalents
  Investments
  Property and Equipment
  Impairment of Long-Lived Assets
 Property, Plant, and
Equipment  Overall
 Accounting for Costs Associated with Exit or Disposal Activities
 Exit or Disposal Cost Obligations
 Revenue Recognition
 Revenue Recognition Revised and Updated , Revenue
Recognition. , Revenue
Recognition-Multiple Element Arrangements.
 7




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Contract Revenue.
  Royalty Revenue.
 Research and Development
  Stock-Based Compensation
 Compensation-Stock Compensation Equity-Equity Based Payments to Non-Employees
 Income Taxes
   8




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Net Income/(Loss) Per Common Share
  Recently Issued Accounting Pronouncements
 Milestone Method of Revenue Recognition a consensus of the FASB Emerging
Issues Task Force.
  Improving Disclosures About Fair Value
Measurements
 Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements
 3. Cash, Cash Equivalents and Short-Term Investments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gain
    
    
    (Loss)
    
    
    Fair ValueSeptember 30, 2010Cash and cash equivalents
    
    $
    7,367
    
    
    $
    
    
    
    $
    
    
    
    $
    7,367Short-term investments:Commercial paper
    
    $
    270
    
    
    $
    
    
    
    $
    
    
    
    $
    270Certificates of deposit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    U.S. treasury and agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    270
    
    
    $
    
    
    
    $
    
    
    
    $
    270December 31, 2009Cash and cash equivalents
    
    $
    3,903
    
    
    $
    
    
    
    $
    
    
    
    $
    3,903Short-term investments:Commercial paper
    
    $
    500
    
    
    $
    
    
    
    $
    
    
    
    $
    500Certificates of deposit
    
    
    3,183
    
    
    
    2
    
    
    
    
    
    
    
    3,185U.S. treasury and agencies
    
    
    1,543
    
    
    
    
    
    
    
    
    
    
    
    1,543Total
    
    $
    5,226
    
    
    $
    2
    
    
    $
    
    
    
    $
    5,228
 9




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4. Fair Value Measurements
  Fair Value MeasurementsQuoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantBalance
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsDescription
    
    September  30, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash and cash equivalents
    
    $
    7,367
    
    
    $
    2,286
    
    
    $
    5,081
    
    
    $
    Short-term investments:Commercial paper
    
    $
    270
    
    
    $
    
    
    
    $
    270
    
    
    $
    Total
    
    $
    270
    
    
    $
    
    
    
    $
    270
    
    
    $
    
  5. Sublease Agreement and Lease Exit Liability
    10




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Nine Months EndedSeptember 30,  2010Balance at January 1, 2010
    
    $
    1,091Accretion expense
    
    
    37Lease payments
    
    
    (233
    )Balance at September 30, 2010
    
    $
    895
  6. Collaborations and Royalty Agreements
 Zogenix
    7. Stock-Based Compensation and Stock Options, Awards and Units
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Costs and expenses:Research and development
    
    $
    54
    
    
    $
    70
    
    
    $
    146
    
    
    $
    231General and administrative
    
    
    117
    
    
    
    166
    
    
    
    476
    
    
    
    391Total stock based compensation expense
    
    $
    171
    
    
    $
    236
    
    
    $
    622
    
    
    $
    622
 11




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Stock Option Plans: 1996 Equity Incentive Plan, 2005 Equity Incentive Plan and 1996 Non-Employee
Directors Plan
  Stock Option Activity
  Options OutstandingShares Available
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weightedfor Grant of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AverageOption, Award or
    
    
    Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ExerciseUnit
    
    
    Shares
    
    
    Exercise Price Range
    
    
    PriceBalance at January 1, 2010
    
    
    763,185
    
    
    
    5,088,443
    
    
    $
    0.15
    
    
    
    
    
    
    $
    120.63
    
    
    $
    2.49Shares authorized
    
    
    4,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options granted
    
    
    (1,790,000
    )
    
    
    1,790,000
    
    
    $
    0.12
    
    
    
    
    
    
    $
    0.18
    
    
    $
    0.17Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options cancelled
    
    
    717,627
    
    
    
    (717,627
    )
    
    $
    0.25
    
    
    
    
    
    
    $
    120.63
    
    
    $
    6.02Restricted share awards granted
    
    
    (1,781,666
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted share awards cancelled
    
    
    429,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted share units awarded
    
    
    (333,333
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plan shares cancelled and not reauthorized
    
    
    (9,736
    )
    
    
    
    
    
    $
    107.81
    
    
    
    
    
    
    $
    120.63
    
    
    $
    113.26Balance at September 30, 2010
    
    
    1,995,077
    
    
    
    6,160,816
    
    
    $
    0.12
    
    
    
    
    
    
    $
    115.00
    
    
    $
    2.21
   12




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##### Table of Contents



Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair ValueBalance at December 31, 2009
    
    
    2,668,006
    
    
    $
    0.41Restricted share awards issued
    
    
    1,781,666
    
    
    
    0.16Restricted share awards vested
    
    
    (1,351,756
    )
    
    
    0.20Restricted share awards cancelled
    
    
    (429,000
    
    
    
    0.19Balance at September 30, 2010
    
    
    2,668,916
    
    
    $
    0.39
  8. Private Placement
  9. Debt Extinguishment
   10. Net Income (Loss) Per Common Share
  13




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Three Months Ended
    
    
    Nine Months EndedSeptember 30

       
    September 30(In thousands, except per share amounts)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:Net income/(loss)
    
    $
    1,315
    
    
    $
    (596
    )
    
    $
    (3,017
    )
    
    $
    (10,408
    )Denominator:Weighted average number of common shares used in basic net
income/(loss) per share
    
    
    139,167
    
    
    
    99,347
    
    
    
    114,787
    
    
    
    89,888Effect of dilutive securities (using treasury stock method):Common stock options and restricted stock awards and units
    
    
    1,010
    
    
    
    
    
    
    
    
    
    
    
    Weighted average number of common shares and dilutive
potential common shares used in diluted net income/(loss) per
share
    
    
    140,177
    
    
    
    99,347
    
    
    
    114,787
    
    
    
    89,888Basic net income/(loss) per share
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.12
    )Diluted net income/(loss) per share
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.12
    )
   Nine months endedSeptember 30,2010
    
    
    2009Outstanding stock options
    
    
    6,161
    
    
    
    5,146Unvested restricted stock
    
    
    2,668
    
    
    
    2,920Unvested restricted stock units
    
    
    333
    
    
    
    
 11. Comprehensive Loss
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net loss
    
    $
    1,315
    
    
    $
    (596
    )
    
    $
    (3,017
    )
    
    $
    (10,408
    )Other comprehensive loss:Change in unrealized gain (loss) on available-for-sale securities
    
    
    
    
    
    
    7
    
    
    
    (2
    )
    
    
    (1
    )Comprehensive loss
    
    $
    1,315
    
    
    $
    (589
    )
    
    $
    (3,019
    )
    
    $
    (10,409
    )
 12. Subsequent Events
  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
current beliefs of management, as well as current assumptions made by, and information currently
available to, management. All statements contained in this Quarterly Report on Form 10-Q , other
than statements that are purely historical, are forward-looking statements. Words such as
anticipate, expect, intend, plan, believe, may, will, could, continue, seek,
estimate, or the negative thereof and similar expressions also identify forward-looking
statements. Forwardlooking statements include, but are not limited to, statements regarding: (i)
our expectation that we will continue to receive royalty revenue from Zogenix, (ii) our
anticipation that we will not receive any revenues from the sale of products in the upcoming year,
except for royalty revenue from Zogenix, (iii) our belief that our cash, cash equivalents and
short-term investments as of September 30, 2010, the anticipated recurring royalty payments from
Zogenix and the anticipated Qualifying Therapeutic Discovery Project grants totaling approximately
$733,000 will be sufficient to enable us to fund our operations through at least the first quarter
of 2011, (iv) our business strategies, including our strategy to commercialize our respiratory
product candidates with our own focused sales and marketing force addressing pulmonary specialty
doctors in the United States or in the European Union and our intent to use our pulmonary delivery
methods and formulations to improve their safety, efficacy and convenience of administration to
patients or that we will be able to enter into co-development , co-promotion or other marketing
arrangements with collaborators and (v) our expectations regarding clinical trials, including the
expected timing and completion of the ORBIT-1 trial.. These forward-looking statements are subject
to risks and uncertainties that could cause our future actual results, performance or achievements
to differ materially from those expressed in, or implied by, any such forward-looking statements as
a result of certain factors, including risks and uncertainties discussed in this section, as well
as in the section entitled Risk Factors in this Quarterly Report on Form 10-Q and other reports
filed with the United States Securities and Exchange Commission (the SEC).
 These forward-looking statements and our business are subject to significant risks including,
but not limited to: (i) our ability to obtain additional financing, (ii) our ability to implement
our product development strategy, (iii) the success of product development efforts, (iv) obtaining
and enforcing patents important to our business, (v) clearing the lengthy and expensive regulatory
approval process and (vi) 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
 ®
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Pseudomonas aeruginosa
 Pseudomonas aeruginosa
  Pseudomonas aeruginosa
 Pseudomonas aeruginosa 10
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10
 Pseudomonas aeruginosa
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##### Table of Contents



Critical Accounting Policies and Estimates
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Revenue Recognition
 Revenue Recognition Revised and Updated Revenue Recognition. ASC Revenue Recognition-Multiple Element Arrangements.
 Contract Revenue.
 Royalty Revenue.
 Impairment of Long-Lived Assets
 Property Plant and Equipment  Overall
 Accounting for Costs Associated with Exit or Disposal Activities
 Exit or Disposal Cost Obligations
 Research and Development
  Income Taxes
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Employee Stock-Based Compensation
 Compensation  Stock Compensation
  Recent Accounting Pronouncements
  Results of Operations
 Three months ended September 30, 2010 and 2009
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Nine months ended September 30, 2010 and 2009
      Liquidity and Capital Resources
    Nine months ended September 30, 2010
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Nine months ended September 30, 2009
   Off-Balance Sheet Financings and Liabilities
  
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
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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 2009 Annual Report on Form 10-K and our other filings with the SEC, the
following risk factors should be considered carefully before you decide whether to buy, hold or
sell our common stock. Our business, financial condition, results of operations and stock price
could be materially adversely affected by any of these risks. Additional risks not presently known
to us or that we currently deem immaterial may also impair our business, financial conditions,
results of operations and stock price.
 The risk factors included herein include any material changes to and supersede the risk
factors associated with our business previously disclosed in Part I, Item 1A, Risk Factors of the
2009 Annual Report on Form 10-K . We have marked with a double asterisk (**) those risk factors that
reflect substantive changes from the risk factors included in the 2009 Annual Report on Form 10-K .
 Risks Related to Our Business
 We will need additional capital, and we may not be able to obtain it on a timely basis, or at
all.
  
    
    our ability to establish collaborative arrangements with others and the terms of those
arrangements;
    
    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 progress in the application of our delivery and formulation technologies, which may
require further refinement of these technologies;
    
    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.
  
    
    continue drug product development efforts;
    
    conduct preclinical testing and clinical trials;
    
    pursue additional applications for our existing delivery technologies;
    
    outsource the commercial-scale production of our products; and
    
    establish a sales and marketing force to commercialize certain of our proprietary products
if these products obtain regulatory approval.
  We are an early-stage company.
  We are dependent upon Zogenix and its partners to successfully market and sell the SUMAVEL
DosePro needle-free delivery system in order to realize value from this asset.
  The results of later stage clinical trials of our product candidates may not be as favorable
as earlier trials and that could result in additional costs and delay or prevent commercialization
of our products.
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If our clinical trials are delayed because of patient enrollment or other problems, we would
incur additional costs and delay the potential receipt of revenues.
  We are subject to extensive regulation, including the requirement of approval before any of
our product candidates can be marketed. We may not obtain regulatory approval for our product
candidates on a timely basis, or at all.
   Regulatory authorities may delay or not approve our product candidates even if the product
candidates meet safety and efficacy endpoints in clinical trials or the approvals may be too
limited for us to earn sufficient revenues.
  Even if we are granted initial FDA approval for any of our product candidates, we may not be
able to maintain such approval, which would reduce our revenues.
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Because our proprietary liposomal ciprofloxacin programs rely on the FDAs and European
Medicines Agencys grant of orphan drug designation for potential market exclusivity, the product
may not be able to obtain market exclusivity and could be barred from the market in the US for up
to seven years or European Union for up to ten years.
   * * We have limited manufacturing capacity and will have to depend on contract manufacturers
and collaborators; if they do not perform as expected, our revenues and customer relations will
suffer.
   Our dependence on future collaborators and other contracting parties may delay or terminate
certain of our programs, and any such delay or termination would harm our business prospects and
stock price.
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In order to market our proprietary products, we are likely to establish our own sales,
marketing and distribution capabilities. We have no experience in these areas, and if we have
problems establishing these capabilities, the commercialization of our products would be impaired.
  If any products that we or our future 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;
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
    
    the sufficiency of coverage and reimbursement of our product candidates by governmental and
other third-party payors; and
    
    the product labeling or product insert required by the FDA or regulatory authorities in
other countries.
  We depend upon our proprietary technologies, and we may not be able to protect our potential
competitive proprietary advantage.
   We may infringe on the intellectual property rights of others, and any litigation could force
us to stop developing or selling potential products and could be costly, divert management
attention and harm our business.
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We are in a highly competitive market, and our competitors have developed or may develop
alternative therapies for our target indications, which would limit the revenue potential of any
product we may develop.
  If we do not continue to attract and retain key employees, our product development efforts
will be delayed and impaired.
  If we market our products in other countries, we will be subject to different laws and we may
not be able to adapt to those laws, which could increase our costs while reducing our revenues.
  We may be exposed to product liability claims, which would hurt our reputation, market
position and operating results.
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If we cannot arrange for adequate third-party reimbursement for our products, our revenues
will suffer.
  Our use of hazardous materials could subject us to liabilities, fines and sanctions.
  If we are unable to effectively implement or maintain a system of internal control over
financial reporting, we may not be able to accurately or timely report our financial results and
our stock price could be adversely affected.
  Risks Related to Our Common Stock
 **Our stock price is likely to remain volatile.
  
    
    investor perception of us;
    
    market conditions relating to our segment of the industry or the securities markets in
general;
    
    announced results from our current and future clinical trials;
    
    investor perception of the value of the royalty stream from Zogenix;
    
    sales of our stock by certain large institutional shareholders;
    
    research analyst recommendations and our ability to meet or exceed quarterly performance
expectations of analysts or investors;
    
    failure to establish new collaborative relationships, specifically those related to our
inhaled liposomal ciprofloxacin program;
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
    
    fluctuations in our operating results;
    
    announcements of technological innovations or new commercial products by us or our
competitors;
    
    publicity regarding actual or potential developments relating to products under development
by us or our competitors;
    
    developments or disputes concerning patents or proprietary rights;
    
    delays in the development or approval of our product candidates;
    
    regulatory developments in both the United States and foreign countries;
    
    concern of the public or the medical community as to the safety or efficacy of our products,
or products deemed to have similar safety risk factors or other similar characteristics to our
products;
    
    future sales or expected sales of substantial amounts of common stock by shareholders;
    
    our ability to raise financing; and
    
    economic and other external factors.
  Our common stock is quoted on the OTC Bulletin Board, which may provide less liquidity for our
shareholders than the national exchanges.
  We have implemented certain anti-takeover provisions, which may make an acquisition less
likely or might result in costly litigation or proxy battles.
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We have never paid dividends on our capital stock, and we do not anticipate paying cash
dividends for at least the foreseeable future.
  **A small number of shareholders own a large percentage of our common stock and can influence
the outcome of matters submitted to our shareholders for approval.
  **You may experience significant dilution of your ownership interests because of the future
issuance of additional shares of our common stock.
  **Our common stock may be considered a penny stock.
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. (REMOVED AND RESERVED)
 
 Item 5. OTHER INFORMATION
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Item 6. EXHIBITS
 ExhibitNumber
    
    Description3.1 (1)
    
    Amended and Restated Articles of Incorporation of Aradigm Corporation, as amended to date.10.1 (2)
    
    Stock Purchase Agreement, dated as of July 30, 2010, by and among Aradigm Corporation and Novo Nordisk A/S.10.2 (3)
    
    Registration Rights Agreement, dated as of July 30, 2010, by and among Aradigm Corporation and Novo
Nordisk A/S.10.3 (4)
    
    First Amendment to Securities Purchase Agreement and Registration Rights Agreement, dated as of July 20,
2010, by and among Aradigm Corporation and the investors party thereto.31.1
    
    Certification of the Principal Executive Officer required by Rule 13a-14(a) under the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Principal Financial Officer required by Rule 13a-14(a) under the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Principal Executive Officer and Principal Financial Officer required by Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on September 20, 2010.(2)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on August 2, 2010.(3)
    
    Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on August
2, 2010.(4)
    
    Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on August
2, 2010. 34




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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)  35




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INDEX TO EXHIBITS
 ExhibitNumber
    
    Description3.1 (1)
    
    Amended and Restated Articles of Incorporation of Aradigm Corporation, as amended to date.10.1 (2)
    
    Stock Purchase Agreement, dated as of July 30, 2010, by and among Aradigm Corporation and Novo Nordisk A/S.10.2 (3)
    
    Registration Rights Agreement, dated as of July 30, 2010, by and among Aradigm Corporation and Novo
Nordisk A/S.10.3 (4)
    
    First Amendment to Securities Purchase Agreement and Registration Rights Agreement, dated as of July 20,
2010, by and among Aradigm Corporation and the investors party thereto.31.1
    
    Certification of the Principal Executive Officer required by Rule 13a-14(a) under the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Principal Financial Officer required by Rule 13a-14(a) under the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Principal Executive Officer and Principal Financial Officer required by Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on
September 20, 2010.(2)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on August
2, 2010.(3)
    
    Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on August
2, 2010.(4)
    
    Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on August
2, 2010. 36