##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 Or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to .
 Commission File Number 0-28402
 Aradigm Corporation
 (Exact name of registrant as specified in its charter)
 California
    
    94-3133088(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 3929 Point Eden Way
Hayward, CA 94545  (Address of principal executive offices including zip code)
 (510) 265-9000  (Registrants telephone number, including area code)
 þ o
  Large accelerated filer
o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company
þ
 o þ
  (Class)
    
    (Outstanding at October 31, 2008)Common
    
    55,076,979




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##### 



ARADIGM CORPORATION
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Balance Sheets at September 30, 2008 (unaudited) and December 31, 2007
    
    
    3Condensed Statements of Operations for the three and nine months ended September 30, 2008 and 2007 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)
    
    
    5Notes to Unaudited Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATION
    
    
    26Item 1A. Risk Factors
    
    
    26Item 6. Exhibits
    
    
    37Signatures
    
    
    38EX-10.33EX-31.1EX-31.2EX-32.1
  p 2 of 42




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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 31,2008
    
    
    2007(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    21,319
    
    
    $
    29,964Short-term investments
    
    
    
    
    
    
    10,546Receivables
    
    
    413
    
    
    
    500Restricted cash
    
    
    314
    
    
    
    152Prepaid and other current assets
    
    
    502
    
    
    
    971Total current assets
    
    
    22,548
    
    
    
    42,133Property and equipment, net
    
    
    5,238
    
    
    
    3,223Notes receivable from officers and employees
    
    
    34
    
    
    
    33Restricted cash
    
    
    
    
    
    
    153Other assets
    
    
    253
    
    
    
    271Total assets
    
    $
    28,073
    
    
    $
    45,813LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,122
    
    
    $
    1,658Accrued clinical and cost of other studies
    
    
    126
    
    
    
    789Accrued compensation
    
    
    1,029
    
    
    
    1,252Deferred revenue
    
    
    1,145
    
    
    
    880Facility lease exit obligation
    
    
    353
    
    
    
    376Other accrued liabilities
    
    
    722
    
    
    
    584Total current liabilities
    
    
    4,497
    
    
    
    5,539Deferred rent
    
    
    222
    
    
    
    283Facility lease exit obligation
    
    
    1,115
    
    
    
    1,373Other non-current liabilities
    
    
    86
    
    
    
    248Note payable and accrued interest to related party
    
    
    8,369
    
    
    
    8,071Total liabilities
    
    
    14,289
    
    
    
    15,514Commitments and contingenciesShareholders equity:Preferred stock, 2,950,000 shares authorized, none outstandingCommon stock, no par value; authorized shares: 150,000,000 at
September 30, 2008 and 100,000,000 at December 2007; issued
and outstanding shares: 54,923,839 at September 30, 2008 and
54,772,705 at December 31, 2007
    
    
    343,136
    
    
    
    342,355Accumulated other comprehensive income
    
    
    
    
    
    
    10Accumulated deficit
    
    
    (329,352
    )
    
    
    (312,066
    )Total shareholders equity
    
    
    13,784
    
    
    
    30,299Total liabilities and shareholders equity
    
    $
    28,073
    
    
    $
    45,813
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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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Contract revenues from related parties
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    23Contract revenues from unrelated parties
    
    
    197
    
    
    
    230
    
    
    
    251
    
    
    
    920Total revenues
    
    
    197
    
    
    
    230
    
    
    $
    251
    
    
    
    943Operating expenses:Research and development
    
    
    3,199
    
    
    
    3,899
    
    
    
    12,892
    
    
    
    11,147General and administrative
    
    
    1,615
    
    
    
    1,757
    
    
    
    4,989
    
    
    
    6,372Restructuring and lease exit activities
    
    
    19
    
    
    
    2,059
    
    
    
    61
    
    
    
    2,157Total operating expenses
    
    
    4,833
    
    
    
    7,715
    
    
    
    17,942
    
    
    
    19,676Loss from operations
    
    
    (4,636
    )
    
    
    (7,485
    )
    
    
    (17,691
    )
    
    
    (18,733
    )Interest income
    
    
    146
    
    
    
    684
    
    
    
    709
    
    
    
    2,020Interest expense
    
    
    (105
    )
    
    
    (101
    )
    
    
    (303
    )
    
    
    (293
    )Other income (expense), net
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    16Net loss
    
    $
    (4,596
    )
    
    $
    (6,902
    )
    
    $
    (17,286
    )
    
    $
    (16,990
    )Basic and diluted net loss per common share
    
    $
    (0.08
    )
    
    $
    (0.13
    )
    
    $
    (0.32
    )
    
    $
    (0.34
    )Shares used in computing basic and diluted net loss per common share
    
    
    54,165
    
    
    
    53,948
    
    
    
    54,111
    
    
    
    49,617
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ARADIGM CORPORATION
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (17,286
    )
    
    $
    (16,990
    )Adjustments to reconcile net loss to cash used in operating activities:Impairment loss on property and equipment
    
    
    
    
    
    
    180Amortization and accretion of investments
    
    
    1
    
    
    
    (26
    )Depreciation and amortization
    
    
    590
    
    
    
    589Stock-based compensation
    
    
    638
    
    
    
    1,097Loss on retirement and sale of property and equipment
    
    
    1
    
    
    
    10Facility lease exit cost
    
    
    
    
    
    
    1,459Changes in operating assets and liabilities:Receivables
    
    
    87
    
    
    
    341Prepaid and other current assets
    
    
    469
    
    
    
    190Restricted cash
    
    
    (9
    )
    
    
    (302
    )Other assets
    
    
    17
    
    
    
    168Accounts payable
    
    
    (563
    )
    
    
    (378
    )Accrued compensation
    
    
    (223
    )
    
    
    (175
    )Other accrued liabilities
    
    
    (495
    )
    
    
    894Deferred revenue
    
    
    265
    
    
    
    440Facility lease exit obligation
    
    
    (281
    )
    
    
    (235
    )Deferred rent
    
    
    (61
    )
    
    
    (114
    )Net cash used in operating activities
    
    
    (16,850
    )
    
    
    (12,852
    )Cash flows from investing activities:Capital expenditures
    
    
    (2,473
    )
    
    
    (946
    )Purchases of available-for-sale investments
    
    
    (1,235
    )
    
    
    (13,494
    )Proceeds from sales and maturities of available-for-sale investments
    
    
    11,770
    
    
    
    1,500Proceeds from sales and of property and equipment
    
    
    
    
    
    
    11Net cash provided by (used in) investing activities
    
    
    8,062
    
    
    
    (12,929
    )Cash flows from financing activities:Proceeds from public offering of common stock, net
    
    
    
    
    
    
    33,178Proceeds from issuance of common stock, net
    
    
    143
    
    
    
    103Advances to officers and employees on notes receivable
    
    
    
    
    
    
    (1
    )Net cash provided by financing activities
    
    
    143
    
    
    
    33,280Net increase (decrease) in cash and cash equivalents
    
    
    (8,645
    )
    
    
    7,499Cash and cash equivalents at beginning of period
    
    
    29,964
    
    
    
    27,013Cash and cash equivalents at end of period
    
    $
    21,319
    
    
    $
    34,512Supplemental disclosure of non-cash financing activities:Conversion of convertible preferred stock to common stock
    
    $
    
    
    
    $
    23,669Supplemental disclosure of non-cash investing activities:Purchases of property and equipment through accounts payable
    
    $
    605
    
    
    $
    307
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ARADIGM CORPORATION
 
 NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
 September 30, 2008
 1. Organization and Basis of Presentation
 Organization
  Basis of Presentation
   Reclassifications
  2. Summary of Significant Accounting Policies
 Use of Estimates
  Revenue Recognition
 Revenue Recognition
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Revenue Arrangements with Multiple Deliverables
 
 Accounting for Costs Associated with Exit or Disposal Activities
 Accounting for
Costs Associated with Exit or Disposal Activities ,
 Research and Development
  Income Taxes
 Accounting for Income Taxes
 Stock-Based Compensation Expense
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Recently Issued Accounting Pronouncements
 Effective Date of FASB Statement No. 157
 Accounting for Collaborative Arrangements
Related to the Development and Commercialization of Intellectual Property .
 3. Stock-Based Compensation
 Share Based Payment
 Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Research and development expense
    
    $
    66
    
    
    $
    183
    
    
    $
    427
    
    
    $
    438General and administrative expense
    
    
    90
    
    
    
    225
    
    
    
    211
    
    
    
    659Total stock-based compensation with adoption of SFAS 123R
    
    $
    156
    
    
    $
    408
    
    
    $
    638
    
    
    $
    1,097Total stock-based compensation without the adoption of SFAS 123R
    
    $
    2
    
    
    $
    14
    
    
    $
    67
    
    
    $
    84Impact on basic and diluted net loss per common share
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
  Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Employee stock option plans and employee stock purchase plan (ESPP)
    
    $
    97
    
    
    $
    376
    
    
    $
    423
    
    
    $
    959Restricted stock awards to employees
    
    
    57
    
    
    
    18
    
    
    
    148
    
    
    
    54Total employee stock-based compensation expense
    
    
    154
    
    
    
    394
    
    
    
    571
    
    
    
    1,013Stock options and restricted stock awards to consultants
    
    
    2
    
    
    
    14
    
    
    
    67
    
    
    
    84Total stock-based compensation
    
    $
    156
    
    
    $
    408
    
    
    $
    638
    
    
    $
    1,097
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Valuation Assumptions
  Three Months Ended September 30,
    
    Nine months ended September 30,2008
    
    2007
    
    2008
    
    2007Employee Stock OptionsDividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    67.1
    %
    
    
    72.8
    %
    
    
    67.7
    %
    
    
    81.2
    %Risk-free interest rate
    
    
    2.8
    %
    
    
    4.0
    %
    
    
    2.8
    %
    
    
    4.9
    %Expected life (years)
    
    
    4.0
    
    
    
    4.0
    
    
    
    3.8
    
    
    
    4.0Weighted-average fair
value of options
granted during the
periods
    
    $
    0.30
    
    
    $
    0.76
    
    
    $
    0.33
    
    
    $
    0.82ESPPDividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    59.9
    %
    
    
    82.7
    %
    
    
    59.9
    %
    
    
    82.7
    %Risk-free interest rate
    
    
    1.6
    %
    
    
    4.8
    %
    
    
    1.6
    %
    
    
    4.8
    %Expected life (years)
    
    
    0.8
    
    
    
    1.3
    
    
    
    0.8
    
    
    
    1.3Weighted-average fair
value of employee
stock purchases during
the periods
    
    $
    0.39
    
    
    $
    0.61
    
    
    $
    0.39
    
    
    $
    0.61
 Stock Option Activity
  Weighted-Weighted-
    
    averageNumber
    
    average
    
    remaining
    
    Aggregateof
    
    exercise
    
    contractual
    
    intrinsicshares
    
    price
    
    life in years
    
    valueOptions outstanding at December 31, 2007
    
    
    3,493,154
    
    
    $
    5.37
    
    
    
    8.34
    
    
    $
    167,000Options granted
    
    
    898,000
    
    
    
    0.80Options exercised
    
    
    (3,750
    )
    
    
    1.15Options cancelled
    
    
    (124,961
    )
    
    
    11.02Options outstanding at September 30, 2008
    
    
    4,262,443
    
    
    
    4.25
    
    
    
    7.93
    
    
    
    Options exercisable at September 30, 2008
    
    
    2,178,921
    
    
    $
    7.06
    
    
    
    6.87
    
    
    
    
 4. Net Loss Per Share
   September 30,2008
    
    2007Outstanding stock options
    
    
    4,262
    
    
    
    2,849Unvested restricted stock
    
    
    754
    
    
    
    50Warrants to purchase common stock
    
    
    417
    
    
    
    836Performance bonus stock award
    
    
    
    
    
    
    100
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5. Comprehensive Loss
  Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (4,596
    )
    
    $
    (6,902
    )
    
    $
    (17,286
    )
    
    $
    (16,990
    )Other comprehensive loss:Change in unrealized gain (loss) on available-for-sale securities
    
    
    (1
    )
    
    
    (8
    )
    
    
    (10
    )
    
    
    (12
    )Comprehensive loss
    
    $
    (4,597
    )
    
    $
    (6,910
    )
    
    $
    (17,296
    )
    
    $
    (17,002
    )
 6. Cash, Cash Equivalents and Short-Term Investments
  September 30,
    
    
    December 31,2008
    
    
    2007Cash and cash equivalents:Cash and money market funds
    
    $
    2,013
    
    
    $
    1,345Commercial paper
    
    
    13,522
    
    
    
    28,619U.S. government agency notes
    
    
    5,784
    
    
    
    $
    21,319
    
    
    $
    29,964Short-term investments:Corporate and U.S. government agency notes
    
    $
    
    
    
    $
    10,546
  Fair Value Measurements
 7. Related Parties
 CyDex
 ®
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Novo Nordisk
  All rights to the inhaled insulin program
 
    
    Supply the Company with insulin for use in continuing development of inhaled insulin.
    
    Identify in writing the patent claims that describe the insulin formulation used by Novo
Nordisk in its development of inhaled insulin so that the Company can make such formulation
(and permitted alternatives).
    
    Provide the Company full access to the data generated in the development of inhaled
insulin, including data from all the clinical trials, as well as relevant sections of
applicable regulating filings.
 Transfer of technology
 Intellectual Property transfer
   8. Revenue and Deferred Revenue
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2008
    
    
    2008Deferred revenue  beginning balance
    
    $
    1,168
    
    
    $
    880Amounts billed or received for collaborator funded programs
    
    
    174
    
    
    
    516Revenues recognized for collaborator funded programs
    
    
    (197
    )
    
    
    (251
    )Deferred revenue  September 30, 2008
    
    
    1,145
    
    
    
    1,145Less: non-current portion of deferred revenue
    
    
    
    
    
    
    Current portion of deferred revenue
    
    $
    1,145
    
    
    $
    1,145
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9. Property Tax Assessment
  10. Sublease Agreement and Lease Exit Liability
  Loss on sublease to Mendel in July 2007
    
    $
    2,063Accretion of imputed interest expense
    
    
    39Lease payments
    
    
    (353
    )Balance at December 31, 2007
    
    
    1,749Accretion of imputed interest expense
    
    
    22Lease payments
    
    
    (117
    )Balance at March 31, 2008
    
    
    1,654Accretion of imputed interest expense
    
    
    20Lease payments
    
    
    (109
    )Balance at June 30, 2008
    
    
    1,565Accretion of imputed interest expense
    
    
    20Lease payments
    
    
    (117
    )Balance at September 30, 2008
    
    $
    1,468
 11.  2006 Restructuring
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12. Tekmira License Agreement
  13. Feasibility Study
  14. Manufacturing and Supply Agreement
  15. Shareholders Equity
     p 13 of 42




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16. Subsequent Event
 TM
  
 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 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. Further, even if
our product candidates appear promising at various stages of development, our share price may
decrease such that we are unable to raise additional capital without dilution that may be
unacceptable to our shareholders.
 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
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TM TM
 Product Candidates
  p 15 of 42




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Product Candidate
    
    Indication
    
    Stage of DevelopmentProprietary Programs Under DevelopmentARD-3100 (Liposomal ciprofloxacin)
    
    Cystic Fibrosis
    
    Phase 2ARD-3150 (Liposomal ciprofloxacin)
    
    Bronchiectasis
    
    Phase 2ARD-1100 (Liposomal ciprofloxacin)
    
    Inhalation Anthrax
    
    PreclinicalARD-1600 (Nicotine)
    
    Tobacco Smoking Cessation
    
    Phase 1 CompletedCollaborative Programs Under DevelopmentARD-1550 (Inhaled treprostinil) (1)
    
    Pulmonary Arterial Hypertension
    
    Bridging studyARD-1500 (Inhaled liposomal treprostinil)
    
    Pulmonary Arterial Hypertension
    
    PreclinicalARD-1700 (combination products) (2)
    
    Asthma, COPD
    
    Preclinical
 
 (1)
    
    A bridging clinical study began in April 2008 to compare delivery with the AERx Essence® system
against the nebulizer used in the completed Phase 3 TRIUMPH (TReprostinil Sodium Inhalation Used
in the Management of Pulmonary Arterial Hypertension) study with our partner Lung Rx.(2)
    
    The Asthma and COPD program is being conducted pursuant to the Collaboration Agreement with CyDex.  Proprietary Programs Under Development:
 Liposomal Ciprofloxacin
  ARD-3100 and ARD 3150-Liposomal Ciprofloxacin for the Treatment of Infections in Cystic
Fibrosis and Non-CF Bronchiectasis Patients
   p 16 of 42




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Pseudomonas aeruginosa,
   Development
   Pseudomonas
aeruginosa Pseudomonas aeruginosa
  p 17 of 42




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Pseudomonas aeruginosa
 ARD-1100  Liposomal Ciprofloxacin for the Treatment of Inhalation Anthrax
   Development
 Francisella tularensis, F. tularensis
  Smoking Cessation Therapy
 ARD-1600 (Nicotine) Tobacco Smoking Cessation Therapy
  p 18 of 42




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Development
   Collaborative Programs Under Development:
 ARD-1550 and 1500  Treprostinil for the Treatment of Pulmonary Arterial Hypertension
    Development
   p 19 of 42




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ARD-1300  Hydroxychloroquine for the Treatment of Asthma
  Development
  ARD-1700 (combination products) and Other Potential Applications
   Combination Products for Asthma, Cystic Fibrosis and other Chronic Obstructive Pulmonary Disease
(COPD)
  Pain Management System
  Other Programs .
 Critical Accounting Policies and Estimates
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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
  Income Taxes
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Stock-Based Compensation Expense
   Results of Operations
 Revenue
 Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,
    
    
    Increase (Decrease)2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    Three Months
    
    
    Nine months($s in thousands)
    
    
    ($s in thousands)Revenues from related parties
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    23
    
    
    $
    
    
    
    
    
    %
    
    $
    (23
    )
    
    
    (100
    )%Revenues from unrelated parties
    
    
    197
    
    
    
    230
    
    
    
    251
    
    
    
    920
    
    
    
    (33
    )
    
    
    (14
    )%
    
    
    (669
    )
    
    
    (73
    )%Total revenues
    
    $
    197
    
    
    $
    230
    
    
    $
    251
    
    
    $
    943
    
    
    $
    (33
    )
    
    
    (14
    )%
    
    $
    (692
    )
    
    
    (73
    )%
  Research and Development Expenses
 Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,
    
    
    Increase (Decrease)2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    Three Months
    
    
    Nine months($s in thousands)
    
    
    ($s in thousands)Collaborative
    
    $
    430
    
    
    $
    (46
    )
    
    $
    1,777
    
    
    $
    759
    
    
    $
    476
    
    
    
    1,035
    %
    
    $
    1,018
    
    
    
    134
    %Self-initiated
    
    
    2,769
    
    
    
    3,945
    
    
    
    11,115
    
    
    
    10,388
    
    
    
    (1,176
    )
    
    
    (30
    )%
    
    
    727
    
    
    
    7
    %Total research and development expenses
    
    $
    3,199
    
    
    $
    3,899
    
    
    $
    12,892
    
    
    $
    11,147
    
    
    $
    (700
    )
    
    
    (18
    )%
    
    $
    1,745
    
    
    
    16
    %
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General and Administrative Expenses
 Three Months Ended
    
    Nine months EndedSeptember 30,
    
    September 30
    
    Increase (Decrease)2008
    
    2007
    
    2008
    
    2007
    
    Three Months
    
    Nine months(in thousands)
    
    ($s in thousands)General and administrative expenses
    
    $
    1,615
    
    
    $
    1,757
    
    
    $
    4,989
    
    
    $
    6,372
    
    
    $
    (142
    )
    
    
    (8
    )%
    
    $
    (1,383
    )
    
    
    (22
    )%
  Restructuring and lease exit activities
 Three Months Ended
    
    Nine months EndedSeptember 30,
    
    September 30
    
    Increase (Decrease)2008
    
    2007
    
    2008
    
    2007
    
    Three Months
    
    Nine months(in thousands)
    
    ($s in thousands)Restructuring and
lease exit
activities expense
    
    $
    19
    
    
    $
    2,059
    
    
    $
    61
    
    
    $
    2,157
    
    
    $
    (2,040
    )
    
    
    (99
    )%
    
    $
    (2,096
    )
    
    
    (97
    )%
  Interest income, interest expense and other income
 Three Months Ended
    
    Nine months EndedSeptember 30,
    
    September 30,
    
    Increase (Decrease)2008
    
    2007
    
    2008
    
    2007
    
    Three Months
    
    Nine months(in thousands)
    
    ($s in thousands)Interest income
    
    $
    146
    
    
    $
    684
    
    
    $
    709
    
    
    $
    2,020
    
    
    $
    (538
    )
    
    
    (79
    )%
    
    $
    (1,311
    )
    
    
    (65
    )%Interest expense
    
    
    (105
    )
    
    
    (101
    )
    
    
    (303
    )
    
    
    (293
    )
    
    
    4
    
    
    
    4
    %
    
    
    10
    
    
    
    3
    %Other income (expense), net
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    16
    
    
    
    (1
    )
    
    
    
    
    
    
    (17
    )
    
    
    (106
    )%
  p 23 of 42




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Liquidity and Capital Resources
     Off-Balance Sheet Financings and Liabilities
  Contractual Obligations
  2013 andTotal
    
    
    2008(1)
    
    
    2009-2010
    
    
    2011-2012
    
    
    later(In thousands)Operating lease obligations
    
    $
    17,065
    
    
    $
    601
    
    
    $
    4,532
    
    
    $
    4,060
    
    
    $
    7,872Promissory note (2)
    
    
    10,543
    
    
    
    
    
    
    
    
    
    
    
    3,514
    
    
    
    7,029Unconditional capital purchase obligations
    
    
    581
    
    
    
    581
    
    
    
    
    
    
    
    
    
    
    
    Unconditional purchase obligations
    
    
    1,737
    
    
    
    1,737
    
    
    
    
    
    
    
    
    
    
    
    Total contractual commitments
    
    
    29,926
    
    
    
    2,919
    
    
    
    4,532
    
    
    
    7,574
    
    
    
    14,901Less-sublease payments from Mendel (3)
    
    
    (3,881
    )
    
    
    (223
    )
    
    
    (1,828
    )
    
    
    (1,830
    )
    
    
    Total contractual commitments, net
    
    $
    26,045
    
    
    $
    2,696
    
    
    $
    2,704
    
    
    $
    5,744
    
    
    $
    14,901
 
 (1)
    
    For the three months ending December 31, 2008.(2)
    
    Represents total principal and interest payments due on the Novo Nordisk promissory note through the 2014 maturity
date. As of September 30, 2008, the balance outstanding on the note was $8.4 million. The note contains a number of
covenants that include restrictions in the event of changes to corporate structure, change in control and certain asset
transactions. p 24 of 42




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(3)
    
    Included to demonstrate the effect of the sublease with Mendel entered into in July 2007. Mendel has the option to
terminate the sublease early on September 1, 2012 for a termination fee of $225,000. In the event that the sublease is not
terminated early in 2012, $4.0 million in additional payments will be received through August 2016. Recently Issued Accounting Pronouncements
 Effective Date of FASB Statement No. 157
 Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property .
 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Market Risk Disclosures
   
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
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Changes in Internal Controls over Financial Reporting
  
 PART II: OTHER INFORMATION
 
 Item 1A. RISK FACTORS
 In addition to the other information contained in this Form 10-Q , and risk factors set forth in our
most recent SEC filings, the following risk factors should be considered carefully in evaluating
our business. Our business, financial condition, or results of operations could be materially
adversely affected by any of these risks. Additional risks not presently known to us or that we
currently deem immaterial may also impair our business and operations.
 The risk factors included herein include any material changes to and supersede the risk factors
associated with our business previously disclosed in Item 1A to Part I of our Annual Report on Form
10-K for the fiscal year ended December 31, 2007. We have marked with an asterisk (*) those risk
factors that reflect substantive changes from the risk factors included in our Annual Report Form
10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2007.
 Risks Related to Our Business
 We are an early-stage company.
  We changed our product development strategy, and if we do not successfully implement this
strategy our business and reputation will be damaged.
  * We will need additional capital, and we may not be able to obtain it.
  p 26 of 42




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
    
    our progress in the application of our delivery and formulation technologies, which may
require further refinement of these technologies;
    
    the number of product development programs we pursue and the pace of each program;
    
    our progress with formulation development;
    
    the scope, rate of progress, results and costs of preclinical testing and clinical trials;
    
    the time and costs associated with seeking regulatory approvals;
    
    our ability to outsource the manufacture of our product candidates and the costs of doing
so;
    
    the time and costs associated with establishing in-house resources to market and sell
certain of our products;
    
    our ability to establish and maintain collaborative arrangements with others and the terms
of those arrangements;
    
    the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims, and
    
    our need to acquire licenses, or other rights for our product candidates.
  We have a history of losses, we expect to incur losses for at least the foreseeable future, and we
may never attain or maintain profitability.
  
    
    expand drug product development efforts;
    
    conduct preclinical testing and clinical trials;
    
    pursue additional applications for our existing delivery technologies;
    
    outsource the commercial-scale production of our products; and
    
    establish a sales and marketing force to commercialize certain of our proprietary
products if these products obtain regulatory approval.
  p 27 of 42




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* Our dependence on collaborators and other contracting parties may delay or terminate certain of our programs, and any such
delay or termination would harm our business prospects and stock price.
    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.
  p 28 of 42




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We are subject to extensive regulation, including the requirement of approval before any of our
product candidates can be marketed. We may not obtain regulatory approval for our product
candidates on a timely basis, or at all.
   Regulatory authorities may not approve our product candidates even if the product candidates meet
safety and efficacy endpoints in clinical trials or the approvals may be too limited for us to earn
sufficient revenues.
  Even if we are granted initial FDA approval for any of our product candidates, we may not be able
to maintain such approval, which would reduce our revenues.
  p 29 of 42




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* Because two of our key proprietary programs, the ARD-3100 and ARD-3150 liposomal ciprofloxacin
programs, rely on the FDAs granting of orphan drug designation for potential market exclusivity,
the product may not be able to obtain market exclusivity and could be barred from the market for up
to seven years.
  We have limited manufacturing capacity and will have to depend on contract manufacturers and
collaborators; if they do not perform as expected, our revenues and customer relations will suffer.
     We rely on a small number of vendors and contract manufacturers to supply us with specialized
equipment, tools and components; if they do not perform as we need them to, we will not be able to
develop or commercialize products.
  p 30 of 42




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In order to market our proprietary products, we are likely to establish our own sales, marketing
and distribution capabilities. We have no experience in these areas, and if we have problems
establishing these capabilities, the commercialization of our products would be impaired.
  If any products that we or our collaborators may develop do not attain adequate market acceptance
by healthcare professionals and patients, our business prospects and results of operations will
suffer.
  
    
    the demonstration of efficacy and safety in clinical trials;
    
    the existence, prevalence and severity of any side effects;
    
    the potential or perceived advantages or disadvantages compared to alternative treatments;
    
    the timing of market entry relative to competitive treatments;
    
    the relative cost, convenience, product dependability and ease of administration;
    
    the strength of marketing and distribution support;
    
    the sufficiency of coverage and reimbursement of our product candidates by governmental and
other third-party payors; and
    
    the product labeling or product insert required by the FDA or regulatory authorities in
other countries.
  * We depend upon our proprietary technologies, and we may not be able to protect our potential
competitive proprietary advantage.
   p 31 of 42




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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.
  p 32 of 42




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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.
  p 33 of 42




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We may be exposed to product liability claims, which would hurt our reputation, market position and
operating results.
  If we cannot arrange for adequate third-party reimbursement for our products, our revenues will
suffer.
  Our use of hazardous materials could subject us to liabilities, fines and sanctions.
  If we are unable to effectively implement or maintain a system of internal control over financial
reporting, we may not be able to accurately or timely report our financial results and our stock
price could be adversely affected.
 .
 Risks Related to Our Common Stock
 * Our stock price is likely to remain volatile.
  p 34 of 42




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
    
    investor perception of us;
    
    market conditions relating to our segment of the industry or the securities markets in general;
    
    research analyst recommendations and our ability to meet or exceed quarterly performance
expectations of analysts or investors;
    
    failure to maintain existing or establish new collaborative relationships;
    
    fluctuations in our operating results;
    
    announcements of technological innovations or new commercial products by us or our
competitors;
    
    publicity regarding actual or potential developments relating to products under development
by us or our competitors;
    
    developments or disputes concerning patents or proprietary rights;
    
    delays in the development or approval of our product candidates;
    
    regulatory developments in both the United States and foreign countries;
    
    concern of the public or the medical community as to the safety or efficacy of our
products, or products deemed to have similar safety risk factors or other similar
characteristics to our products;
    
    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.
   p 35 of 42




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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.
  p 36 of 42




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Item 6. EXHIBITS
 ExhibitNumber
    
    Description3.1 (1)
    
    Amended and Restated Articles of Incorporation of the Company.10.29 (1) #
    
    Development and License Agreement, dated June 2, 1998, by and between the Company and Novo Nordisk A/S.10.30 (1) #
    
    First Amendment to Development and License Agreement, dated October 22, 2001, by and between the Company and Novo Nordisk A/S.10.31 (2) +
    
    2005 Equity Incentive Plan, as amended10.32 (2) +
    
    Employee Stock Purchase Plan, as amended10.33
    
    Amended and Restated Rights Agreement, dated as of September 5, 2008, by and between the Company and ComputerShare Trust Company, N.A.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.
 #
    
    The Commission has granted the Companys request for an extension to
the confidential treatment with respect to portions of this exhibit.+
    
    Represents a management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference to the Companys Form 10-Q filed on August 8, 2008.(2)
    
    Incorporated by reference to the Companys definitive proxy statement filed
on April 7, 2008.  
 *
    
    Other names and brands may be claimed as the property of others. p 37 of 42




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SIGNATURES
  ARADIGM CORPORATION
(Registrant)/s/ Igor GondaDr. Igor GondaPresident and Chief Executive Officer/s/ Nancy E. PecotaNancy E. PecotaChief Financial Officer
  p 38 of 42




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INDEX TO EXHIBITS
 ExhibitNumber
    
    Description3.1 (1)
    
    Amended and Restated Articles of Incorporation of the Company.10.29 (1) #
    
    Development and License Agreement, dated June 2, 1998, by and between the Company and Novo Nordisk A/S.10.30 (1) #
    
    First Amendment to Development and License Agreement, dated October 22, 2001, by and between the Company and Novo Nordisk A/S.10.31 (2) +
    
    2005 Equity Incentive Plan, as amended10.32 (2) +
    
    Employee Stock Purchase Plan, as amended10.33
    
    Amended and Restated Rights Agreement, dated as of September 5, 2008, by and between the Company and ComputerShare Trust Company, N.A.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.
 
 #
    
    The Commission has granted the Companys request for an extension to
the confidential treatment with respect to portions of this exhibit.+
    
    Represents a management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference to the Companys Form 10-Q filed on August 8, 2008.(2)
    
    Incorporated by reference to the Companys definitive proxy statement filed
on April 7, 2008. p 39 of 42