##### 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 June 30, 2009
 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
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ
  (Class)
    
    (Outstanding at July 31, 2009)Common
    
    100,726,171




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##### 



ARADIGM CORPORATION
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Balance Sheets at June 30, 2009 and December 31, 2008 (unaudited)
    
    
    3Condensed Statements of Operations for the three and six months ended June 30, 2009 and 2008 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the six months ended June 30, 2009 and 2008 (unaudited)
    
    
    5Notes to the Unaudited Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    34Item 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)
 June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,101
    
    
    $
    16,741Short-term investments
    
    
    8,665
    
    
    
    2,399Receivables
    
    
    230
    
    
    
    393Restricted cash
    
    
    225
    
    
    
    225Prepaid and other current assets
    
    
    630
    
    
    
    387Total current assets
    
    
    16,851
    
    
    
    20,145Property and equipment, net
    
    
    4,465
    
    
    
    5,093Notes receivable
    
    
    50
    
    
    
    34Other assets
    
    
    104
    
    
    
    247Total assets
    
    $
    21,470
    
    
    $
    25,519LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,463
    
    
    $
    739Accrued clinical and cost of other studies
    
    
    173
    
    
    
    94Accrued compensation
    
    
    1,190
    
    
    
    1,051Deferred revenue
    
    
    4,832
    
    
    
    Facility lease exit obligation
    
    
    254
    
    
    
    318Other accrued liabilities
    
    
    402
    
    
    
    630Total current liabilities
    
    
    8,314
    
    
    
    2,832Deferred rent
    
    
    152
    
    
    
    199Facility lease exit obligation, non-current
    
    
    967
    
    
    
    1,056Deferred revenue, non-current
    
    
    
    
    
    
    4,122Other non-current liabilities
    
    
    75
    
    
    
    82Note payable and accrued interest
    
    
    8,679
    
    
    
    8,472Total liabilities
    
    
    18,187
    
    
    
    16,763Commitments and contingenciesShareholders equity:Preferred stock, 2,950,000 shares authorized, none outstandingCommon stock, no par value; authorized shares: 150,000,000 at
June 30, 2009 and December 2008; issued and outstanding
shares: 100,726,171 at June 30, 2009 and 55,029,384 at
December 31, 2008
    
    
    347,774
    
    
    
    343,426Accumulated other comprehensive income (loss)
    
    
    (4
    )
    
    
    4Accumulated deficit
    
    
    (344,487
    )
    
    
    (334,674
    )Total shareholders equity
    
    
    3,283
    
    
    
    8,756Total liabilities and shareholders equity
    
    $
    21,470
    
    
    $
    25,519
  3




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ARADIGM CORPORATION

CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue:Contract revenue
    
    $
    
    
    
    $
    54
    
    
    $
    
    
    
    $
    54Operating expenses:Research and development
    
    
    2,927
    
    
    
    5,364
    
    
    
    6,653
    
    
    
    9,693General and administrative
    
    
    1,368
    
    
    
    1,825
    
    
    
    2,766
    
    
    
    3,374Restructuring and asset impairment
    
    
    205
    
    
    
    20
    
    
    
    223
    
    
    
    42Total operating expenses
    
    
    4,500
    
    
    
    7,209
    
    
    
    9,642
    
    
    
    13,109Loss from operations
    
    
    (4,500
    )
    
    
    (7,155
    )
    
    
    (9,642
    )
    
    
    (13,055
    )Interest income
    
    
    14
    
    
    
    202
    
    
    
    42
    
    
    
    563Interest expense
    
    
    (105
    )
    
    
    (100
    )
    
    
    (209
    )
    
    
    (198
    )Other income (expense), net
    
    
    (3
    )
    
    
    1
    
    
    
    (4
    )
    
    
    Net loss
    
    $
    (4,594
    )
    
    $
    (7,052
    )
    
    $
    (9,813
    )
    
    $
    (12,690
    )Basic and diluted net loss per common share
    
    $
    (0.05
    )
    
    $
    (0.13
    )
    
    $
    (0.12
    )
    
    $
    (0.23
    )Shares used in computing basic and diluted net loss per common share
    
    
    99,298
    
    
    
    54,519
    
    
    
    85,080
    
    
    
    54,083
  4




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ARADIGM CORPORATION


CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)  (Unaudited)
 Six Months EndedJune 30,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (9,813
    )
    
    $
    (12,690
    )Adjustments to reconcile net loss to cash used in operating activities:Impairment loss on property and equipment
    
    
    31
    
    
    
    Amortization and accretion of investments
    
    
    (5
    )
    
    
    (6
    )Depreciation
    
    
    600
    
    
    
    375Stock-based compensation
    
    
    384
    
    
    
    482Loss on retirement and sale of property and equipment
    
    
    3
    
    
    
    Facility lease exit cost
    
    
    158
    
    
    
    Changes in operating assets and liabilities:Receivables
    
    
    163
    
    
    
    282Prepaid and other current assets
    
    
    (243
    )
    
    
    459Restricted cash
    
    
    
    
    
    
    (6
    )Other assets
    
    
    27
    
    
    
    12Accounts payable
    
    
    724
    
    
    
    (267
    )Accrued compensation
    
    
    139
    
    
    
    3Other accrued liabilities
    
    
    51
    
    
    
    83Deferred rent
    
    
    (47
    )
    
    
    (37
    )Deferred revenue
    
    
    710
    
    
    
    288Facility lease exit obligation
    
    
    (195
    )
    
    
    (184
    )Net cash used in operating activities
    
    
    (7,313
    )
    
    
    (11,206
    )Cash flows from investing activities:Capital expenditures
    
    
    (6
    )
    
    
    (2,013
    )Purchases of available-for-sale investments
    
    
    (8,669
    )
    
    
    (1,235
    )Proceeds from sales and maturities of available-for-sale investments
    
    
    2,400
    
    
    
    10,547Notes receivable payments
    
    
    (16
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    (6,291
    )
    
    
    7,299Cash flows from financing activities:Proceeds from public offering of common stock, net
    
    
    3,927
    
    
    
    Proceeds from issuance of common stock, net
    
    
    37
    
    
    
    143Net cash provided by financing activities
    
    
    3,964
    
    
    
    143Net decrease in cash and cash equivalents
    
    
    (9,640
    )
    
    
    (3,764
    )Cash and cash equivalents at beginning of period
    
    
    16,741
    
    
    
    29,964Cash and cash equivalents at end of period
    
    $
    7,101
    
    
    $
    26,200
  5




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ARADIGM CORPORATION
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
June 30, 2009
 1. Organization and Basis of Presentation
 Organization
  Basis of Presentation
   Subsequent Events,
 2. Summary of Significant Accounting Policies
 Use of Estimates
  Cash and Cash Equivalents
  Investments
  6




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Property and Equipment
  Impairment of Long-Lived Assets
 Accounting
for the Impairment or Disposal of Long-Lived Assets
 Accounting for Costs Associated with Exit or Disposal Activities
 Accounting for Costs Associated with Exit or Disposal
Activities ,
 Revenue Recognition
 Revenue Recognition Revised and Updated Revenue Arrangements with Multiple Deliverables
  7




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Research and Development
  Stock-Based Compensation
 Share-Based Payment
 Income Taxes
   Net Loss Per Common Share
  Recently Issued Accounting Pronouncements
 The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles 
a replacement of FAS No 162 (SFAS 168).
 Subsequent Events
 8




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Recognition
and Presentation of Other-Than-Temporary Impairments (
 Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (
 Interim
Disclosures about Fair Value of Financial Instruments
 Effective Date of
FASB Statement No. 157 Fair
Value Measurements
 Business Combinations Business Combinations
 Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property
 9




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3. Cash, Cash Equivalents and Short-Term Investments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gain
    
    
    (Loss)
    
    
    Fair ValueJune 30, 2009Cash and cash equivalents
    
    $
    7,101
    
    
    $
    
    
    
    $
    
    
    
    $
    7,101Short-term investments:Commercial paper
    
    $
    2,948
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    2,947Certificates of deposit
    
    
    3,671
    
    
    
    

    
    
    
    (4
    )
    
    
    3,667U.S. Treasury and agencies
    
    
    2,050
    
    
    
    1
    
    
    
    
    
    
    
    2,051Total
    
    $
    8,669
    
    
    $
    1
    
    
    $
    (5
    )
    
    $
    8,665December 31, 2008Cash and cash equivalents
    
    $
    16,741
    
    
    $
    
    
    
    $
    
    
    
    $
    16,741Short-term investments:Commercial paper
    
    $
    2,395
    
    
    $
    4
    
    
    $
    
    
    
    $
    2,399U.S. Treasury and agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    2,395
    
    
    $
    4
    
    
    $
    
    
    
    $
    2,399
   4. Fair Value Measurements
 Fair Value Measurements.
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Fair Value Measurements at Reporting Date UsingQuotedPrices inActive
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantBalance
    
    
    Identical
    
    
    Observable
    
    
    UnobservableJune 30,
    
    
    Assets
    
    
    Inputs
    
    
    InputsDescription
    
    2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(in thousands)Cash and cash equivalents
    
    $
    7,101
    
    
    $
    6,699
    
    
    $
    402
    
    
    $
    Short-term investments
    
    
    8,665
    
    
    
    
    
    
    
    8,665
    
    
    
    Total
    
    $
    15,766
    
    
    $
    6,699
    
    
    $
    9,067
    
    
    $
    
  5. Sublease Agreement and Lease Exit Liability
     Six Months EndedJune 30, 2009Balance at January 1, 2009
    
    $
    1,374Accretion expense
    
    
    32Lease payments
    
    
    (227
    )Loss on sublease of additional space
    
    
    42Balance at June 30, 2009
    
    $
    1,221
  6. Shareholders Equity
  11




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7. Related Parties
 Novo Nordisk
   8. Collaborations and Licensing Agreements
 Lung Rx
 ®
   Zogenix
  12




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9. Stock-Based Compensation and Stock Options and Awards
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Costs and expenses:Research and development
    
    $
    44
    
    
    $
    162
    
    
    $
    160
    
    
    $
    361General and administrative
    
    
    127
    
    
    
    112
    
    
    
    224
    
    
    
    121Total stock based compensation expense
    
    $
    171
    
    
    $
    274
    
    
    $
    384
    
    
    $
    482
    Stock Option Plans: 1996 Equity Incentive Plan, 2005 Equity Incentive Plan and 1996
Non-Employee Directors Plan
  13




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Stock Option Activity
  Options OutstandingWeightedShares Available
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Averagefor Grant of
    
    Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    ExerciseOption or Award
    
    Shares
    
    Exercise Price Range
    
    PriceBalance at January 1, 2009
    
    
    3,987,599
    
    
    
    4,185,061
    
    
    $
    .39
    
    
    
    
    
    
    $
    120.63
    
    
    $
    4.09Options authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options granted
    
    
    (2,068,000
    )
    
    
    2,068,000
    
    
    $
    .16
    
    
    
    
    
    
    $
    .25
    
    
    $
    .22Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options cancelled
    
    
    875,747
    
    
    
    (875,747
    )
    
    $
    .25
    
    
    
    
    
    
    $
    112.50
    
    
    $
    3.40Restricted share awards granted
    
    
    (820,750
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted share awards cancelled
    
    
    93,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plan shares cancelled and not reauthorized
    
    
    (3,407
    )
    
    
    
    
    
    $
    41.25
    
    
    
    
    
    
    $
    42.19
    
    
    $
    41.78Balance at June 30, 2009
    
    
    2,064,814
    
    
    
    5,377,314
    
    
    $
    .16
    
    
    
    
    
    
    $
    120.63
    
    
    $
    2.75
   Number
    
    
    Weighted Averageof
    
    
    Grant Date FairShares
    
    
    ValueBalance at January 1, 2009
    
    
    703,535
    
    
    $
    1.60Restricted share awards issued
    
    
    820,750
    
    
    
    .19Restricted share awards vested
    
    
    (7,034
    )
    
    
    3.63Restricted share awards cancelled
    
    
    (93,625
    )
    
    
    1.05Balance at June 30, 2009
    
    
    1,423,626
    
    
    $
    .79
 10. Net Loss Per Share
   June 30,2009
    
    2008Outstanding stock options
    
    
    5,377
    
    
    
    3,664Unvested restricted stock
    
    
    1,423
    
    
    
    761Warrants to purchase common stock
    
    
    
    
    
    
    421Performance bonus stock award
    
    
    
    
    
    
    100
 14




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11. Comprehensive Loss
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (4,594
    )
    
    $
    (7,052
    )
    
    $
    (9,813
    )
    
    $
    (12,690
    )Other comprehensive loss:Change in unrealized gain (loss) on available-for-sale securities
    
    
    (4
    )
    
    
    (15
    )
    
    
    (8
    )
    
    
    (9
    )Comprehensive loss
    
    $
    (4,598
    )
    
    $
    (7,067
    )
    
    $
    (9,821
    )
    
    $
    (12,699
    )
 12. Subsequent Events
 Zogenix
   
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Cautionary Note Regarding Forward-Looking Statements
 This Quarterly Report on Form 10-Q contains forward-looking statements that are based on the
beliefs of management, as well as assumptions made by, and information currently available to,
management. Words such as anticipate, expect, intend, plan, believe, may, will,
could, continue, seek, estimate, or the negative thereof and similar expressions also
identify forward-looking statements. 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, but not limited to, those 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 elsewhere in the 2008 Form 10-K and our other filings with the SEC. Forward-looking statements
include our belief that our cash, cash equivalents and short-term investments as of June 30, 2009
and the anticipated Zogenix milestone payment will be sufficient to enable us meet our obligations
through at least the second quarter of 2010.
 These forward-looking statements and our business are subject to significant risks including,
but not limited to, our ability to obtain additional financing, our ability to implement our
product development strategy, the success of product development efforts, our dependence on
collaborators for certain programs, obtaining and enforcing patents important to our business,
clearing the lengthy and expensive regulatory approval process and possible competition from other
products. Even if product candidates appear promising at various stages of development, they may
not reach the market or may not be commercially successful for a number of reasons. Such reasons
include, but are not limited to, the possibilities that the potential products may be found to be
ineffective during clinical trials, may fail to receive necessary regulatory approvals, may be
difficult to manufacture on a large scale, are uneconomical to market, may be precluded from
commercialization by proprietary rights of third parties or may not gain acceptance from health
care professionals and patients.
 You are cautioned not to place undue reliance on the forward-looking statements contained
herein, which speak only as of the date of the filing of this Quarterly Report on Form 10-Q . We
undertake no obligation to update these forward-looking statements in light of
events or circumstances occurring after the date of the filing of this Quarterly Report on
Form 10-Q or to reflect the occurrence of unanticipated events.
 15




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Overview
    16




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Pseudomonas aeruginosa
 Pseudomonas
aeruginosa
 Pseudomonas Aeruginosa
    17




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Critical Accounting Policies and Estimates
  18




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Revenue Recognition
 Revenue Recognition Revised and Updated Revenue Arrangements with Multiple Deliverables
   Impairment of Long-Lived Assets
 Accounting for the Impairment or Disposal of Long-Lived
Assets
 Accounting for Costs Associated with Exit or Disposal Activities
 Accounting for Costs Associated with Exit or Disposal
Activities ,
 Research and Development
  19




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Income Taxes
   Stock Based Compensation
 Share-Based Payment
  Recent Accounting Pronouncements
  Results of Operations
 Revenue
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    


    Increase  (Decrease)2009
    
    2008
    
    2009
    
    2008
    
    Three Months
    
    Six Months(in thousands)
    ($s in thousands)Contract revenue
    
    $
    
    
    
    $
    54
    
    
    $
    
    
    
    $
    54
    
    
    $
    (54
    )
    
    
    (100
    )%
    
    $
    (54
    )
    
    
    (100
    )%
  20




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Research and Development Expenses
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    




    Increase  (Decrease)2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Three Months
    
    
    Six Months(in thousands)
    
    
    ($s in thousands)Collaborative
    
    $
    352
    
    
    $
    810
    
    
    $
    1,442
    
    
    $
    1,347
    
    
    $
    (458
    )
    
    
    (57
    )%
    
    $
    95
    
    
    
    7
    %Self-initiated
    
    
    2,575
    
    
    
    4,554
    
    
    
    5,211
    
    
    
    8,346
    
    
    
    (1,979
    )
    
    
    (43
    )%
    
    
    (3,135
    )
    
    
    (38
    )%Total research and development expenses
    
    $
    2,927
    
    
    $
    5,364
    
    
    $
    6,653
    
    
    $
    9,693
    
    
    $
    (2,437
    )
    
    
    (45
    )%
    
    $
    (3,040
    )
    
    
    (31
    )%
    General and Administrative Expenses
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    





    Increase  (Decrease)2009
    
    2008
    
    2009
    
    2008
    
    Three Months
    
    Six Months(in thousands)
    
    ($s in thousands)General and administrative expenses
    
    $
    1,368
    
    
    $
    1,825
    
    
    $
    2,766
    
    
    $
    3,374
    
    
    $
    (457
    )
    
    
    (25
    )%
    
    $
    (608
    )
    
    
    (18
    )%
   Restructuring and Asset Impairment
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    

    Increase  (Decrease)2009
    
    2008
    
    2009
    
    2008
    
    Three Months
    
    Six Months(in thousands)
    
    ($s in thousands)Restructuring and asset impairment
    
    $
    205
    
    
    $
    20
    
    
    $
    223
    
    
    $
    42
    
    
    $
    185
    
    
    
    925
    %
    
    $
    181
    
    
    
    431
    %
  21




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Interest income, Interest expense and Other Income
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    Increase  (Decrease)2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Three Months
    
    
    Six Months(in thousands)
    
    
    ($s in thousands)Interest income
    
    $
    14
    
    
    $
    202
    
    
    $
    42
    
    
    $
    563
    
    
    $
    (188
    )
    
    
    (93
    )%
    
    $
    (521
    )
    
    
    (93
    )%Interest expense
    
    
    (105
    )
    
    
    (100
    )
    
    
    (209
    )
    
    
    (198
    )
    
    
    (5
    )
    
    
    5
    %
    
    
    ( 11
    )
    
    
    (6
    )%Other income (expense), net
    
    
    (3
    )
    
    
    1
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )
    
    
    (400
    )%
    
    
    (4
    )
    
    
    (100
    )%Total interest income,
interest expense and
other income (expense)
    
    $
    (94
    )
    
    $
    103
    
    
    $
    ( 171
    )
    
    $
    365
    
    
    $
    (197
    )
    
    
    (191
    )%
    
    $
    (536
    )
    
    
    (147
    )%
  Liquidity and Capital Resources
     Off-Balance Sheet Financings and Liabilities
  
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Controls over Financial Reporting
  
 PART II: OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
 In addition to the other information contained in this Quarterly Report on Form 10-Q, and risk
factors set forth in the 2008 Form 10-K and our other filings with the SEC, the following risk
factors should be considered carefully before you decide whether to buy, hold or sell our common
stock. Our business, financial condition, results of operations and stock price could be materially
adversely affected by any of these risks. Additional risks not presently known to us or that we
currently deem immaterial may also impair our business, financial conditions, results of operations
and stock price.
 The risk factors included herein include any material changes to and supersede the risk factors
associated with our business previously disclosed in Part I, Item 1A, Risk Factors of the 2008
Form 10-K. We have marked with a double asterisk (**) those risk factors that reflect substantive
changes from the risk factors included in the 2008 Form 10-K.
 Risks Related to Our Business
 We are an early-stage company.
  We changed our product development strategy, and if we do not successfully implement this
strategy, our business and reputation will be damaged.
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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.
  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.
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
    
    expand drug product development efforts;
    
    conduct preclinical testing and clinical trials;
    
    pursue additional applications for our existing delivery technologies;
    
    outsource the commercial-scale production of our products; and
    
    establish a sales and marketing force to commercialize certain of our proprietary
products if these products obtain regulatory approval.
  ** Our dependence on collaborators and other contracting parties may delay or terminate certain of
our programs, and any such delay or termination would harm our business prospects and stock price.
     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 postpone the potential receipt of revenues.
  We are subject to extensive regulation, including the requirement of approval before any of our
product candidates can be marketed. We may not obtain regulatory approval for our product
candidates on a timely basis, or at all.
   Regulatory authorities may not approve our product candidates even if the product candidates meet
safety and efficacy endpoints in clinical trials or the approvals may be too limited for us to
earn sufficient revenues.
  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 USA 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.
 ®
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We rely on a small number of vendors and contract manufacturers to supply us with specialized
equipment, tools and components; if they do not perform as we need them to, we will not be able to
develop or commercialize products.
  In order to market our proprietary products, we are likely to establish our own sales, marketing
and distribution capabilities. We have no experience in these areas, and if we have problems
establishing these capabilities, the commercialization of our products would be impaired.
  If any products that we or our collaborators may develop do not attain adequate market acceptance
by healthcare professionals and patients, our business prospects and results of operations will
suffer.
  
    
    the demonstration of efficacy and safety in clinical trials;
    
    the existence, prevalence and severity of any side effects;
    
    the potential or perceived advantages or disadvantages compared to alternative
treatments;
    
    the timing of market entry relative to competitive treatments;
    
    the relative cost, convenience, product dependability and ease of administration;
    
    the strength of marketing and distribution support;
    
    the sufficiency of coverage and reimbursement of our product candidates by governmental
and other third-party payors; and
    
    the product labeling or product insert required by the FDA or regulatory authorities in
other countries.
  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.
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We are in a highly competitive market, and our competitors have developed or may develop
alternative therapies for our target indications, which would limit the revenue potential of any
product we may develop.
  If we do not continue to attract and retain key employees, our product development efforts will be
delayed and impaired.
  Acquisition of complementary businesses or technologies could result in operating difficulties and
harm our results of operations.
  
    
    diversion of our management from the development and commercialization of our pipeline
product candidates;
    
    difficulty in assimilating and efficiently using the acquired assets or personnel; and
    
    inability to retain key personnel.
  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 control over financial
reporting, we may not be able to accurately or timely report our financial results and our stock
price could be adversely affected.
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Risks Related to Our Common Stock
 Our stock price is likely to remain volatile.
  
    
    investor perception of us;
    
    market conditions relating to our segment of the industry or the securities markets in
general;
    
    sales of our stock by certain large institutional shareholders to meet liquidity concerns
during the current economic climate or bankruptcy of the institutions holding the shares of
investors in our company, resulting in large quantities of our shares being traded at
discount prices;
    
    research analyst recommendations and our ability to meet or exceed quarterly performance
expectations of analysts or investors;
    
    failure to maintain existing or establish new collaborative relationships;
    
    fluctuations in our operating results;
    
    announcements of technological innovations or new commercial products by us or our
competitors;
    
    publicity regarding actual or potential developments relating to products under
development by us or our competitors;
    
    developments or disputes concerning patents or proprietary rights;
    
    delays in the development or approval of our product candidates;
    
    regulatory developments in both the United States and foreign countries;
    
    concern of the public or the medical community as to the safety or efficacy of our
products, or products deemed to have similar safety risk factors or other similar
characteristics to our products;
    
    future sales or expected sales of substantial amounts of common stock by shareholders;
    
    our ability to raise financing; and
    
    economic and other external factors.
  Our common stock is quoted on the OTC Bulletin Board, which may provide less liquidity for our
shareholders than the national exchanges.
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We have implemented certain anti-takeover provisions, which may make an acquisition less likely or
might result in costly litigation or proxy battles.
    We have never paid dividends on our capital stock, and we do not anticipate paying cash dividends
for at least the foreseeable future.
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 At the Companys Annual Meeting of Shareholders held on May 15, 2009, three matters were
voted upon. A description of each matter and tabulation of the votes for each of the matters is
as follows:
 1.
    
    Four directors were elected to hold offices until the next annual meeting of
shareholders and until their successors are elected:
 Nominee
    
    For
    
    WithheldFrank H. Barker
    
    
    73,256,900
    
    
    
    4,338,855Igor Gonda
    
    
    73,263,565
    
    
    
    4,332,190John M. Siebert
    
    
    73,264,767
    
    
    
    4,330,998Virgil D. Thompson
    
    
    73,261,607
    
    
    
    4,334,148
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2.
    
    The Companys shareholders approved an amendment to Aradigms Employee Stock Purchase
Plan to increase the aggregate number of shares of common stock authorized for issuance
under such plan by 2,500,000 shares:
 For
    
    Against
    
    Abstain56,317,363
    
    3,235,200
    
    68,410
 3.
    
    The shareholders ratified the selection of Odenberg, Ullakko, Muranishi & Co. LLP as
the Companys independent registered public accounting firm for the fiscal year ending
December 31, 2009:
 For
    
    Against
    
    Abstain76,829,193
    
    706,210
    
    60,352
 
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
 ExhibitNumber
    
    Description10.32 + (1)
    
    Employee Stock Purchase Plan, as amended31.1
    
    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.(1)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed with the SEC on May 21, 2009.  
 *
    
    Other names and brands may be claimed as the property of others. 34




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SIGNATURES
  ARADIGM CORPORATION
(Registrant)/s/ Igor GondaDr. Igor GondaPresident and Chief Executive Officer  
(Principal Executive Officer) /s/ Nancy E. PecotaNancy E. PecotaVice President, Finance and Chief Financial Officer
(Principal Financial Officer)  35




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INDEX TO EXHIBITS
 ExhibitNumber
    
    Description10.32 + (1)
    
    Employee Stock Purchase Plan, as amended31.1
    
    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.(1)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed with the SEC on May 21, 2009. 36