<PAGE>

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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                             ---------------------

                                   FORM 10-Q

                             ---------------------

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

                                       OR

[ ]  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)

<Table>
<S>                                            <C>
                 CALIFORNIA                                     94-3133088
       (State or other jurisdiction of                       (I.R.S. Employer
       incorporation or organization)                       Identification No.)
</Table>

                              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)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]     No [ ]

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

<Table>
<S>                                            <C>
          COMMON STOCK, NO PAR VALUE                             29,536,383
                   (Class)                           (Outstanding at November 7, 2001)
</Table>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                              ARADIGM CORPORATION

                                     INDEX

<Table>
<Caption>
                                                                           PAGE
                                                                           NO.
                                                                           ----
<S>      <C> <C>                                                           <C>
                        PART I.  FINANCIAL INFORMATION
ITEM 1.  Financial Statements
         Statements of Operations (Unaudited)
             Three months ended September 30, 2001 and 2000..............    1
             Nine months ended September 30, 2001 and 2000...............    2
         Balance Sheets
             September 30, 2001 (Unaudited) and December 31, 2000........    3
         Statements of Cash Flows (Unaudited)
             Nine months ended September 30, 2001 and 2000...............    4
         Notes to Unaudited Financial Statements.........................    5
ITEM 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations...........................................    8
ITEM 3.  Quantitative and Qualitative Disclosure About Market Risk.......   12

                          PART II. OTHER INFORMATION
ITEM 2.  Changes in Securities and Use of Proceeds.......................   13
ITEM 6.  Exhibits and Reports on Form 8-K................................   13
Signature................................................................   14
</Table>

                                        i
<PAGE>

                         PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                              ARADIGM CORPORATION

                            STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<Table>
<Caption>
                                                              THREE MONTHS ENDED
                                                                SEPTEMBER 30,
                                                              ------------------
                                                                2001      2000
                                                              --------   -------
                                                                 (UNAUDITED)
<S>                                                           <C>        <C>
Contract revenues...........................................  $  6,889   $ 4,715
                                                              --------   -------
Expenses:
  Research and development..................................    14,890    11,974
  General and administrative................................     2,233     2,399
                                                              --------   -------
          Total expenses....................................    17,123    14,373
                                                              --------   -------
Loss from operations........................................   (10,234)   (9,658)
Interest income.............................................       167       936
Interest expense and other..................................      (216)     (413)
                                                              --------   -------
Net loss....................................................  $(10,283)  $(9,135)
                                                              ========   =======
Basic and diluted net loss per share........................  $  (0.48)  $ (0.51)
                                                              ========   =======
Shares used in computing basic and diluted net loss per
  share.....................................................    21,581    17,967
                                                              ========   =======
</Table>

                            See accompanying notes.

                                        1
<PAGE>

                              ARADIGM CORPORATION

                            STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<Table>
<Caption>
                                                               NINE MONTHS ENDED
                                                                 SEPTEMBER 30,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
                                                                  (UNAUDITED)
<S>                                                           <C>        <C>
Contract revenues...........................................  $ 22,096   $ 15,219
                                                              --------   --------
Expenses:
  Research and development..................................    44,349     34,379
  General and administrative................................     6,883      6,925
                                                              --------   --------
          Total expenses....................................    51,232     41,304
                                                              --------   --------
Loss from operations........................................   (29,136)   (26,085)
Interest income.............................................     1,134      2,300
Interest expense and other..................................      (841)    (1,101)
                                                              --------   --------
Loss before extraordinary gain..............................   (28,843)   (24,886)
Extraordinary gain..........................................     6,675         --
                                                              --------   --------
Net loss....................................................  $(22,168)  $(24,886)
                                                              ========   ========
Basic and diluted net loss per share:
Loss before extraordinary gain..............................  $  (1.45)  $  (1.47)
Extraordinary gain..........................................      0.34         --
                                                              --------   --------
Net loss per share..........................................  $  (1.11)  $  (1.47)
                                                              ========   ========
Shares used in computing basic and diluted net loss per
  share.....................................................    19,929     16,878
                                                              ========   ========
</Table>

                            See accompanying notes.

                                        2
<PAGE>

                              ARADIGM CORPORATION

                                 BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARES DATA)

<Table>
<Caption>
                                                              SEPTEMBER 30,   DECEMBER 31,
                                                                  2001            2000
                                                              -------------   ------------
                                                               (UNAUDITED)
<S>                                                           <C>             <C>
                                          ASSETS
Current assets:
  Cash and cash equivalents.................................    $  18,046      $  20,732
  Short-term investments....................................        2,965         23,649
  Receivables...............................................          334             70
  Prepaid expenses and other current assets.................        1,576            735
                                                                ---------      ---------
          Total current assets..............................       22,921         45,186
Property and equipment, net.................................       51,905         25,323
Notes receivable from officers and employees................          105            119
Other assets................................................          595            743
                                                                ---------      ---------
          Total assets......................................    $  75,526      $  71,371
                                                                =========      =========

                           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................    $   4,362      $   4,894
  Accrued clinical and cost of other studies................        1,210            517
  Accrued compensation......................................        3,019          1,246
  Deferred revenue..........................................       10,452          6,622
  Current portion of capital lease obligations..............        3,314          3,099
  Other accrued liabilities.................................          646          2,234
  Notes payable.............................................           --          6,712
                                                                ---------      ---------
          Total current liabilities.........................       23,003         25,324
Noncurrent portion of deferred revenue......................        2,182          2,032
Capital lease obligations, less current portion.............        3,705          6,230
Commitments and contingencies
Shareholders' equity:
  Preferred stock, no par value; 5,000,000 shares
     authorized; no shares issued or outstanding............           --             --
  Common stock, no par value; 40,000,000 shares authorized;
     issued and outstanding shares: September 30,
     2001 -- 23,870,660; December 31, 2000 -- 18,266,955....      179,345        148,573
Shareholder notes receivable................................           (1)          (131)
Deferred compensation.......................................          (95)          (216)
Accumulated deficit.........................................     (132,613)      (110,441)
                                                                ---------      ---------
          Total shareholders' equity........................       46,636         37,785
                                                                ---------      ---------
          Total liabilities and shareholders' equity........    $  75,526      $  71,371
                                                                =========      =========
</Table>

                            See accompanying notes.

                                        3
<PAGE>

                              ARADIGM CORPORATION

                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                               NINE MONTHS ENDED
                                                                 SEPTEMBER 30,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
                                                                  (UNAUDITED)
<S>                                                           <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss..................................................  $(22,168)  $(24,886)
  Adjustments to reconcile net loss to cash used in
    operating activities:
    Depreciation and amortization...........................     3,280      2,289
    Extraordinary gain related to Genentech note............    (6,675)        --
    Issuance of common stock for services...................        48         --
    Amortization of deferred compensation...................       121        122
    Changes in operating assets and liabilities:
      Receivables...........................................      (264)     2,125
      Prepaid expenses and other current assets.............      (841)       186
      Other assets..........................................       148         --
      Accounts payable......................................      (532)      (587)
      Accrued compensation..................................     1,773      1,787
      Other accrued liabilities.............................      (932)     1,888
      Deferred revenue......................................     3,980     (3,854)
                                                              --------   --------
Net cash used in operating activities.......................   (22,062)   (20,930)
                                                              --------   --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures......................................   (29,863)    (4,800)
  Purchase of available-for-sale investments................    (5,733)   (10,191)
  Proceeds from maturities of available-for-sale
    investments.............................................    26,414     22,731
                                                              --------   --------
Net cash provided by (used in) investing activities.........    (9,182)     7,740
                                                              --------   --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock, net...............    30,724     45,473
  Proceeds from notes payable...............................        --      2,756
  Proceeds from repayments of shareholder notes.............       130         11
  Proceeds from notes receivable from officers..............        14         25
  Proceeds from equipment loans.............................        --      1,275
  Payments on lease obligations and equipment loans.........    (2,310)    (1,616)
                                                              --------   --------
Net cash provided by financing activities...................    28,558     47,924
                                                              --------   --------
Net (decrease) increase in cash and cash equivalents........    (2,686)    34,734
Cash and cash equivalents at beginning of period............    20,732      9,347
                                                              --------   --------
Cash and cash equivalents at end of period..................  $ 18,046   $ 44,081
                                                              ========   ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for interest....................................  $    714   $    652
                                                              ========   ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
  Issuance of warrants for services.........................  $     --   $    249
                                                              ========   ========
</Table>

                            See accompanying notes.

                                        4
<PAGE>

                              ARADIGM CORPORATION

                  NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2001

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  ORGANIZATION AND BASIS OF PRESENTATION

     Aradigm Corporation (the "Company") is a California corporation. Since
inception, Aradigm has been engaged in the development and commercialization of
non-invasive pulmonary drug delivery systems. Through June 1997, the Company was
in the development stage. The Company does not anticipate receiving any revenue
from the sale of products in the upcoming year. Principal activities to date
have included obtaining financing, recruiting management and technical
personnel, securing operating facilities, conducting research and development,
and expanding commercial production capabilities. These factors indicate that
the Company's ability to continue its research, development and
commercialization activities is dependent upon the ability of management to
obtain additional financing as required.

     The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management, the financial statements reflect all
adjustments, which are of a normal recurring nature, necessary for a fair
presentation. The accompanying financial statements should be read in
conjunction with the financial statements and notes thereto included with the
Company's Annual Report on Form 10-K, as amended. The results of the Company's
operations for the interim periods presented are not necessarily indicative of
operating results for the full fiscal year or any future interim period.

     The Balance Sheet at December 31, 2000 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

  NET LOSS PER SHARE

     Historical net loss per share has been calculated under Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Basic net loss per
share has been computed using the weighted average number of shares of common
stock outstanding less the weighted average number of shares subject to
repurchase during the period. No diluted loss per share information has been
presented in the accompanying statements of operations since potential common
shares from stock options and warrants are antidilutive.

2.  SHAREHOLDERS' EQUITY

     In January 2001, the Company raised $5 million through the sale of 339,961
common shares at a price of $14.71 per share to GlaxoSmithKline plc
("GlaxoSmithKline"). The sale was made pursuant to the exercise of a put option
by the Company under the terms of the collaboration agreement with
GlaxoSmithKline.

     In February 2001, the Company raised $5 million through the sale of 436,110
shares of common stock at an average price of $11.46 per share to Acqua
Wellington North American Equities Fund, Ltd. ("Acqua") under the terms of an
equity sales agreement signed in November 2000 (the "Acqua Agreement").

     In June 2001, the Company raised $5 million through the sale of 708,216
shares of common stock at a price of $7.06 per share to Novo Nordisk A/S ("Novo
Nordisk"). The sale was made pursuant to the exercise of a put option by the
Company under the terms of the collaboration agreement with Novo Nordisk.

     In July 2001, the Company raised $539,000 through the sale of 92,407 shares
of common stock at an average price of $5.84 per share to Acqua under the terms
of the Acqua Agreement.

     In August 2001, the Company completed a private placement of shares of
common stock for gross proceeds of $14.6 million to a group of institutional
investors. Under the terms of the private placement, the

                                        5
<PAGE>
                              ARADIGM CORPORATION

           NOTES TO THE UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)

Company sold 3,639,316 shares of common stock at a price of $4.00 per share. The
company also issued warrants to the investors to purchase 363,929 shares of
common stock at an exercise price of $5.41 per share or a 15% premium to the
Nasdaq National Market price on the closing date. The Company valued the
warrants using the Black-Scholes option pricing model and recorded approximately
$978,969 as issuance costs related to the private placement. These warrants are
exercisable through August 21, 2005.

3.  CONTINGENCIES

     In June 1998, Eli Lilly and Company ("Lilly") filed a complaint against the
Company in the United States District Court for the Southern District of
Indiana. The complaint made various allegations against the Company, arising
from the Company's decision to enter into an exclusive collaboration with Novo
Nordisk with respect to the development and commercialization of a pulmonary
delivery system for insulin and insulin analogs. The Company has sponsored
various studies of the pulmonary delivery of insulin and insulin analogs using
materials supplied by Lilly under a series of agreements dating from January
1996. The Company and Lilly had also conducted negotiations concerning a
long-term supply agreement under which Lilly would supply bulk insulin to the
Company for commercialization in the Company's AERx Diabetes Management System,
and a separate agreement under which the Company would license certain
intellectual property to Lilly. These negotiations were terminated after the
Company proceeded with its agreement with Novo Nordisk. The complaint sought a
declaration that Lilly scientists were co-inventors of a patent application
filed by the Company relating to pulmonary delivery of an insulin analog or, in
the alternative, enforcement of an alleged agreement to grant Lilly a
nonexclusive license under such patent application. The complaint also contained
allegations of misappropriation of trade secrets, breach of fiduciary duty,
conversion and unjust enrichment and seeks unspecified damages and injunctive
relief. The Company filed an answer denying all material allegations of the
complaint and a motion for summary judgment directed against all claims in
Lilly's complaint. The Court has issued two written rulings on the Company's
motion substantially limiting the claims against the Company. Specifically, the
Court granted the Company's motion as to Lilly's claim to enforce an alleged
license agreement, for misappropriation of trade secrets, breach of fiduciary
duty, conversion, estoppel and breach of contract (in part) and dismissed those
claims from the case. The Court denied the Company's motion as to Lilly's claims
for declaratory relief, unjust enrichment and breach of contract (in part),
based on factual disputes between the parties, and those issues remain to be
resolved. The Company recently filed a motion asking the Court to reconsider
summary judgment on the inventorship and unjust enrichment claims, based on
evidence recently produced by Lilly. Trial was set for November 2001, but has
been continued due to a conflict on the Court's calendar. The risks to the
Company should Lilly prevail in this case are that Lilly would be given rights
of an owner, along with the Company, on one or more Aradigm patents relating to
pulmonary delivery of insulin analogs and/or that Lilly would be awarded damages
on its remaining claims for breach of contract and unjust enrichment. Management
believes that it has meritorious defenses against each of Eli Lilly's remaining
claims and that this litigation will not have a material adverse effect on the
Company's financial position, results of operations or cash flows. However,
there can be no assurance that the Company will prevail in this case.

4.  RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), which establishes accounting
and reporting standards for derivative instruments and hedging activities. FAS
133 requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value. In
June 1999, the FASB issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133", which amended FAS 133 by deferring the effective date to the
fiscal year beginning after June 30, 2000. In June 2000, the FASB issued
Statement No. 138, "Accounting for Certain Derivative

                                        6
<PAGE>
                              ARADIGM CORPORATION

           NOTES TO THE UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)

Instruments and Certain Hedging Activities -- an Amendment to FASB Statement No.
133", which amended FAS 133 with respect to four specific issues. The Company
adopted FAS 133, as amended, as of January 1, 2001. The adoption of this
statement had no material effect on the financial position, results of
operations or cash flows.

     In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Standards (SFAS) No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets". The new rules require business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and goodwill acquired after this date will no
longer be amortized, but will be subject to annual impairment tests. All other
intangible assets will continue to be amortized over their estimated useful
lives. Companies are required to adopt SFAS No. 142 for fiscal years beginning
after December 31, 2001. The Company did not complete any business combinations
through the nine months ended September 30, 2001, as a result these standards
did not have a material impact on its financial position or operating results.

     In August 2001, the FASB issued FASB Statement No. 144 (FAS 144),
"Accounting for the Impairment or Disposal of Long-lived Assets". FAS 144
supercedes FASB Statement No. 121, Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that Opinion).
This Statement also amends ARB No. 51, Consolidated Financial Statements, to
eliminate the exception to consolidation of a subsidiary for which control is
likely to be temporary. Companies are required to adopt FAS 144 for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, but early adoption is encouraged. The Company has not yet determined the
impact this standard will have on its financial position and results of
operations, although it does not anticipate that the adoption of this standard
will have a material impact on the Company's financial position or results of
operations.

5.  SUBSEQUENT EVENT

     In October 2001, the Company raised $20 million through the sale of
5,665,723 shares of common stock at $3.53 per share to Novo Nordisk
Pharmaceuticals, Inc. Under the terms of the investment, Novo Nordisk will
retain all of the Company's common stock held by it for at least two years from
the date of the agreement, subject to certain exceptions.

                                        7
<PAGE>

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 the Company's Form 10-K filed with the
Securities and Exchange Commission on March 30, 2001, as amended.

     The business is subject to significant risks including, but not limited to,
the success of research and development efforts, dependence on corporate
partners for marketing and distribution resources, obtaining and enforcing
patents important to the business, clearing the lengthy and expensive regulatory
process and possible competition from other products. Even if the products
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, fail to receive necessary
regulatory approvals, are difficult to manufacture on a large scale, are
uneconomical to market, are precluded from commercialization by proprietary
rights of third parties or may not gain acceptance from health care
professionals and patients. Readers are cautioned not to place undue reliance on
the forward-looking statements contained herein. We undertake no obligation to
publicly release the results of any revision to these forward-looking statements
which may be made to reflect events or circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.

OVERVIEW

     Since our inception in 1991, we have been engaged in the development of
pulmonary drug delivery systems. As of September 30, 2001, we had an accumulated
deficit of $132.6 million. We have not been profitable since inception and
expect to incur additional operating losses over the next several years as
research and development efforts, preclinical and clinical testing activities
and manufacturing scale-up efforts expand and as we plan and build our
late-stage clinical and early commercial production capabilities. To date, we
have not had any material product sales and do not anticipate receiving any
revenue from the sale of products during 2001. The sources of working capital
have been equity financings, equipment lease financings, contract revenues and
interest earned on investments.

     We have performed initial feasibility work on a number of compounds and
have been compensated for expenses incurred while performing this work in
several cases pursuant to feasibility study agreements with third parties. Once
feasibility is demonstrated with respect to a potential product, we seek to
enter into development contracts with pharmaceutical corporate partners. We
currently have such agreements pursuant to which we are developing pulmonary
delivery systems with Novo Nordisk A/S ("Novo Nordisk"), to manage diabetes
using insulin and other blood glucose regulating compounds, and with
GlaxoSmithKline plc ("GlaxoSmithKline"), to manage acute and breakthrough pain
using opioid analgesics.

     The collaborative agreement with Novo Nordisk provides for reimbursement of
research and development expenses as well as additional payments to us as we
achieve certain significant milestones. We also expect to receive royalties from
this development partner based on revenues from sales of product and to receive
revenue from the manufacturing of unit dose packets and hand-held devices. We
recognize revenues under the terms of our collaborative agreement as the
research and development expenses are incurred, to the extent they are
reimbursable. During 2001, this partner-funded program has contributed a
majority of our total contract revenues.

     During December 2000, GlaxoSmithKline and we amended the product
development and commercialization agreement whereby we assumed full control and
responsibility for conducting and financing the remainder of all development
activities. Under the amendment, unless we have terminated the agreement,
GlaxoSmithKline can restore its rights to participate in development and
commercialization of the product under the amended agreement upon payment of a
restoration fee to us. We anticipate that GlaxoSmithKline will review its
restoration election upon the delivery of Phase 2b trial results, which are
expected to be available before year-end, but there can be no assurance that
GlaxoSmithKline will elect to restore its rights.

                                        8
<PAGE>

If we elect to terminate the agreement and continue or intend to continue any
development activities, either alone or in collaboration with a third party, we
will be obligated to pay an exit fee to GlaxoSmithKline. This development
program is currently being funded through existing working capital.

     In February 2001, we announced that we had mutually agreed with Genentech
to discontinue the development of rhDNase using our proprietary AERx system. We
also entered into a new agreement allowing Genentech to evaluate the feasibility
of using the AERx Pulmonary Drug Delivery System for pulmonary delivery of other
Genentech compounds. Under the terms of the agreement, Genentech did not require
us to repay the loan of funds required to conduct product development to date
under the discontinued program. Forgiveness of the loan and accrued interest
resulted in an extraordinary gain during the first quarter of 2001 of
approximately $6.7 million. During 2001, we reimbursed Genentech $773,000 for
unspent project prepayments.

     In addition to the diabetes and pain management programs, we have four
additional partner-funded programs and a gene therapy effort, which is funded
through the National Institutes of Health. It is our policy not to disclose the
partner or the drug until we have entered into long-term development agreements
with a partner.

RESULTS OF OPERATIONS

  THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

     Contract Revenues:  Contract revenues for the three months ended September
30, 2001 increased to $6.9 million from $4.7 million for the same period in
2000. The revenue increase results primarily from an increase in partner-funded
project development revenue from Novo Nordisk, which was $6.1 million for the
three months ended September 30, 2001 and $4.0 million for the same period in
2000. Costs associated with collaborative agreements approximate contract
revenue as these expenses are incurred under the program agreements. These costs
are included in research and development expenses.

     Research and Development Expenses:  Research and development expenses for
the three months ended September 30, 2001 increased to $14.9 million from $12.0
million for the same period in 2000. The increase relates primarily to the
hiring of additional scientific personnel and the expansion of other development
efforts to support the ongoing program with Novo Nordisk. Expenses for other
funded and unfunded development areas including manufacturing scale-up efforts
remained relatively unchanged from the same period in 2000. Research and
development expenses associated with collaborative agreements approximate
contract revenue as these expenses are incurred under the program agreements.

     These expenses represent proprietary research expenses as well as costs
related to contract revenues and include salaries and benefits of scientific and
development personnel, laboratory supplies, consulting services and expenses
associated with the development of manufacturing processes. We expect research
and development spending to increase over the next few years as we continue to
expand our development activities to support current and potential future
collaborations and initiate commercial manufacturing of the AERx systems. The
increase in research and development expenditures cannot be predicted accurately
as it depends in part upon future success in pursuing existing development
collaborations, as well as obtaining new collaborative agreements.

     General and Administrative Expenses:  General and administrative expenses
for the three months ended September 30, 2001 decreased to $2.2 million from
$2.4 million for the same period in 2000. The decrease resulted primarily from
lower overall operating expenses in this area.

     Interest Income:  Interest income for the three months ended September 30,
2001 decreased to $167,000 from $936,000 for the same period in 2000. The
decrease is due to income being earned on lower cash and investment balances.

     Interest Expense and Other:  Interest expense for the three months ended
September 30, 2001 decreased to $216,000 from $413,000 for the same period in
2000. The decrease is primarily due to the cancellation of loans made by
Genentech in connection with product development that had been funded by them.

                                        9
<PAGE>

     Net Loss:  Net loss for the three months ended September 30, 2001 increased
to $10.3 million from $9.1 million for the same period in 2000. The increase in
net loss is primarily due to an increase in net loss from operations, which was
$10.2 million for the three months ended September 30, 2001 and $9.7 million for
the same prior year period and a decrease in interest income, which was $167,000
for the three months ended September 30, 2001 and $936,000 for the same prior
year period.

  NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

     Contract Revenues:  Contract revenues for the nine months ended September
30, 2001 increased to $22.1 million from $15.2 million for the same period in
2000. The revenue increase results primarily from an increase in partner-funded
project development revenue from Novo Nordisk, which was $18.5 million for the
nine months ended September 30, 2001 and $11.1 million for the same period in
2000. Revenue also increased in other partner-funded programs, which was $2.1
million for the nine months ended September 30, 2001 and $1.3 million for the
same period in 2000. These increases were offset by a reduction in
partner-funded project development revenue from GlaxoSmithKline, which was $1.5
million for the nine months ended September 30, 2001 and $2.8 million for the
same period in 2000. Costs associated with collaborative agreements approximate
contract revenue as these expenses are incurred under the program agreements.
These costs are included in research and development expenses.

     Research and Development Expenses:  Research and development expenses for
the nine months ended September 30, 2001 increased to $44.3 million from $34.4
million for the same period in 2000. The increase relates primarily from the
hiring of additional scientific personnel and the expansion of research and
development efforts to support the ongoing program with Novo Nordisk and an
expansion of research and development efforts in other funded and unfunded
development areas including manufacturing scale-up efforts. Research and
development expenses associated with collaborative agreements approximate
contract revenue as these expenses are incurred under the program agreements.

     General and Administrative Expenses:  General and administrative expenses
for the nine months ended September 30, 2001 remained relatively unchanged from
the same period in 2000.

     Interest Income:  Interest income for the nine months ended September 30,
2001 decreased to $1.1 million from $2.3 million for the same period in 2000.
The decrease is due to interest income being earned on lower cash and investment
balances.

     Interest Expense and Other:  Interest expense for the nine months ended
September 30, 2001 decreased to $841,000 from $1.1 million for the same period
in 2000. The decrease is primarily due to the cancellation of loans made by
Genentech in connections with product development that had been funded by them.

     Extraordinary Gain:  For the nine months ended September 30, 2001, we
reported an extraordinary gain of approximately $6.7 million. The extraordinary
gain results from the cancellation of outstanding loans and accrued interest
required to conduct product development with the program that had been funded by
Genentech.

     Net Loss:  Net loss for the nine months ended September 30, 2001 decreased
to $22.2 million from $24.9 million for the same period in 2000. The decrease in
net loss is primarily due to the $6.7 million extraordinary gain recorded during
2001 resulting from the cancellation of outstanding loans and accrued interest
required to conduct product development that had been funded by Genentech offset
by an by an increase in net loss from operations, which was $29.1 million for
the nine months ended September 30, 2001 and $26.1 million for the same prior
year period and a decrease in interest income, which was $1.1 million for the
nine months ended September 30, 2001 and $2.3 million for the same prior year
period.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has financed its operations since inception primarily through
private placements and public offerings of capital stock, proceeds from
equipment lease financing, contract revenues and interest earned on investments.
As of September 30, 2001, we have received approximately $179.4 million in net
proceeds from

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sales of capital stock. As of September 30, 2001, we had cash, cash equivalents
and short-term investments of approximately $21 million.

     In January 2001, we raised $5 million through the sale of 339,961 common
shares at a price of $14.71 per share to GlaxoSmithKline. The sale was made
pursuant to the exercise of a put option by us under the terms of the
collaboration agreement with GlaxoSmithKline.

     In February 2001, we raised $5 million through the sale of 436,110 shares
of common stock at an average price of $11.46 per share to Acqua Wellington
North American Equities Fund, Ltd. ("Acqua") under the terms of the equity sales
agreement signed in November 2000 (the "Acqua Agreement").

     In June 2001, we raised $5 million through the sale of 708,216 shares of
common stock at a price of $7.06 per share to Novo Nordisk. The sale was made
pursuant to the exercise of a put option by us under the terms of the
collaboration agreement with Novo Nordisk.

     In July 2001, we raised $539,000 through the sale of 92,407 shares of
common stock at an average price of $5.84 per share to Acqua under the terms of
the Acqua Agreement.

     In August 2001, we completed a private placement of shares of common stock
for gross proceeds of $14.6 million to a group of institutional investors. Under
the terms of the private placement, we sold 3,639,316 shares of common stock at
a price of $4.00 per share. We also issued warrants to the investors to purchase
363,929 shares of common stock at an exercise price of $5.41 per share or a 15%
premium to the Nasdaq National Market price on the closing date.

     In October 2001, we raised $20 million through the sale of 5,665,723 shares
of common stock at a price of $3.53 per share to Novo Nordisk Pharmaceuticals,
Inc. under the terms of a stock purchase agreement signed in October 2001.

     Net cash used in operating activities for the nine months ended September
30, 2001 increased to $22.1 million from $20.9 million for the same period in
2000. The increase in net cash used resulted primarily from a decrease in
accounts payable and other accrued liabilities combined with increases in
receivables, prepaid expenses and other current assets and net loss before
extraordinary gain partially offset by increases in deferred revenue and accrued
compensation. The decrease in the net loss was primarily due to the forgiveness
of outstanding loans and accrued interest under the cancellation of the
development agreement with Genentech. The decrease in accounts payable results
primarily from accelerated payments for expenses associated with development
programs and capital expenditures. The increase in accounts receivable results
primarily from increased activity in a partner-funded program, which is billed
in arrears.

     Net cash used by investing activities for the nine months ended September
30, 2001 was $9.2 million compared to cash provided by investing activities of
$7.7 million for the same period in 2000. The change results primarily from
increased capital expenditures relating primarily to construction of the
large-scale commercial manufacturing facility offset by a decrease in new
investments and an increase in proceeds from maturing investments.

     Net cash provided by financing activities for the nine months ended
September 30, 2001 decreased to $28.6 million from $47.9 million for the same
period in 2000. The decrease results primarily from a net reduction in proceeds
from the issuance of common stock due to an overall reduction in the amount of
equity funding received, a reduction in proceeds from notes payable due to the
forgiveness of outstanding loans under the cancellation of the development
agreement with Genentech and a reduction in funding from equipment financing
agreements partially offset by increased principal payments on lease obligations
and equipment loans.

     The development of our technology and proposed products will require a
commitment of substantial funds to conduct the costly and time-consuming
research, preclinical studies and clinical trial activities necessary to develop
and refine the technology and proposed products and bring such products to
market. Future capital requirements will depend on many factors, including
continued progress and results from research and development for the technology
and drug delivery systems, the ability to establish and maintain favorable
collaborative arrangements with others, progress with preclinical studies and
clinical trials and the

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results thereof, the time and costs involved in obtaining regulatory approvals,
the cost of development and the rate of scale-up for the required production
technologies, the costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims and the need to acquire licenses or other rights to
new technology.

     We continue to review our planned operations through the end of 2001, and
beyond. We are also focusing on capital spending requirements to ensure that
capital outlays are not expended sooner than necessary. We expect our total
capital outlays for 2001 will be in the range of $35 to $37 million. We believe
that our existing cash balances at September 30, 2001, together with the $20
million in proceeds from the subsequent sale of common stock to Novo Nordisk and
funding commitments from corporate development partners, should be sufficient to
meet our needs for the next twelve months.

     If we continue to make good progress in our development programs, we would
expect our cash requirements for capital spending and operations to increase in
future periods. We will need to raise additional capital to fund our capital
spending and operations before we become profitable. We may seek additional
funding through collaborations, borrowing arrangements or through public or
private equity financings. There can be no assurance that additional financing
can be obtained on acceptable terms, or at all. Dilution to shareholders may
result if funds are raised by issuing additional equity securities. If adequate
funds are not available, we may be required to delay, to reduce the scope of, or
to eliminate one or more of our research and development programs, or to obtain
funds through arrangements with collaborative partners or other sources that may
require us to relinquish rights to certain of our technologies or products that
we would not otherwise relinquish.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  MARKET RISK DISCLOSURES

     In the normal course of business, our financial position is routinely
subject to a variety of risks, including market risk associated with interest
rate movement. We regularly assess these risks and have established policies and
business practices to protect against these and other exposures. As a result, we
do not anticipate material potential losses in these areas.

     As of September 30, 2001, we had cash and cash equivalents and short-term
investments of $21 million consisting of cash and highly liquid short-term
investments. Our short-term investments will decline by an immaterial amount if
market interest rates increase, and therefore, our exposure to interest rate
changes has been immaterial. Declines of interest rates over time will, however,
reduce our interest income from our short-term investments. Our outstanding
capital lease obligations are all at fixed interest rates and, therefore, have
minimal exposure to changes in interest rates.

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                          PART II.  OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

     In August 2001, we completed a private stock sale of 3,639,316 shares of
common stock to certain institutional investors for an aggregate purchase price
of $14,557,264. In connection with the sale, we issued warrants to purchase
363,929 shares of common stock at an exercise price of $5.41 per share. The
warrants are exercisable at the election of such investors for a four-year term.
The sale and issuance of common stock and warrants was deemed to be exempt from
registration under the Securities Act of 1933, as amended, by virtue of
Regulation D promulgated under such Act. Each purchaser represented that it was
an accredited investor within the meaning of Rule 501(a) of the Act and that it
was acquiring the securities for investment only and not with the view to the
distribution thereof.

     In October 2001, we issued 5,665,723 shares of common stock to Novo Nordisk
Pharmaceuticals, Inc. for an aggregate purchase price of $20 million. The sale
and issuance of common stock was deemed to be exempt from registration under the
Securities Act of 1933, as amended, by virtue of Regulation D promulgated under
such Act. The purchaser represented that it was an accredited investor under
Regulation D and that it was acquiring the securities for investment only and
not with the view to the distribution thereof.

ITEM 6.  EXHIBITS

     (a) Exhibits

     None

     (b) Reports on Form 8-K

     The Company did not file any reports on Form 8-K during the quarter ended
September 30, 2001.

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                                   SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated: November 14, 2001

                                          ARADIGM CORPORATION
                                          (Registrant)

                                          /s/     RICHARD P. THOMPSON
                                          --------------------------------------
                                                   Richard P. Thompson
                                          President and Chief Executive Officer

                                          /s/      MICHAEL MOLKENTIN
                                          --------------------------------------
                                                    Michael Molkentin
                                              Acting Chief Financial Officer

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