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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549




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Form 10-Q



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|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended June 30,
    2002                                                
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to           .                                     

Commission File Number 0-28402

Aradigm Corporation

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|California                                                         |  | 94-3133088                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

3929 Point Eden Way

Hayward, CA 94545


(Address of principal executive offices
including zip code)


(510) 265-9000

(Registrants telephone number, including
area code)


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 þ     No o

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

|                           |  |                               
|-------------------------- |  | ------------------------------
|Common Stock, no par value |  | 30,905,253                    
|(Class)                    |  | (Outstanding at July 25, 2002)



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TABLE OF CONTENTS



|                              |                                                                                               |                                             |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | STATEMENTS OF OPERATIONS                   
|                              |                                                                                               | STATEMENTS OF OPERATIONS                   
|                              |                                                                                               | BALANCE SHEETS                             
|                              |                                                                                               | STATEMENTS OF CASH FLOWS                   
|                              |                                                                                               | NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II. OTHER INFORMATION   
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 6. Exhibits                                                                             
|SIGNATURE                    
|INDEX TO EXHIBITS            
|EXHIBIT 99.1                 



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ARADIGM CORPORATION

INDEX

|                                   |  |                                                                                           |    |      |    | 
|---------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                   |  |                                                                                           |    | Page
|                                   |  |                                                                                           |    | No. 
|                                   |  |                                                                                           |    |     
|PART I.  FINANCIAL
    INFORMATION
|                                  
|ITEM 1.                            |  | Financial Statements                                                                      |    |      |    | 
|                                   |  | Statements of Operations (Unaudited)                                                      |    |      |    | 
|                                   |  | Three months ended June 30, 2002
    and 2001                                             |    |      | 2  | 
|                                   |  | Six months ended June 30, 2002
    and 2001                                               |    |      | 3  | 
|                                   |  | Balance Sheets                                                                            |    |      |    | 
|                                   |  | June 30, 2002 (Unaudited) and
    December 31, 2001                                       |    |      | 4  | 
|                                   |  | Statements of Cash Flows (Unaudited)                                                      |    |      |    | 
|                                   |  | Six months ended June 30, 2002
    and 2001                                               |    |      | 5  | 
|                                   |  | Notes to Unaudited Financial Statements                                                   |    |      | 6  | 
|ITEM 2.                            |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 9  | 
|ITEM 3.                            |  | Quantitative and Qualitative Disclosure About
    Market Risk                             |    |      | 14 | 
|PART II.  OTHER
    INFORMATION   
|                                  
|ITEM 2.                            |  | Changes in Securities and Use of Proceeds                                                 |    |      | 15 | 
|ITEM 4.                            |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 15 | 
|ITEM 6.                            |  | Exhibits and Reports on Form 8-K                                                          |    |      | 16 | 
|Signature                          |  |                                                                                           | 17 |     
|Exhibits                           |  |                                                                                           | 18 |     

1



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##### Table of Contents






PART I.     FINANCIAL
INFORMATION




Item 1.     Financial
Statements

ARADIGM CORPORATION






STATEMENTS OF OPERATIONS


(In thousands, except per share
data)


|                                                                                                 |                            |                          |         |        |        |   |        |        |        | 
|------------------------------------------------------------------------------------------------ | -------------------------- | ------------------------ | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                                                 |                            |                         
|                                                                                                 |                            | Three Months Ended      
|                                                                                                 |                            | June 30,                
|                                                                                                 |                            |                         
|                                                                                                 |                            | 2002                     |         | 2001  
|                                                                                                 |                            |                          |         |       
|                                                                                                 |                            |                         
|                                                                                                 |                            | (Unaudited)             
|Contract revenues (Including amounts from related
    parties:
    2002  $6,558; 2001  $7,279) |                            | $                        | 7,295   |        |        | $ | 8,520  |       
|                                                                                                 |                            |                          |         |        |        |   |        |       
|Operating expenses:                                                                              |                            |                          |         |        |        |   |        |       
|                                                                                                 | Research and development   |                          |         | 14,588 |        |   |        | 15,298 |       
|                                                                                                 | General and administrative |                          |         | 2,809  |        |   |        | 2,322  |       
|                                                                                                 |                            |                          |         |        |        |   |        |       
|                                                                                                 |                            | Total operating expenses |         |        | 17,397 |   |        |        | 17,620 | 
|                                                                                                 |                            |                          |         |        |        |   |        |       
|Loss from operations                                                                             |                            |                          | (10,102 | )      |        |   | (9,100 | )     
|Interest income                                                                                  |                            |                          | 210     |        |        |   | 299    |       
|Interest expense and other                                                                       |                            |                          | (84     | )      |        |   | (364   | )     
|                                                                                                 |                            |                          |         |        |        |   |        |       
|Net loss                                                                                         |                            | $                        | (9,976  | )      |        | $ | (9,165 | )     
|                                                                                                 |                            |                          |         |        |        |   |        |       
|Basic and diluted net loss per share                                                             |                            | $                        | (0.34   | )      |        | $ | (0.47  | )     
|                                                                                                 |                            |                          |         |        |        |   |        |       
|Shares used in computing basic and diluted net
    loss per share                                |                            |                          | 29,723  |        |        |   | 19,338 |       
|                                                                                                 |                            |                          |         |        |        |   |        |       

See accompanying notes.

2



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##### Table of Contents



ARADIGM CORPORATION






STATEMENTS OF OPERATIONS


(In thousands, except per share
data)


|                                                                                                   |                                |                          |         |        |        |   |         |        |        | 
|-------------------------------------------------------------------------------------------------- | ------------------------------ | ------------------------ | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                                   |                                |                         
|                                                                                                   |                                | Six Months Ended        
|                                                                                                   |                                | June 30,                
|                                                                                                   |                                |                         
|                                                                                                   |                                | 2002                     |         | 2001  
|                                                                                                   |                                |                          |         |       
|                                                                                                   |                                |                         
|                                                                                                   |                                | (Unaudited)             
|Contract revenues (Including amounts from related
    parties:
    2002  $14,157; 2001  $13,128) |                                | $                        | 15,413  |        |        | $ | 15,207  |       
|                                                                                                   |                                |                          |         |        |        |   |         |       
|Operating expenses:                                                                                |                                |                          |         |        |        |   |         |       
|                                                                                                   | Research and development       |                          |         | 28,901 |        |   |         | 29,458 |       
|                                                                                                   | General and administrative     |                          |         | 5,267  |        |   |         | 4,650  |       
|                                                                                                   |                                |                          |         |        |        |   |         |       
|                                                                                                   |                                | Total operating expenses |         |        | 34,168 |   |         |        | 34,108 | 
|                                                                                                   |                                |                          |         |        |        |   |         |       
|Loss from operations                                                                               |                                |                          | (18,755 | )      |        |   | (18,901 | )     
|Interest income                                                                                    |                                |                          | 501     |        |        |   | 967     |       
|Interest expense and other                                                                         |                                |                          | (250    | )      |        |   | (626    | )     
|                                                                                                   |                                |                          |         |        |        |   |         |       
|Loss before extraordinary gain                                                                     |                                |                          | (18,504 | )      |        |   | (18,560 | )     
|Extraordinary gain                                                                                 |                                |                          |        |        |        |   | 6,675   |       
|                                                                                                   |                                |                          |         |        |        |   |         |       
|Net loss                                                                                           |                                | $                        | (18,504 | )      |        | $ | (11,885 | )     
|                                                                                                   |                                |                          |         |        |        |   |         |       
|Basic and diluted net loss per share:                                                              |                                |                          |         |        |        |   |         |       
|                                                                                                   | Loss before extraordinary gain |                          | $       | (0.62  | )      |   | $       | (0.97  | )     
|                                                                                                   | Extraordinary gain             |                          |         |       |        |   |         | 0.35   |       
|                                                                                                   |                                |                          |         |        |        |   |         |       
|Net loss per share                                                                                 |                                | $                        | (0.62   | )      |        | $ | (0.62   | )     
|                                                                                                   |                                |                          |         |        |        |   |         |       
|Shares used in computing basic and diluted net
    loss per share                                  |                                |                          | 29,634  |        |        |   | 19,090  |       
|                                                                                                   |                                |                          |         |        |        |   |         |       

See accompanying notes.

3



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ARADIGM CORPORATION




BALANCE SHEETS

(In thousands, except shares data)


|                                                                                                                                                                                                                                                             |                                              |                            |                                                                                        |              |         |         |          |        |         |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------- | -------------------------- | -------------------------------------------------------------------------------------- | ------------ | ------- | ------- | -------- | ------ | ------- | ------- | 
|                                                                                                                                                                                                                                                             |                                              | June 30,                   |                                                                                        | December 31,
|                                                                                                                                                                                                                                                             |                                              | 2002                       |                                                                                        | 2001        
|                                                                                                                                                                                                                                                             |                                              |                            |                                                                                        |             
|                                                                                                                                                                                                                                                             |                                              | (Unaudited)                |                                                                                        |             
|ASSETS                                                                                                                                                                                                                                                      
|Current assets:                                                                                                                                                                                                                                              |                                              |                            |                                                                                        |              |         |         |          |       
|                                                                                                                                                                                                                                                             | Cash and cash equivalents                    |                            | $                                                                                      | 35,023       |         |         | $        | 69,965 |        
|                                                                                                                                                                                                                                                             | Short-term investments                       |                            |                                                                                        | 3,859        |         |         |          | 1,199  |        
|                                                                                                                                                                                                                                                             | Receivables                                  |                            |                                                                                        | 326          |         |         |          | 1,349  |        
|                                                                                                                                                                                                                                                             | Prepaid expenses and other current assets    |                            |                                                                                        | 1,769        |         |         |          | 957    |        
|                                                                                                                                                                                                                                                             |                                              |                            |                                                                                        |              |         |         |          |       
|                                                                                                                                                                                                                                                             |                                              | Total current assets       |                                                                                        |              | 40,977  |         |          |        | 73,470  |        
|Property and equipment, net                                                                                                                                                                                                                                  |                                              |                            | 61,613                                                                                 |              |         |         | 57,940   |       
|Notes receivable from officers and employees                                                                                                                                                                                                                 |                                              |                            | 223                                                                                    |              |         |         | 160      |       
|Other assets                                                                                                                                                                                                                                                 |                                              |                            | 506                                                                                    |              |         |         | 530      |       
|                                                                                                                                                                                                                                                             |                                              |                            |                                                                                        |              |         |         |          |       
|                                                                                                                                                                                                                                                             |                                              | Total assets               |                                                                                        | $            | 103,319 |         |          | $      | 132,100 |        
|                                                                                                                                                                                                                                                             |                                              |                            |                                                                                        |              |         |         |          |       
|LIABILITIES, REDEEMABLE CONVERTIBLE
    PREFERRED
    STOCK AND SHAREHOLDERS EQUITY                                                                                                                                                                        
|Current liabilities:                                                                                                                                                                                                                                         |                                              |                            |                                                                                        |              |         |         |          |       
|                                                                                                                                                                                                                                                             | Accounts payable                             |                            | $                                                                                      | 2,017        |         |         | $        | 5,297  |        
|                                                                                                                                                                                                                                                             | Accrued clinical and cost of other studies   |                            |                                                                                        | 346          |         |         |          | 703    |        
|                                                                                                                                                                                                                                                             | Accrued compensation                         |                            |                                                                                        | 3,475        |         |         |          | 1,761  |        
|                                                                                                                                                                                                                                                             | Deferred revenue                             |                            |                                                                                        | 6,429        |         |         |          | 11,115 |        
|                                                                                                                                                                                                                                                             | Current portion of capital lease obligations |                            |                                                                                        | 2,695        |         |         |          | 3,526  |        
|                                                                                                                                                                                                                                                             | Other accrued liabilities                    |                            |                                                                                        | 809          |         |         |          | 2,760  |        
|                                                                                                                                                                                                                                                             |                                              |                            |                                                                                        |              |         |         |          |       
|                                                                                                                                                                                                                                                             |                                              | Total current liabilities  |                                                                                        |              | 15,771  |         |          |        | 25,162  |        
|Noncurrent portion of deferred revenue                                                                                                                                                                                                                       |                                              |                            | 1,746                                                                                  |              |         |         | 2,327    |       
|Noncurrent portion of capital lease obligations                                                                                                                                                                                                              |                                              |                            | 1,252                                                                                  |              |         |         | 2,427    |       
|Noncurrent portion of deferred rent                                                                                                                                                                                                                          |                                              |                            | 450                                                                                    |              |         |         | 300      |       
|Commitments and contingencies                                                                                                                                                                                                                                |                                              |                            |                                                                                        |              |         |         |          |       
|Redeemable convertible preferred stock, no par
    value; 5,000,000 shares authorized; issued and outstanding
    shares: 2,001,236 at June 30, 2002 and December 31,
    2001; liquidation preference of $48,430 at June 30, 2002
    and December 31, 2001 |                                              |                            | 30,665                                                                                 |              |         |         | 30,735   |       
|Shareholders equity:                                                                                                                                                                                                                                        |                                              |                            |                                                                                        |              |         |         |          |       
|Common stock, no par value; 100,000,000 shares
    authorized; issued and outstanding shares: 29,723,219 at
    June 30, 2002 and 29,536,383 at December 31, 2001                                                                                            |                                              |                            | 225,462                                                                                |              |         |         | 224,738  |       
|Deferred compensation                                                                                                                                                                                                                                        |                                              |                            |                                                                                       |              |         |         | (54      | )     
|Accumulated deficit                                                                                                                                                                                                                                          |                                              |                            | (172,027                                                                               | )            |         |         | (153,535 | )     
|                                                                                                                                                                                                                                                             |                                              |                            |                                                                                        |              |         |         |          |       
|                                                                                                                                                                                                                                                             |                                              | Total shareholders equity |                                                                                        |              | 53,435  |         |          |        | 71,149  |        
|                                                                                                                                                                                                                                                             |                                              |                            |                                                                                        |              |         |         |          |       
|                                                                                                                                                                                                                                                             |                                              |                            | Total liabilities, redeemable convertible
    preferred stock and shareholders equity |              | $       | 103,319 |          |        | $       | 132,100 | 
|                                                                                                                                                                                                                                                             |                                              |                            |                                                                                        |              |         |         |          |       

See accompanying notes.

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ARADIGM CORPORATION






STATEMENTS OF CASH FLOWS


(In thousands)


|                                                        |                                                                             |                                              |         |         |        |   |         |         |        |  
|------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------- | ------- | ------- | ------ | - | ------- | ------- | ------ | -
|                                                        |                                                                             |                                             
|                                                        |                                                                             | Six Months Ended                            
|                                                        |                                                                             | June 30,                                    
|                                                        |                                                                             |                                             
|                                                        |                                                                             | 2002                                         |         | 2001   
|                                                        |                                                                             |                                              |         |        
|                                                        |                                                                             |                                             
|                                                        |                                                                             | (Unaudited)                                 
|Cash flows from operating
    activities:               |                                                                             |                                              |         |         |        |   |         |        
|                                                        | Net loss                                                                    |                                              | $       | (18,504 | )      |   | $       | (11,885 | )     
|                                                        | Adjustments to reconcile net loss to cash used in
    operating activities: |                                              |         |         |        |   |         |         |       
|                                                        |                                                                             | Depreciation and amortization                |         |         | 2,954  |   |         |         | 2,100  |  
|                                                        |                                                                             | Extraordinary gain related to Genentech note |         |         |       |   |         |         | (6,675 | )
|                                                        |                                                                             | Issuance of common stock for services        |         |         | 2      |   |         |         | 48     |  
|                                                        |                                                                             | Amortization of deferred compensation        |         |         | 54     |   |         |         | 81     |  
|                                                        |                                                                             | Changes in operating assets and liabilities: |         |         |        |   |         |         |        |  
|                                                        |                                                                             | Receivables                                  |         |         | 1,023  |   |         |         | (271   | )
|                                                        |                                                                             | Prepaid expenses and other current assets    |         |         | (822   | ) |         |         | (579   | )
|                                                        |                                                                             | Other assets                                 |         |         | 24     |   |         |         | 128    |  
|                                                        |                                                                             | Accounts payable                             |         |         | (3,280 | ) |         |         | (373   | )
|                                                        |                                                                             | Accrued compensation                         |         |         | 1,714  |   |         |         | 1,352  |  
|                                                        |                                                                             | Other accrued liabilities                    |         |         | (2,158 | ) |         |         | 40     |  
|                                                        |                                                                             | Deferred revenue                             |         |         | (5,267 | ) |         |         | 2,704  |  
|                                                        |                                                                             |                                              |         |         |        |   |         |        
|Net cash used in operating activities                   |                                                                             |                                              | (24,260 | )       |        |   | (13,330 | )      
|                                                        |                                                                             |                                              |         |         |        |   |         |        
|Cash flows from investing
    activities:               |                                                                             |                                              |         |         |        |   |         |        
|                                                        | Capital expenditures                                                        |                                              |         | (6,627  | )      |   |         | (24,758 | )     
|                                                        | Purchase of available-for-sale investments                                  |                                              |         | (7,410  | )      |   |         | (5,733  | )     
|                                                        | Proceeds from maturities of available-for-sale
    investments              |                                              |         | 4,762   |        |   |         | 21,152  |       
|                                                        |                                                                             |                                              |         |         |        |   |         |        
|Net cash used in investing activities                   |                                                                             |                                              | (9,275  | )       |        |   | (9,339  | )      
|                                                        |                                                                             |                                              |         |         |        |   |         |        
|Cash flows from financing
    activities:               |                                                                             |                                              |         |         |        |   |         |        
|                                                        | Proceeds from issuance of common stock, net                                 |                                              |         | 722     |        |   |         | 15,875  |       
|                                                        | Cost from issuance of redeemable convertible
    preferred stock            |                                              |         | (70     | )      |   |         |        |       
|                                                        | Proceeds from repayments of shareholder notes                               |                                              |         |        |        |   |         | 110     |       
|                                                        | Notes receivable from officers                                              |                                              |         | (53     | )      |   |         | 14      |       
|                                                        | Payments on lease obligations and equipment loans                           |                                              |         | (2,006  | )      |   |         | (1,469  | )     
|                                                        |                                                                             |                                              |         |         |        |   |         |        
|Net cash provided by (used in) financing
    activities |                                                                             |                                              | (1,407  | )       |        |   | 14,530  |        
|                                                        |                                                                             |                                              |         |         |        |   |         |        
|Net decrease in cash and cash equivalents               |                                                                             |                                              | (34,942 | )       |        |   | (8,139  | )      
|Cash and cash equivalents at beginning of period        |                                                                             |                                              | 69,965  |         |        |   | 20,732  |        
|                                                        |                                                                             |                                              |         |         |        |   |         |        
|Cash and cash equivalents at end of period              |                                                                             | $                                            | 35,023  |         |        | $ | 12,593  |        
|                                                        |                                                                             |                                              |         |         |        |   |         |        
|Supplemental disclosure of cash flow
    information:   |                                                                             |                                              |         |         |        |   |         |        
|                                                        | Cash paid for interest                                                      |                                              | $       | 292     |        |   | $       | 502     |       
|                                                        |                                                                             |                                              |         |         |        |   |         |        
|Non-cash investing and financing
    activities:        |                                                                             |                                              |         |         |        |   |         |        
|                                                        | Issuance of common stock for services                                       |                                              | $       | 2       |        |   | $       | 48      |       
|                                                        |                                                                             |                                              |         |         |        |   |         |        

See accompanying notes.

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ARADIGM CORPORATION






NOTES TO THE UNAUDITED FINANCIAL
STATEMENTS


June 30, 2002


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. 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.
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. 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, 2001 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. Certain amounts have been
reclassified to conform with the current periods
presentation.



| |                   
| | ------------------
| | 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.     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 A/S (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 insulin 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. The
Court granted

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ARADIGM CORPORATION


NOTES TO THE UNAUDITED FINANCIAL
STATEMENTS  (Continued)

summary judgment in favor of the Company as to
Lillys claims relating to an alleged license agreement,
for misappropriation of trade secrets, breach of fiduciary duty,
conversion, estoppel and breach of contract (in part),
dismissing those claims from the case. The remaining claims were
tried before a jury during the week of April 22, 2002. The
jury returned verdicts in favor of the Company and against Lilly
on three of four of Lillys asserted claims of
co-inventorship and on Lillys unjust enrichment claim. The
jury returned verdicts in favor of Lilly on one of Lillys
claims of co-inventorship and on two breach of contract claims,
awarding Lilly damages of $1 for each breach of contract claim.
These verdicts will be subject to various post-trial motions and
possible appeals by both parties. Although there can be no
assurance that the Company will ultimately prevail in this
matter, management believes that the ultimate outcome of this
litigation will not in any event have a material adverse effect
on the Companys financial position or results of
operations.

3.     Related
Party

Novo Nordisk and its affiliate, Novo Nordisk
Pharmaceuticals, Inc., are considered related parties and at
June 30, 2002 own approximately 18% of the Companys
total outstanding common stock (on an as-converted basis).

4.     Recent
Accounting Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statements of Financial Accounting
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. The Company adopted the standard effective
January 1, 2002. The Company has not completed any business
combinations and as a result the adoption of these standards did
not have a material impact on its financial position or
operating results.

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets. SFAS No. 144 supercedes SFAS 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 Accounting Principles
Board 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). SFAS No. 144 also amends Accounting Research
Bulletin 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 SFAS No. 144 for fiscal
years beginning after December 15, 2001, and interim
periods within those fiscal years, but early adoption is
encouraged. The Company adopted the standard effective
January 1, 2002, and the adoption of this standard did not
have a material impact on the Companys financial position
or results of operations.

In April 2002, the FASB issued SFAS No. 145,
 Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections. Previous to the issuance of SFAS
No. 145, SFAS No. 4 had required that all gains and
losses from extinguishment of debt were to be aggregated and, if
material, classified as an extraordinary item, net of related
income tax effect. SFAS No. 145 rescinds SFAS No. 4
and the related required classification of extraordinary items.
Companies are required to retroactively adopt SFAS No. 145
for fiscal years beginning after May 15, 2002, and interim
periods within those fiscal years. The Company believes the
impact of adopting this standard will be to reclassify the
$6.7 million extraordinary gain related to Genentech in
2001 as a component of operating results and does not anticipate
that the adoption of this standard will have a material impact
on the Companys financial position, results of operations
or cash flows.

7



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##### Table of Contents



ARADIGM CORPORATION


NOTES TO THE UNAUDITED FINANCIAL
STATEMENTS  (Continued)

5.     Subsequent
Event

In July 2002, the Company received
$5 million from the sale of 1,182,034 shares of its common
stock at a price of $4.23 per share to Novo Nordisk
Pharmaceuticals, Inc., an affiliate of Novo Nordisk pursuant to
a common stock purchase agreement entered into during 2001. As
of the date of this transaction, Novo Nordisk and its affiliate,
which are considered related parties, own approximately 20% of
the Companys total outstanding common stock (on an
as-converted basis).

8



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The discussion below contains forward-looking
statements that are based on the beliefs of management, as well
as assumptions made by, and information currently available to,
management. Our future results, performance or achievements
could differ materially from those expressed in, or implied by,
any such forward-looking statements as a result of certain
factors, including, but not limited to, those discussed in this
section as well as in the section entitled Risk
Factors and elsewhere in the Companys Form 10-K
filed with the Securities and Exchange Commission on
March 29, 2002.

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
June 30, 2002, we had an accumulated deficit of
$172 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 2002. Our
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, to manage diabetes using insulin and other blood
glucose regulating compounds, and with GlaxoSmithKline plc, 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 product sales
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. For the three and six months ended June 30,
2002, this partner-funded program has contributed approximately
90% and 92%, respectively, of our total contract revenues. At
June 30, 2002, Novo Nordisk and its affiliate Novo Nordisk
Pharmaceuticals, Inc. own approximately 18% of our total
outstanding common stock (on an as-converted basis). In July
2002, Novo Nordisk and its affiliate increased its ownership
percentage to 20% (on an as-converted basis) through the
purchase of common stock directly from the Company.

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,

9



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GlaxoSmithKline can restore its rights to
participate in the 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 was made available to them during the
current quarter, but there can be no assurance that
GlaxoSmithKline will elect to restore its rights. 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. If we elect to pay the exit fee, it will not
have a material impact on our financial position or operating
results. This development program is currently being funded
through existing working capital.


In February 2001, we announced that Genentech had
discontinued the development of dornase alfa using our
proprietary AERx Respiratory Management 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 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 three 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
identity of the partner or the drug until we have entered into
long-term development agreements with a partner or until data
from a study has been published.

Critical Accounting Policies

We consider certain accounting policies related
to revenue recognition and the use of estimates to be critical
accounting policies that require the use of significant
judgments and estimates relating to matters that are inherently
uncertain and may result in materially different results under
different assumptions and conditions.



| |                    
| | -------------------
| | Revenue Recognition

Contract revenues consist of revenue from
collaboration agreements and feasibility studies. We recognize
revenue under the agreements as costs are incurred. Deferred
revenue represents the portion of all refundable and
nonrefundable research payments received that have not been
earned. In accordance with contract terms, milestone payments
from collaborative research agreements are considered
reimbursements for costs incurred under the agreements and,
accordingly, are generally recognized as revenue either upon the
completion of the milestone effort when payments are contingent
upon completion of the effort or are based on actual efforts
expended over the remaining term of the agreements when payments
precede the required efforts. Costs of contract revenues
approximate such revenue and are included in research and
development expenses. Refundable development and license fee
payments are deferred until the specified performance criteria
are achieved. Refundable development and license fee payments
are generally not refundable once the specific performance
criteria are achieved.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
requires us to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes to the financial statements. These estimates include
useful lives for property and equipment and related depreciation
calculations, estimated amortization period for payments
received from product development and license agreements as they
relate to the revenue recognition of deferred revenue and
assumptions for valuing options and warrants. Actual results
could differ from these estimates.

10



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Results of Operations



| |                                              
| | ---------------------------------------------
| | Three Months Ended June 30, 2002 and
    2001

Contract Revenues:Contract revenues for the three months
ended June 30, 2002 decreased to $7.3 million from
$8.5 million for the same period in 2001. The decrease in
revenue is primarily due to a reduction in partner-funded
project development revenue from Novo Nordisk, which was
$6.6 million for the three months ended June 30, 2002
and $7.3 million for the same period in 2001, and no
partner-funded revenue earned from the pain management program
during the current quarter, which contributed revenue of
$700,000 for the same period in 2001. The decrease in contract
revenues was partially offset by a modest increase in contract
revenues from other partner-funded programs. Costs associated
with collaborative agreements approximate contract revenues 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 June 30, 2002 decreased to
$14.6 million from $15.3 million for the same period in
2001. The decrease in research and development expenses is
primarily due to a reduction in development efforts to support
the ongoing program with Novo Nordisk and the pain management
program and a reduction in manufacturing scale-up efforts offset
by increases in expenses in other funded and unfunded
development programs. Research and development expenses
associated with collaborative agreements approximate contract
revenues 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 and funding levels supported by our existing development
collaborations, as well as obtaining new collaborative
agreements.

Our lead development program is developing
pulmonary delivery systems to manage diabetes using insulin and
other blood glucose regulating compounds with our partner Novo
Nordisk. Since Novo Nordisk and we successfully completed during
2001 a Phase 2b clinical trial using the AERx insulin
Diabetes Management System, we are focused on preparing for
Phase 3 clinical trials, which Novo Nordisk intends to
commence during the summer of 2002.

Our next major program is with our partner
GlaxoSmithKline pursuant to our development agreement, as
amended, which covers the use of the AERx Pain Management System
for the delivery of narcotic analgesics. During December 2001,
we successfully completed Phase 2b clinical trials for the
AERx morphine Pain Management System. During the current quarter
we made available to GlaxoSmithKline data from the Phase 2b
clinical trials. We are working with GlaxoSmithKline to
determine the next steps for the AERx morphine program. Future
progress for this program is contingent on either
GlaxoSmithKline recommitting to this program or our entering
into another development agreement with a new partner. We
continue to move forward with this program for a Phase 3 start,
which is anticipated to occur in 2003.

We have three other partner-funded programs and a
gene therapy effort, which is funded through the National
Institutes of Health, that are all in various stages of
Phase 1 clinical trials. The three Phase 1 clinical
trials are expected to be completed during 2002. Future research
and development efforts for these partner-funded programs are
difficult to predict at this time due to their early stage of
development.

General and Administrative Expenses:General and administrative expenses
for the three months ended June 30, 2002 increased to
$2.8 million from $2.3 million for the same period in
2001. The increase is primarily due to higher business
development expenses, including the hiring of additional
personnel and higher facility support costs.

11



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Interest Income:Interest income for the three months
ended June 30, 2002 decreased to $210,000 from $299,000 for
the same period in 2001. The decrease is due to an overall
decrease in interest rates earned on invested cash balances.

Interest Expense and
Other:Interest expense for the three
months ended June 30, 2002 decreased to $84,000 from
$364,000 for the same period in 2001. The decrease is primarily
due to lower outstanding capital lease and equipment loan
balances under various equipment and lease lines of credit.

Net Loss:Net loss
for the three months ended June 30, 2002 increased to
$10.0 million from $9.2 million for the same period in
2001. The increase in net loss is primarily due to a decrease in
contract revenues, an increase in general and administrative
expenses and a decrease in interest income partially offset by a
reduction in research and development expenses and a reduction
in interest expense and other.



| |                                            
| | -------------------------------------------
| | Six Months Ended June 30, 2002 and
    2001

Contract Revenues:Contract revenues for the six months
ended June 30, 2002 increased to $15.4 million from
$15.2 million for the same period in 2001. The increase in
revenue is primarily due to an increase in partner-funded
project development revenue from Novo Nordisk and an increase in
revenue from other partner-funded programs, but offset by no
partner-funded revenue earned from the pain management program,
which contributed revenue of $1.3 million for the same
period in 2001. Costs associated with collaborative agreements
approximate contract revenues 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 six months ended June 30, 2002 decreased to
$28.9 million from $29.5 million for the same period
in 2001. The decrease in research and development expenses is
primarily due to a reduction in development efforts to support
the ongoing program with Novo Nordisk and the pain management
program and a reduction in manufacturing scale-up efforts, but
offset by increases in expenses in other funded and unfunded
development programs. 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 six months ended June 30, 2002 increased to
$5.3 million from $4.7 million for the same period in
2001. The increase is primarily due to higher business
development expenses, including the hiring of additional
personnel, and higher facility support costs.

Interest Income:Interest income for the six months
ended June 30, 2002 decreased to $501,000 from $967,000 for
the same period in 2001. The decrease is due to an overall
decrease in interest rates earned on invested cash balances.

Interest Expense and
Other:Interest expense for the six
months ended June 30, 2002 decreased to $250,000 from $626,000
for the same period in 2001. The decrease is primarily due to
lower outstanding capital lease and equipment loan balances
under various equipment and lease lines of credit.

Extraordinary Gain:No extraordinary gain was reported for
the six months ended June 30, 2002. For the same period in
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 development for the Pulmozyme program that had been
funded by Genentech.

Net Loss:Net loss
for the six months ended June 30, 2002 increased to
$18.5 million from $11.9 million for the same period
in 2001. The increase in net loss is primarily due to the prior
year period including an extraordinary gain of approximately
$6.7 million that resulted from the cancellation of
outstanding loans and accrued interest required for product
development under the program that had been funded by Genentech.

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

12



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investments. As of June 30, 2002, we had
cash, cash equivalents and investments of approximately
$38.9 million.


Net cash used in operating activities for the six
months ended June 30, 2002 increased to $24.3 million
from $13.3 million for the same period in 2001. The
increase in net cash used in operating activities resulted
primarily from an increase in net loss and prepaid expenses and
other current assets and a decrease in accounts payable, other
accrued liabilities, deferred revenue offset by a decrease in
accounts receivable and an increase in accrued compensation. The
increase in the net loss was primarily due to the prior year
period including an extraordinary gain for the forgiveness of
outstanding loans and accrued interest under the cancellation of
a development agreement with Genentech. The increase in prepaid
expenses and other current assets is primarily due to
prepayments made to vendors for services they will perform over
a future contractual period. The prepayments will be expensed to
operations over the contractual period the services are
performed by the vendor. The decrease in accounts payable and
other accrued liabilities results primarily from increased
payments for expenses associated with our development programs
and capital expenditures, while the decrease in deferred revenue
is due primarily to our partners funding future development at a
lower level. The decrease in receivables is due to the receipt
of payments from our partners for billings associated with our
development activities. The increase in accrued compensation is
due primarily to an increase in estimated accruals for employee
compensation and other employee benefits.

Net cash used in investing activities for the six
months ended June 30, 2002 remained relatively unchanged at
$9.3 million compared to the same period in 2001. Net cash
used in investing activities resulted primarily from a reduction
in capital expenditures and proceeds from maturing investments
offset by an increase in the purchase of investments. Capital
expenditures for the current year relate primarily to the
acquisition of manufacturing production equipment while in the
prior year period capital expenditures related primarily to the
construction of our large-scale commercial manufacturing
facility including the acquisition of related production
equipment.

Net cash used in financing activities for the six
months ended June 30, 2002 was $1.4 million compared
to net cash provided by financing activities of
$14.5 million for the same period in 2001. The change
results primarily from a significant reduction in proceeds from
the issuance of equity funding during the current year and an
increase in 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. Our 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 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 2002 and beyond. We particularly focus on
capital spending requirements to ensure that capital outlays are
not expended sooner than necessary. We expect our total annual
capital outlays for 2002 will be approximately $19 million.
Since December 31, 2001, there have been no material
changes in our contractual obligations or commitments. We
believe that our existing cash balances at June 30, 2002,
including the $5 million proceeds received from the Novo
Nordisk stock purchase in July 2002, together with the
$20 million unused common stock purchase commitment from
Novo Nordisk, research and development funding commitments from
corporate development partners and interest earned on our
investments should be sufficient to meet our needs for at least
the next twelve months. The sale of additional common stock to
Novo Nordisk is subject to certain conditions including, if
applicable, obtaining any requisite shareholder approval. In
addition, there can be no assurance that our funding commitments
from corporate development partners will not be amended or
terminated. If we cannot exercise our option to sell additional
shares of common stock to Novo Nordisk because of the need for
shareholder approval or otherwise or if our current funding
commitments from corporate development partners are

13



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amended or terminated, we will need to obtain
additional sources of capital sooner than would otherwise be the
case.


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 June 30, 2002, we had cash and cash
equivalents and short-term investments of $38.9 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.

14



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##### Table of Contents






PART II.     OTHER
INFORMATION




Item 2.     Changes
in Securities and Use of Proceeds

Pursuant to a Common Stock Purchase Agreement
between the Company and Novo Nordisk Pharmaceuticals, Inc.,
dated October 22, 2001, the Company issued
1,182,032 shares of its common stock to Novo Nordisk
Pharmaceuticals, Inc. for an aggregate purchase price of
$5 million. The shares were issued in reliance on
Rule 506 of Regulation D of the Securities Act of
1933, as amended.




Item 4.     Submission
of Matters to a Vote of Security Holders

(a) The Annual Meeting of Shareholders of
Aradigm Corporation was held on May 17, 2002.

(b) Frank H. Barker, Wayne I. Roe,
Richard P. Thompson, Virgil D. Thompson, Igor Gonda,
Stan M. Benson, and John M. Nehra were elected to the
Board of Directors to hold office until the next Annual Meeting
of Shareholders and until their successors are elected and
qualified.

(c) The matters voted upon at the meeting
and the voting of the shareholders with respect thereto were as
follows:



| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) The election of Frank H. Barker as
    Director to hold office until the next Annual Meeting of
    Shareholders and until his successor is elected and qualified:

For:
18,426,949                    Against:
114,471



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) The election of Wayne I. Roe as Director
    to hold office until the next Annual Meeting of Shareholders and
    until his successor is elected and qualified:

For:
18,427,749                    Against:
113,671



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (3) The election of Richard P. Thompson as
    Director to hold office until the next Annual Meeting of
    Shareholders and until his successor is elected and qualified:

For:
18,377,346                    Against:
164,074



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (4) The election of Virgil D. Thompson as
    Director to hold office until the next Annual Meeting of
    Shareholders and until his successor is elected and qualified:

For:
18,427,249                    Against:
114,171



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (5) The election of Igor Gonda as Director
    to hold office until the next Annual Meeting of Shareholders and
    until his successor is elected and qualified:

For:
18,426,218                    Against:
115,202



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (6) The election of Stan M. Benson as
    Director to hold office until the next Annual Meeting of
    Shareholders and until his successor is elected and qualified:

For:
18,427,749                    Against:
113,671



| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (7) The election of John M. Nehra as
    Director to hold office until the next Annual Meeting of
    Shareholders and until his successor is elected and qualified:

For:
18,427,749                    Against:
113,671



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | (8) Ratification of the selection of Ernst
    & Young LLP as independent auditors of the company for its
    fiscal year ending December 31, 2002:

For:
18,496,691          Against:
34,701          Abstained:
10,028

15



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##### Table of Contents






Item 6.     Exhibits

(a) Exhibit

| |      |  |  |                                                                         
| | ---- |  |  | ------------------------------------------------------------------------
| | 99.1 |  |  | Certification by Chief Executive Officer and
    Chief Financial Officer

(b) Reports on Form 8-K

The Company did not file any reports on
Form 8-K during the quarter ended June 30, 2002.

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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: August 2, 2002



| |                                          
| | -----------------------------------------
| | 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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##### Table of Contents






INDEX TO EXHIBITS

|        |      |             |  |                                                                         
|------- | ---- | ----------- |  | ------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 99.1 |             |  | Certification by Chief Executive Officer and
    Chief Financial Officer

18