##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549


Form 10-Q


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|           |  | For the quarterly period ended March 31,
    2003                                           
|           |  | 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 by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).     Yes o          No þ

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 |  |  | 50,685,427                     |  
|(Class)                    |  |  | (Outstanding at April 30, 2003 | )



---






---

TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. 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                           
|                              | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|CERTIFICATION                
|CERTIFICATION                
|INDEX TO EXHIBITS            
|Exhibit 99.1                 



---



##### Table of Contents



ARADIGM CORPORATION

INDEX

|                              |  |                                                                                                   |    |          |    | 
|----------------------------- |  | ------------------------------------------------------------------------------------------------- | -- | -------- | -- | 
|                              |  |                                                                                                   |    | Page No.
|                              |  |                                                                                                   |    |         
|PART I. FINANCIAL INFORMATION
|ITEM 1.                       |  | Financial Statements                                                                              |    |          | 1  | 
|                              |  | Balance Sheets  at March 31,
    2003 and December 31, 2002  (unaudited)                          |    |          | 1  | 
|                              |  | Statements of Operations  for the
    three months ended March 31, 2003 and
    2002  (unaudited) |    |          | 2  | 
|                              |  | Statements of Cash Flows  for the
    three months ended March 31, 2003 and
    2002  (unaudited) |    |          | 3  | 
|                              |  | Notes to Unaudited Financial Statements                                                           |    |          | 4  | 
|ITEM 2.                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations         |    |          | 6  | 
|ITEM 3.                       |  | Quantitative and Qualitative Disclosure About
    Market Risk                                     |    |          | 10 | 
|ITEM 4.                       |  | Controls and Procedures                                                                           |    |          | 10 | 
|                             
|PART II. OTHER INFORMATION   
|ITEM 1.                       |  | Legal Proceedings                                                                                 |    |          | 12 | 
|ITEM 2.                       |  | Changes in Securities and Use of Proceeds                                                         |    |          | 12 | 
|ITEM 4.                       |  | Submission of Matters to a Vote of Security
    Holders                                           |    |          | 12 | 
|ITEM 6.                       |  | Exhibits and Reports on Form 8-K                                                                  |    |          | 13 | 
|Signatures                    |  |                                                                                                   | 14 |         
|Certifications                |  |                                                                                                   | 15 |         
|Index to Exhibits             |  |                                                                                                   | 17 |         

i



---



##### Table of Contents






PART I.     FINANCIAL
INFORMATION






|        |                     
|------- | --------------------
|Item 1. | Financial Statements

ARADIGM CORPORATION

BALANCE SHEETS

|                                                                                                                                                                                                                                                               |                                                                                                                                                                 |                                                                                        |        |              |         |  |        |          |        | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------ | ------------ | ------- |  | ------ | -------- | ------ | 
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 | March 31,                                                                              |        | December 31,
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 | 2003                                                                                   |        | 2002        
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 |                                                                                        |        |             
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 | (unaudited)                                                                            |        | (Note 1)    
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 |                                                                                       
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 | (In thousands, except                                                                 
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 | shares data)                                                                          
|ASSETS                                                                                                                                                                                                                                                        
|Current assets:                                                                                                                                                                                                                                                |                                                                                                                                                                 |                                                                                        |        |              |         |  |        |         
|                                                                                                                                                                                                                                                               | Cash and cash equivalents                                                                                                                                       |                                                                                        | $      | 27,828       |         |  | $      | 22,800   |       
|                                                                                                                                                                                                                                                               | Short-term investments                                                                                                                                          |                                                                                        |        | 8,396        |         |  |        | 7,090    |       
|                                                                                                                                                                                                                                                               | Receivables                                                                                                                                                     |                                                                                        |        | 79           |         |  |        | 282      |       
|                                                                                                                                                                                                                                                               | Current portion of notes receivable from officers
    and employees                                                                                             |                                                                                        |        | 137          |         |  |        | 136      |       
|                                                                                                                                                                                                                                                               | Prepaid and other current assets                                                                                                                                |                                                                                        |        | 1,740        |         |  |        | 1,457    |       
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 |                                                                                        |        |              |         |  |        |         
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 | Total current assets                                                                   |        |              | 38,180  |  |        |          | 31,765 | 
|Property and equipment, net                                                                                                                                                                                                                                    |                                                                                                                                                                 |                                                                                        | 62,921 |              |         |  | 63,233 |         
|Noncurrent portion of notes receivable from
    officers and employees                                                                                                                                                                                         |                                                                                                                                                                 |                                                                                        | 315    |              |         |  | 169    |         
|Long-term investments                                                                                                                                                                                                                                          |                                                                                                                                                                 |                                                                                        |       |              |         |  | 1,553  |         
|Other assets                                                                                                                                                                                                                                                   |                                                                                                                                                                 |                                                                                        | 404    |              |         |  | 409    |         
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 |                                                                                        |        |              |         |  |        |         
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 | Total assets                                                                           |        | $            | 101,820 |  |        | $        | 97,129 | 
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 |                                                                                        |        |              |         |  |        |         
|                                                                                                                                                                                                                                                              
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
    STOCK AND SHAREHOLDERS EQUITY                                                                                                                                                                              
|Current liabilities:                                                                                                                                                                                                                                           |                                                                                                                                                                 |                                                                                        |        |              |         |  |        |         
|                                                                                                                                                                                                                                                               | Accounts payable                                                                                                                                                |                                                                                        | $      | 1,444        |         |  | $      | 1,951    |       
|                                                                                                                                                                                                                                                               | Accrued clinical and cost of other studies                                                                                                                      |                                                                                        |        | 287          |         |  |        | 291      |       
|                                                                                                                                                                                                                                                               | Accrued compensation                                                                                                                                            |                                                                                        |        | 2,975        |         |  |        | 2,195    |       
|                                                                                                                                                                                                                                                               | Deferred revenue                                                                                                                                                |                                                                                        |        | 9,627        |         |  |        | 10,682   |       
|                                                                                                                                                                                                                                                               | Current portion of capital lease obligations                                                                                                                    |                                                                                        |        | 1,343        |         |  |        | 1,753    |       
|                                                                                                                                                                                                                                                               | Other accrued liabilities                                                                                                                                       |                                                                                        |        | 662          |         |  |        | 407      |       
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 |                                                                                        |        |              |         |  |        |         
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 | Total current liabilities                                                              |        |              | 16,338  |  |        |          | 17,279 | 
|Noncurrent portion of deferred revenue                                                                                                                                                                                                                         |                                                                                                                                                                 |                                                                                        | 5,656  |              |         |  | 6,170  |         
|Capital lease obligations and other, less current
    portion                                                                                                                                                                                                  |                                                                                                                                                                 |                                                                                        | 287    |              |         |  | 497    |         
|Noncurrent portion of deferred rent                                                                                                                                                                                                                            |                                                                                                                                                                 |                                                                                        | 1,162  |              |         |  | 1,108  |         
|Commitments and contingencies                                                                                                                                                                                                                                  |                                                                                                                                                                 |                                                                                        |        |              |         |  |        |         
|Redeemable convertible preferred stock, no par
    value; 5,000,000 shares authorized; issued and outstanding
    shares: 2,001,236 at March 31, 2003 and December 31,
    2002; liquidation preference of $48,430 at March 31, 2003
    and December 31, 2002 |                                                                                                                                                                 |                                                                                        | 30,665 |              |         |  | 30,665 |         
|Shareholders equity:                                                                                                                                                                                                                                          |                                                                                                                                                                 |                                                                                        |        |              |         |  |        |         
|                                                                                                                                                                                                                                                               | Common stock, no par value, 100,000,000 shares
    authorized; issued and outstanding shares: 50,168,003 at
    March 31, 2003; 31,157,612 at December 31, 2002 |                                                                                        |        | 245,091      |         |  |        | 230,853  |       
|                                                                                                                                                                                                                                                               | Accumulated deficit                                                                                                                                             |                                                                                        |        | (197,379     | )       |  |        | (189,443 | )     
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 |                                                                                        |        |              |         |  |        |         
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 | Total shareholders equity                                                             |        |              | 47,712  |  |        |          | 41,410 | 
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 |                                                                                        |        |              |         |  |        |         
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 | Total liabilities, redeemable convertible
    preferred stock and shareholders equity |        | $            | 101,820 |  |        | $        | 97,129 | 
|                                                                                                                                                                                                                                                               |                                                                                                                                                                 |                                                                                        |        |              |         |  |        |         

See accompanying notes.

1



---



##### Table of Contents



ARADIGM CORPORATION

STATEMENTS OF OPERATIONS

|                                                              |                                      |                       |        |        |        |   |        |        |        | 
|------------------------------------------------------------- | ------------------------------------ | --------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                              |                                      |                      
|                                                              |                                      | Three Months Ended   
|                                                              |                                      | March 31,            
|                                                              |                                      |                      
|                                                              |                                      | 2003                  |        | 2002  
|                                                              |                                      |                       |        |       
|                                                              |                                      |                      
|                                                              |                                      | (In thousands, except
|                                                              |                                      | per share data)      
|                                                              |                                      | (Unaudited)          
|Contract and license revenues                                 |                                      |                       |        |        |        |   |        |       
|                                                              | Related party                        |                       | $      | 7,569  |        |   | $      | 7,599  |       
|                                                              | Unrelated party                      |                       |        | 121    |        |   |        | 519    |       
|                                                              |                                      |                       |        |        |        |   |        |       
|                                                              |                                      | Total revenues        |        |        | 7,690  |   |        |        | 8,118  | 
|                                                              | Research and development             |                       |        | 12,999 |        |   |        | 14,313 |       
|                                                              | General and administrative           |                       |        | 2,669  |        |   |        | 2,458  |       
|                                                              |                                      |                       |        |        |        |   |        |       
|                                                              |                                      | Total expenses        |        |        | 15,668 |   |        |        | 16,771 | 
|                                                              |                                      |                       |        |        |        |   |        |       
|Loss from operations                                          |                                      |                       | (7,978 | )      |        |   | (8,653 | )     
|Interest income                                               |                                      |                       | 108    |        |        |   | 291    |       
|Interest expense and other                                    |                                      |                       | (56    | )      |        |   | (166   | )     
|                                                              |                                      |                       |        |        |        |   |        |       
|Net loss                                                      |                                      | $                     | (7,926 | )      |        | $ | (8,528 | )     
|                                                              |                                      |                       |        |        |        |   |        |       
|                                                              | Basic and diluted net loss per share |                       | $      | (0.22  | )      |   | $      | (0.29  | )     
|                                                              |                                      |                       |        |        |        |   |        |       
|Shares used in computing basic and diluted loss
    per share |                                      |                       | 35,601 |        |        |   | 29,544 |       
|                                                              |                                      |                       |        |        |        |   |        |       

See accompanying notes.

2



---



##### Table of Contents



ARADIGM CORPORATION

STATEMENTS OF CASH FLOWS

|                                                         |                                                                                 |                                                    |                      |                                                  |       |        |         |        |       |        |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------------------- | -------------------- | ------------------------------------------------ | ----- | ------ | ------- | ------ | ----- | ------ | ------- | -
|                                                         |                                                                                 |                                                   
|                                                         |                                                                                 | Three Months Ended                                
|                                                         |                                                                                 | March 31,                                         
|                                                         |                                                                                 |                                                   
|                                                         |                                                                                 | 2003                                               |                      | 2002                                            
|                                                         |                                                                                 |                                                    |                      |                                                 
|                                                         |                                                                                 |                                                   
|                                                         |                                                                                 | (In thousands)                                    
|                                                         |                                                                                 | (Unaudited)                                       
|Cash flows from operating activities:                    |                                                                                 |                                                    |                      |                                                  |       |        |         |       
|                                                         | Net loss                                                                        |                                                    | $                    | (7,926                                           | )     |        | $       | (8,528 | )    
|                                                         | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                    |                      |                                                  |       |        |         |        |      
|                                                         |                                                                                 | Depreciation and amortization                      |                      |                                                  | 1,592 |        |         |        | 1,325 |       
|                                                         |                                                                                 | Issuance of warrants and common stock for services |                      |                                                  | 5     |        |         |        |      |       
|                                                         |                                                                                 | Amortization of deferred compensation              |                      |                                                  |      |        |         |        | 40    |       
|                                                         |                                                                                 | Changes in operating assets and liabilities:       |                      |                                                  |       |        |         |        |       |       
|                                                         |                                                                                 |                                                    | Receivables          |                                                  |       | 203    |         |        |       | 1,280  |        
|                                                         |                                                                                 |                                                    | Other current assets |                                                  |       | (283   | )       |        |       | (519   | )      
|                                                         |                                                                                 |                                                    | Other assets         |                                                  |       | 5      |         |        |       | 19     |        
|                                                         |                                                                                 |                                                    | Accounts payable     |                                                  |       | (507   | )       |        |       | (3,748 | )      
|                                                         |                                                                                 |                                                    | Accrued compensation |                                                  |       | 780    |         |        |       | 1,124  |        
|                                                         |                                                                                 |                                                    | Accrued liabilities  |                                                  |       | 251    |         |        |       | (1,905 | )      
|                                                         |                                                                                 |                                                    | Deferred rent        |                                                  |       | 54     |         |        |       | 75     |        
|                                                         |                                                                                 |                                                    | Deferred revenue     |                                                  |       | (1,569 | )       |        |       | (3,330 | )      
|                                                         |                                                                                 |                                                    |                      |                                                  |       |        |         |       
|                                                         |                                                                                 |                                                    |                      | Net cash used in operating activities            |       |        | (7,395  | )      |       |        | (14,167 | )
|                                                         |                                                                                 |                                                    |                      |                                                  |       |        |         |       
|Cash flows from investing activities:                    |                                                                                 |                                                    |                      |                                                  |       |        |         |       
|                                                         | Capital expenditures                                                            |                                                    |                      | (1,280                                           | )     |        |         | (2,081 | )    
|                                                         | Purchases of available-for-sale investments                                     |                                                    |                      |                                                 |       |        |         | (5,579 | )    
|                                                         | Proceeds from maturities of available-for-sale
    investments                  |                                                    |                      | 237                                              |       |        |         | 1,219  |      
|                                                         |                                                                                 |                                                    |                      |                                                  |       |        |         |       
|                                                         |                                                                                 |                                                    |                      | Net cash used in investing activities            |       |        | (1,043  | )      |       |        | (6,441  | )
|                                                         |                                                                                 |                                                    |                      |                                                  |       |        |         |       
|Cash flows from financing activities:                    |                                                                                 |                                                    |                      |                                                  |       |        |         |       
|                                                         | Proceeds from issuance of common stock, net                                     |                                                    |                      | 14,233                                           |       |        |         | 724    |      
|                                                         | Costs from issuance of redeemable convertible
    preferred stock               |                                                    |                      |                                                 |       |        |         | (56    | )    
|                                                         | Notes receivable from officers and employees                                    |                                                    |                      | (147                                             | )     |        |         | (41    | )    
|                                                         | Payments on capital lease obligations and
    equipment loans                   |                                                    |                      | (620                                             | )     |        |         | (1,040 | )    
|                                                         |                                                                                 |                                                    |                      |                                                  |       |        |         |       
|                                                         |                                                                                 |                                                    |                      | Net cash provided (used) by financing activities |       |        | 13,466  |        |       |        | (413    | )
|                                                         |                                                                                 |                                                    |                      |                                                  |       |        |         |       
|Net increase (decrease) in cash and cash
    equivalents |                                                                                 |                                                    | 5,028                |                                                  |       |        | (21,021 | )     
|Cash and cash equivalents at beginning of year           |                                                                                 |                                                    | 22,800               |                                                  |       |        | 69,965  |       
|                                                         |                                                                                 |                                                    |                      |                                                  |       |        |         |       
|Cash and cash equivalents at end of period               |                                                                                 | $                                                  | 27,828               |                                                  |       | $      | 48,944  |       
|                                                         |                                                                                 |                                                    |                      |                                                  |       |        |         |       
|Supplemental disclosure of cash flow information:        |                                                                                 |                                                    |                      |                                                  |       |        |         |       
|                                                         | Cash paid for interest                                                          |                                                    | $                    | 55                                               |       |        | $       | 161    |      
|                                                         |                                                                                 |                                                    |                      |                                                  |       |        |         |       
|Non-cash investing and financing activities:             |                                                                                 |                                                    |                      |                                                  |       |        |         |       
|                                                         | Issuance of warrants and options to purchase
    common stock for services      |                                                    | $                    | 5                                                |       |        | $       |       |      
|                                                         |                                                                                 |                                                    |                      |                                                  |       |        |         |       
|                                                         | Issuance of warrants in conjunction with private
    placement of common stock  |                                                    | $                    | 2,469                                            |       |        | $       |       |      
|                                                         |                                                                                 |                                                    |                      |                                                  |       |        |         |       

See accompanying notes

3



---



##### Table of Contents



ARADIGM CORPORATION

NOTES TO THE UNAUDITED FINANCIAL
STATEMENTS

March 31, 2003


1.     Organization
and Basis of Presentation

Aradigm Corporation (the Company) is
a California corporation 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. These factors indicate that
the Companys ability to continue its research, development
and commercialization activities are dependent upon the ability
of management to obtain additional financing as required.



| |                      
| | ---------------------
| | Basis of Presentation

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, 2002 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.

2.     Summary of
Significant Accounting Policies



| |                         
| | ------------------------
| | Stock Based Compensation

The Company has elected to follow Accounting
Principles Board Opinion No. 25 Accounting for Stock
Issued to Employees and related interpretations in
accounting for its employee stock options, including Financial
Accounting Standard Board Interpretation 44 Accounting for
Certain Transactions Involving Stock Compensation.
Compensation expense is based on the difference, if any, between
the fair value of the Companys common stock and the
exercise price of the option or share right on the measurement
date, which is typically the date of grant. This amount is
recorded as Deferred stock compensation in the
Balance Sheets and amortized as a charge to operations over the
vesting period of the applicable options or share rights. In
accordance with Statement of Financial Accounting Standards
(SFAS) 123 Accounting for Stock-Based Compensation
(SFAS 123) as amended by SFAS 148 Accounting
for Stock-Based Compensation  Transition and
Disclosure, the Company has provided, below, the pro forma
disclosures of the effect on net loss and loss per share as if
SFAS 123 had been applied in measuring compensation expense for
all periods presented.

4



---



##### Table of Contents



|                                                                             |                                                                                                             |      |        |        |   |   |         |        |  
|---------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ---- | ------ | ------ | - | - | ------- | ------ | -
|                                                                             |                                                                                                             | 2003 |        | 2002  
|                                                                             |                                                                                                             |      |        |       
|Net loss applicable to common
    shareholders  as reported                 |                                                                                                             | $    | (7,926 | )      |   | $ | (8,528  | )     
|Add:                                                                         |                                                                                                             |      |        |        |   |   |         |       
|                                                                             | Stock-based employee compensation expense
    included in reported net loss                                 |      |        | 5      |   |   |         | 40     |  
|Less:                                                                        |                                                                                                             |      |        |        |   |   |         |       
|                                                                             | Total stock-based employee compensation expense
    determined under fair value based method for all awards |      |        | (1,556 | ) |   |         | (1,838 | )
|                                                                             |                                                                                                             |      |        |        |   |   |         |       
|Pro forma net loss applicable to common
    shareholders                     |                                                                                                             | $    | (9,477 | )      |   | $ | (10,326 | )     
|Basic and diluted net loss per share applicable
    to common shareholders  |                                                                                                             |      |        |        |   |   |         |       
|                                                                             | As reported                                                                                                 |      | $      | (0.22  | ) |   | $       | (0.29  | )
|                                                                             | Pro forma                                                                                                   |      | $      | (0.27  | ) |   | $       | (0.35  | )

The Company accounts for options and warrants
issued to non-employees under SFAS 123 and Emerging Issues Task
Force Issue No. 96-18. The value of options and warrants
are periodically remeasured over their vesting terms.



| |                                      
| | -------------------------------------
| | Computation of Net Loss 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,
warrants and redeemable convertible preferred stocks are
antidilutive.

3.     Shareholders
Equity

Pursuant to a Securities Purchase Agreement
entered into as of February 10, 2003, the Company issued
18,992,391 shares of common stock at $0.79 per share and
warrants to purchase 4,273,272 shares of the common stock at
$1.07 per share to certain investors for an aggregate purchase
price of approximately $15.0 million in a private
placement. The warrants are exercisable at the election of the
warrant holders for a four-year term. The Company valued the
warrants using the Black-Scholes option pricing model using the
following assumptions: estimated volatility of 62%, risk-free
interest rate of 4.4%, no dividend yield, and an expected life
of 4 years, and recorded approximately $1,366,964 as
issuance costs related to the private placement. In addition, in
connection with this private placement, the Company has issued
warrants (repriced warrants) to purchase an
aggregate of 4,016,024 shares of its common stock at $1.12 per
share to certain of the investors in the private placement in
exchange for the cancellation of an equal number of warrants to
purchase shares of the common stock at $6.97 per share, held by
the same investors. The Company valued the repriced warrants
using the Black-Scholes option pricing model using the following
assumptions: estimated volatility of 62%, risk-free interest
rate of 4.4%, no dividend yield, and an expected life of
3.8 years, and recorded an additional $1,101,798 as
issuance costs related to the private placement.

4.     Contingencies

In June 1998, Eli Lilly and Company
(Lilly) filed a complaint against the Company in the
United States District Court for the Southern District of
Indiana. The complaint made various allegations against the
Company, arising from the Companys decision to enter into
an exclusive collaboration with Novo Nordisk with respect to the
development and commercialization of a pulmonary delivery system
for insulin and insulin analogs. The Company has sponsored
various studies of the pulmonary delivery of insulin and insulin
analogs using materials supplied by Lilly under a series of
agreements dating from January 1996. The Company and Lilly had
also conducted negotiations concerning a long-term supply
agreement under which Lilly would supply bulk insulin to the
Company for commercialization in the Companys AERx insulin
Diabetes Management System, and a separate agreement under which
the Company would license certain intellectual

5



---



##### Table of Contents



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 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
April 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. After the Court resolved various post-trail
motions, both Lilly and the Company filed appeals; the schedule
for the appeal is not yet set. 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.


5.     Related
Party

Novo Nordisk and its affiliate, Novo Nordisk
Pharmaceuticals, Inc., are considered related parties and at
March 31, 2003 own approximately 13.5% of the
Companys total outstanding common stock (on an
as-converted basis).

6.     Subsequent
Events

On May 12, 2003, Aradigm completed the
purchase of certain assets from the Weston Medical Group
(Weston), a UK public company currently in
administration. Westons business involved the design,
development, manufacture and exploitation of drug delivery
technologies, including a proprietary needle-free injection
technology known as Intraject. Aradigm has acquired
test and production equipment, intellectual property and other
assets associated with Westons drug delivery technologies
for a cash consideration of $2.0 million payable to the
Weston administrators over a two-month period. The acquisition
was funded out of Aradigms working capital. Aradigm will
continue the development of Westons technologies and drug
delivery systems at Aradigms existing US facilities.
Aradigm will continue development of Intraject by re-allocating
existing resources and is not anticipating more than a small
increase in its current cash burn rate.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 21, 2003.

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

6



---



##### Table of Contents



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
that 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, including
our AERx systems. As of March 31, 2003, we had an
accumulated deficit of $197.4 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 2003. 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 months ended March 31, 2003,
this partner-funded program has contributed approximately 98% of
our total contract revenues. At March 31, 2003, Novo
Nordisk and its affiliate Novo Nordisk Pharmaceuticals, Inc. own
approximately 13.5% of our total outstanding common stock (on an
as-converted basis) and are considered a related party.

During December 2000, GlaxoSmithKline and we
amended the product development and commercialization agreement
covering the use of the AERx Pain Management System for the
delivery of narcotic analgesics whereby we assumed full control
and responsibility for conducting and financing the remainder of
all development activities. Under the amendment, unless
GlaxoSmithKline or we have terminated the agreement,
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. While
GlaxoSmithKline has been in a position to exercise its
restoration election since delivery of Phase 2b trial results,
which were made available to them during the second quarter of
2002, it appears unlikely that GlaxoSmithKline will do so. 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. We have the right to explore partnering
options with other companies while this agreement is in effect.
We are currently in active discussions with several alternate
partners that could participate in this product if
GlaxoSmithKline does not elect to restore its rights. There can
be no assurance that we will successfully enter into an
alternative partnership agreement for this product if
GlaxoSmithKline does not elect to restore its rights. No product
development or milestone payments were received from
GlaxoSmithKline during 2002 or in the first quarter of 2003.

In addition to the diabetes and pain programs, we
have six additional programs in development, five of which are
partner funded. It is our policy not to disclose the partner
and/or the drug until a long-term development agreement has been
established; both parties agree to highlight a clinical
advancement in the program or under special circumstances in
which both parties agree to disclosure. In 2002, we announced

7



---



##### Table of Contents



successful clinical results from one partnered
trial with interferon alpha when an abstract was accepted at a
leading scientific session, in which the partner was not
disclosed. In addition, a gene therapy collaboration with
geneRx+ was disclosed which hold certain potentially beneficial
licensing rights to Aradigm.


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 and such payments are no longer refundable.



| |                 
| | ----------------
| | 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.

Results of Operations



| |                                               
| | ----------------------------------------------
| | Three Months Ended March 31, 2003 and
    2002

Contract and License Revenues:Contract revenues for the three months
ended March 31, 2003 decreased to $7.7 million from
$8.1 million for the same period in 2002. The decline in
contract revenue was due in part to no partner-funded revenue
earned from the pain management program during the current
quarter, which contributed revenue of $249,000 for the same
period in 2002. Revenue from Novo Nordisk was $7.6 million
for each of the three months ended March 31, 2003 and 2002.
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 March 31, 2003 decreased to
$13.0 million from $14.3 million for the same period
in 2002. 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 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

8



---



##### Table of Contents



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 initiated Phase
3 clinical trials in September 2002, we have been focused on
preparing for the additional Phase 3 clinical trials that will
be needed for our regulatory submission and commercial scale-up
activities.

Our next program has been conducted to date 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.
Activity in this program has been limited since delivery to
GlaxoSmithKline of data from the Phase 2b clinical trials in the
second quarter of 2002. We are in a position to move forward
with this program and start Phase 3 trial within a year;
however, 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 have six additional programs, five of which
are partner-funded programs and include two gene therapy
programs. Three of these have completed Phase 1 clinical trials
this year. Future research and development efforts for these
partner-funded programs are difficult to predict at this time
due to their early stage of development. In addition, we are
funding the development of inhaled testosterone until such time
that a partner is found for this program.

General and Administrative Expenses:General and administrative expenses
for the three months ended March 31, 2003 marginally
increased to $2.7 million from $2.5 million for the
same period in 2002.

Interest Income:Interest income for the three months
ended March 31, 2003 decreased to $108,000 from $291,000
for the same period in 2002. The decrease is due to lower
invested balances and lower interest rates.

Interest Expense and Other:Interest expense for the three months
ended March 31, 2003 decreased to $56,000 from $166,000 for
the same period in 2002. 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 March 31, 2003 of
$7.9 million was lower compared to the same period in 2002,
reflecting lower revenue offset by reduced expense for the
period.

Liquidity and Capital Resources

The Company has financed its operations since
inception primarily through private placements and public
offerings of capital stock, proceeds from equipment lease
financing, contract revenues and interest earned on investments.
As of March 31, 2003, we had cash, cash equivalents and
investments of approximately $36.2 million.

In March 2003, we raised approximately
$15.0 million through the sale of 18,992,391 shares of
common stock at a price of $0.79 per share and warrants to
purchase 4,273,272 shares of common stock at $1.07 per share to
certain investors in a private placement. In addition, in
connection with this private placement we issued to certain of
the investors in the private placement warrants to purchase an
aggregate of 4,016,024 shares of common stock at $1.12 per share
in exchange for the cancellation of an equal number of warrants
to purchase the common stock at $6.97 per share, held by the
same investors.

Net cash used in operating activities for the
three months ended March 31, 2003 decreased to
$7.4 million from $14.2 million for the same period in
2002. Although, the net loss was $7.9 million in the three
months ended March 31, 2003 and $8.5 million in the
three months ended March 31, 2002, net cash

9



---



##### Table of Contents



used was substantially higher in 2002 due
payments of accrued accounts payable, accrued liabilities and
greater recognition of deferred revenue carried over from 2001.


Net cash used in investing activities for the
three months ended March 31, 2003 decreased to
$1.0 million from $6.4 million for the same period in
2002. Higher spending in 2002 related to capital expenditures
for the acquisition of manufacturing production equipment for
commercial production.

Net cash provided by financing activities for the
three months ended March 31, 2003 was $13.5 million
compared to a use of $413,000 for the same period in 2002. The
increase in cash provided is the result of the completion of the
private placement in March 2003.

On May 12, 2003, Aradigm completed the
purchase of certain assets from the Weston Medical Group
(Weston), a UK public company currently in
administration. Westons business involved the design,
development, manufacture and exploitation of drug delivery
technologies, including a proprietary needle-free injection
technology known as Intraject. Aradigm has acquired
test and production equipment, intellectual property and other
assets associated with Westons drug delivery technologies
for a cash consideration of $2.0 million payable to the
Weston administrators over a two-month period. The acquisition
was funded out of Aradigms working capital. Aradigm will
continue the development of Westons technologies and drug
delivery systems at Aradigms existing US facilities.
Aradigm will continue development of Intraject by re-allocating
existing resources and is not anticipating more than a small
increase in its current cash burn rate.

The development of our technology and proposed
products, including the Intraject development program, 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 2003 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 2003 will be approximately
$11.5 million. Other than in connection with the
acquisition of the Intraject related assets, since
December 31, 2002, there have been no material changes in
our contractual obligations or commitments. We believe that our
existing cash balances at March 31, 2003, together with the
$20.0 million unused common stock purchase commitment from
Novo Nordisk A/S, 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 fifteen months. The sale of additional common stock to
Novo Nordisk A/S 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 A/S because of the need
for shareholder approval or otherwise or if our current funding
commitments from corporate development partners are amended or
terminated, we will need to obtain additional sources of capital
sooner than would otherwise be the case.

If our development programs including the
Intraject development program, continue to progress, 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

10



---



##### Table of Contents



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 March 31, 2003, we had cash and cash
equivalents and short-term investments of $36.2 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.






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures



| |                                                             
| | ------------------------------------------------------------
| | (a)     Evaluation
    of Disclosure Controls and Procedures

Based on their evaluation of our disclosure
controls and procedures conducted within 90 days of the
date of filing this report on Form 10-Q, our Chief
Executive Officer and the Chief Financial Officer have concluded
that our disclosure controls and procedures (as defined in
Rules 13a - 14(c) and 15d - 14(c)
promulgated under the Securities Exchange Act of 1934) are
effective.



| |                                         
| | ----------------------------------------
| | (b)     Changes in
    Internal Controls

There were no significant changes in our internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.

11



---



##### Table of Contents






PART II. OTHER INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

In June 1998, Eli Lilly and Company
(Lilly) filed a complaint against us in the United
States District Court for the Southern District of Indiana. The
complaint made various allegations against us, arising from our
decision to enter into an exclusive collaboration with Novo
Nordisk with respect to the development and commercialization of
a pulmonary delivery system for insulin and insulin analogs. We
have 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. Lilly and
we had also conducted negotiations concerning a long-term supply
agreement under which Lilly would supply bulk insulin to us for
commercialization in our AERx insulin Diabetes Management
System, and a separate agreement under which we would license
certain intellectual property to Lilly. These negotiations were
terminated after we proceeded with our agreement with Novo
Nordisk. The complaint sought a declaration that Lilly
scientists were co-inventors of a patent application we filed
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.
We filed an answer denying all material allegations of the
complaint. The Court granted summary judgment in our favor 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 April 2002. The jury returned
verdicts in our favor 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. After the
Court resolved various post-trail motions, both Lilly and we
filed appeals; the schedule for the appeal is not yet set.
Although there can be no assurance that we will ultimately
prevail in this matter, we believe that the ultimate outcome of
this litigation will not in any event have a material adverse
effect on our financial position or results of operations.






|        |                                              
|------- | ---------------------------------------------
|Item 2. | Changes in Securities and Use of
    Proceeds

Pursuant to a Securities Purchase Agreement
entered into as of February 10, 2003, we issued 18,992,391
shares of common stock at $0.79 per share and warrants to
purchase 4,273,272 shares of our common stock at $1.07 per share
to certain institutional investors and insiders for an aggregate
purchase price of approximately $15.0 million in a private
placement. The warrants are exercisable at the election of the
warrant holders for a four-year term. In addition, in connection
with this private placement, we have issued to certain of the
investors in the private placement warrants (repriced
warrants) to purchase an aggregate of 4,016,024 shares of
our common stock at $1.12 per share in exchange for the
cancellation of an equal number of warrants to purchase our
common stock at $6.97 per share, held by the same investors. We
have issued the shares in reliance on Rule 506 of Reg D of
the Securities Act of 1933, as amended.






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

A Special Meeting of Shareholders of Aradigm
Corporation was held on March 7, 2003. At the Special
Meeting, the shareholders approved (i) the issuance and
sale of up to 18,992,391 shares of the our common stock,
(ii) the issuance of warrants to purchase an aggregate of
up to 4,273,272 shares of our common stock and our common stock
that is issuable upon exercise of such warrants, and
(iii) the cancellation and reissuance of certain
outstanding warrants and the issuance of our common stock that
is issuable upon exercise of such warrants, in a private
financing. The holders of our common stock and our Series A
preferred stock, voting together as a single class on an
as-converted basis, cast 19,667,717 votes in favor and 661,764
votes against, with 6,575 votes abstaining.

12



---



##### Table of Contents








|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits

| |         |  |  |                                                                                                                                             
| | ------- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1(1) |  |  | Securities Purchase Agreement, dated as of
    February 10, 2003, by and between the Company and the
    persons listed on Exhibit A thereto
| | 10.2(1) |  |  | Warrant Repricing Agreement, dated as of
    February 10, 2003, by and between the Company and the
    persons listed on Exhibit A thereto  
| | 99.1    |  |  | Certification by Chief Executive Officer and
    Chief Financial Officer                                                                    



---



|    |                                                                                   
|--- | ----------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Companys
    Form 8-K filed on February 12, 2003

(b) Reports on Form 8-K

We filed a Current Report on Form 8-K dated
February 12, 2003, relating to (i) the execution of a
Securities Purchase Agreement governing the sale and issuance of
shares of our common stock and warrants to purchase share of our
common stock and (ii) the issuance of warrants pursuant to
a Warrant Repricing Agreement.

13



---



##### Table of Contents






SIGNATURES

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.



| |                                                      
| | -----------------------------------------------------
| | ARADIGM CORPORATION                                  
| | (Registrant)                                         
|
| | /s/ RICHARD P. THOMPSON                              
| |                                                      
| | Richard P. Thompson                                  
| | President and Chief Executive
    Officer            
|
| | /s/ THOMAS C. CHESTERMAN                             
| |                                                      
| | Thomas C. Chesterman                                 
| | Senior Vice President and Chief Financial
    Officer

Dated: May 9, 2003

14



---



##### Table of Contents






CERTIFICATION

I, Richard P. Thompson, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of Aradigm Corporation;

2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this quarterly report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



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

Date: May 9, 2003

15



---



##### Table of Contents






CERTIFICATION

I, Thomas C. Chesterman, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of Aradigm Corporation;

2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this quarterly report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                                                      
| | -----------------------------------------------------
| | /s/ THOMAS C. CHESTERMAN                             
| |                                                      
| | Thomas C. Chesterman                                 
| | Senior Vice President and Chief Financial
    Officer

Date: May 9, 2003

16



---



##### Table of Contents






INDEX TO EXHIBITS

|        |         |  |  |             |  |                                                                                                                                             
|------- | ------- |  |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |  |  |            
|Number  |         |  |  | Description
|        |         |  |  |            
|        | 10.1(1) |  |  |             |  | Securities Purchase Agreement, dated as of
    February 10, 2003, by and between the Company and the
    persons listed on Exhibit A thereto
|        | 10.2(1) |  |  |             |  | Warrant Repricing Agreement, dated as of
    February 10, 2003, by and between the Company and the
    persons listed on Exhibit A thereto  
|        | 99.1    |  |  |             |  | Certification by Chief Executive Officer and
    Chief Financial Officer                                                                    



---



|    |                                                                                   
|--- | ----------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Companys
    Form 8-K filed on February 12, 2003