<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

           [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  For the quarterly period ended June 30, 1999

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


                         Commission File Number 0-21185


                       APPLIED ANALYTICAL INDUSTRIES, INC.
             (Exact name of Registrant as specified in its charter)


               DELAWARE                                      04-2687849
   (State or other jurisdiction of                        (I.R.S. employer
    incorporation or organization)                       identification no.)


                5051 NEW CENTRE DRIVE, WILMINGTON, NC    28403
               (Address of principal executive office) (Zip code)


                                 (910) 392-1606
              (Registrant's telephone number, including area code)


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

The number of shares of the Registrant's common stock outstanding, as of
July 10, 1999, was 17,205,391 shares.



<PAGE>   2

                       APPLIED ANALYTICAL INDUSTRIES, INC.
                                Table of Contents



         The terms "Company", "Registrant" or "AAI" in this Form 10-Q include
Applied Analytical Industries, Inc. and its subsidiaries, except where the
context may indicate otherwise. Any item which is not applicable or to which the
answer is negative has been omitted.

                                                                        Page No.
                                                                        --------

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS (unaudited).
           Condensed Consolidated Statement of Income                       3
           Condensed Consolidated Balance Sheet                             4
           Condensed Consolidated Statement of Cash Flows                   5
           Notes to Condensed Consolidated Financial Statements             6

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS.                              11


PART II. OTHER INFORMATION

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                   15

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS               16

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.                                 16


SIGNATURES                                                                 17

EXHIBIT INDEX                                                              18




                                       2

<PAGE>   3

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

                       APPLIED ANALYTICAL INDUSTRIES, INC.
                   Condensed Consolidated Statement of Income
                    (In thousands, except per share amounts)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                    Three months ended                Six months ended
                                                                         June 30,                          June 30,
                                                               ----------------------------      --------------------------
                                                                  1999            1998              1999           1998
                                                               ------------    ------------      ------------    ----------
<S>                                                           <C>             <C>                     <C>           <C>
Net sales                                                     $     21,691    $     23,811            47,806        44,784
                                                               ------------    ------------      ------------    ----------

Operating costs and expenses:
   Direct costs                                                     12,260          11,664            26,858        22,619
   Selling                                                           3,407           2,447             6,075         4,931
   General and administrative                                        5,826           5,449            11,089        10,051
   Research and development                                          4,091           1,965             5,959         3,367
   Transaction, integration, and restructuring costs                                   --              6,400           --
                                                               ------------    ------------      ------------    ----------
                                                                    25,584          21,525            56,381        40,968
                                                               ------------    ------------      ------------    ----------

   Income (loss) from operations                                    (3,893)          2,286            (8,575)        3,816

Other income:
   Interest income, net of expense                                    (255)            131              (434)          261
   Other, net                                                          (17)            (28)              (49)          (17)
                                                               ------------    ------------      ------------    ----------
                                                                      (272)            103              (483)          244
                                                               ------------    ------------      ------------    ----------

Income (loss) before income taxes                                   (4,165)          2,389            (9,058)        4,060
Provision (benefit) for income taxes                                (1,192)            941            (2,322)        1,452
                                                               ------------    ------------      ------------    ----------
Net income (loss)                                             $     (2,973)   $      1,448            (6,736)        2,608
                                                               ============    ============      ============    ==========


Basic earnings (loss) per share                               $      (0.17)   $       0.08             (0.39)         0.15
                                                               ============    ============      ============    ==========
Weighted average shares outstanding                                 17,205          17,105            17,202        17,102
                                                               ============    ============      ============    ==========

Diluted earnings (loss) per share                             $      (0.17)   $       0.08             (0.39)         0.15
                                                               ============    ============      ============    ==========
Weighted average shares outstanding                                 17,205          17,657            17,202        17,709
                                                               ============    ============      ============    ==========
</TABLE>


     The accompanying notes are an integral part of these financial statements.


                                       3


<PAGE>   4

                       APPLIED ANALYTICAL INDUSTRIES, INC.
                      Condensed Consolidated Balance Sheet
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                     June 30,            December 31,
                                                                       1999                  1998
                                                                 -----------------     -----------------
<S>                                                             <C>                   <C>

                            ASSETS

Current assets:
Cash and cash equivalents                                       $           8,774     $          12,299
Accounts receivable                                                        25,190                26,138
Work-in-progress                                                           16,547                15,570
Prepaid and other current assets                                           10,341                 7,902
                                                                 -----------------     -----------------
          Total current assets                                             60,852                61,909
Property and equipment, net                                                41,560                38,802
Goodwill and other intangibles                                             13,541                15,509
Other assets                                                                3,274                 3,288
                                                                 -----------------     -----------------
          Total assets                                          $         119,227     $         119,508
                                                                 =================     =================

             LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current maturities of long-term debt
   and short-term debt                                          $          19,417     $           7,038
Accounts payable                                                            5,053                 7,169
Customer advances                                                           3,882                 6,818
Accrued wages and benefits                                                  5,649                 4,522
Other accrued liabilities                                                   8,471                 7,836
                                                                 -----------------     -----------------
          Total current liabilities                                        42,472                33,383
Long-term debt                                                              5,527                 7,749
Other liabilities                                                           3,697                 3,254
Commitments and contingencies                                                 --                   --
Stockholders' equity:
  Common stock                                                                 17                    17
  Paid-in capital                                                          69,633                69,570
  Retained earnings/(deficit)                                              (1,083)                5,653
  Accumulated other comprehensive losses                                   (1,004)                  (53)
  Stock subscriptions receivable                                              (32)                  (65)
                                                                 -----------------     -----------------
          Total stockholders' equity                                       67,531                75,122
                                                                 -----------------     -----------------
          Total liabilities and stockholders' equity            $         119,227     $         119,508
                                                                 =================     =================
</TABLE>


     The accompanying notes are an integral part of these financial statements.


                                       4
<PAGE>   5

                      APPLIED ANALYTICAL INDUSTRIES, INC.
                 Condensed Consolidated Statement of Cash Flows
                                 (In thousands)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                              Six months ended
                                                                                   June 30,
                                                                        --------------------------------
                                                                            1999               1998
                                                                        ------------     ---------------
<S>                                                                    <C>              <C>
Net income/(loss)                                                      $     (6,736)    $         2,608
Adjustments to reconcile to net cash provided
    (used) by operating activities:
    Depreciation and amortization                                             3,791               3,084
    Other                                                                        (2)                683
    Changes in assets and liabilities:
    Trade and other receivables                                                 497                (807)
    Work-in-progress                                                         (1,377)             (3,262)
    Prepaid and other assets, net                                            (2,580)             (1,220)
    Accounts payable                                                         (1,887)                (80)
    Customer advances                                                        (2,672)             (1,868)
    Other accrued liabilities                                                 3,056               1,119
                                                                        ------------     ---------------
Net cash provided (used) by operating activities:                            (7,910)                257
Cash flows from investing activities:
Purchase of property and equipment                                           (6,763)             (5,329)
Other                                                                           (43)                 77
                                                                        ------------     ---------------
Net cash used by investing activities                                        (6,806)             (5,252)
Cash flows from financing activities:
Net (payments) proceeds on short-term debt                                   12,987                 999
Net (payments) proceeds on long-term debt                                    (1,644)               (588)
Other                                                                           (44)                 76
                                                                        ------------     ---------------
Net cash (used) provided by financing activities                             11,299                 487
                                                                        ------------     ---------------
Net decrease in cash and cash equivalents                                    (3,417)             (4,508)
Effect of exchange rate changes on cash                                        (108)
Cash and cash equivalents, beginning of period                               12,299              27,436
                                                                        ------------     ---------------
Cash and cash equivalents, end of period                               $      8,774     $        22,928
                                                                        ============     ===============
Supplemental information, cash paid for:
     Interest                                                          $        178     $           139
     Income taxes                                                      $          0     $           800
</TABLE>


   The accompanying notes are an integral part of these financial statements.


                                       5
<PAGE>   6

                       APPLIED ANALYTICAL INDUSTRIES, INC.
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
applicable Securities and Exchange Commission regulations for interim financial
information. These financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. It is presumed that users of this interim financial
information have read or have access to the audited financial statements for the
preceding fiscal year. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for fair presentation have
been included. Operating results for the interim periods presented are not
necessarily indicative of the results that may be expected for the full year.

2. MERGERS AND ACQUISITIONS

On March 16, 1999, the Company merged with Medical and Technical Research
Associates, Inc. ("MTRA"), a clinical contract research organization located
near Boston, Massachusetts, in exchange for approximately 1.3 million shares of
AAI stock including the conversion of MTRA options. The merger has been
accounted for as a pooling-of-interests. The results of operations for the
separate companies and the combined amounts presented in the consolidated
financial statements are as follows:

<TABLE>
<CAPTION>
                                               Three months ended                  Six months ended
                                                    June 30,                             June 30,
                                         ------------------------------       -----------------------------
                                             1999             1998               1999             1998
                                         -------------    -------------       ------------     ------------
<S>                                     <C>              <C>                 <C>              <C>
Net sales:
AAI                                     $      17,113    $      19,426       $     38,388     $     36,539
MTRA                                            4,578            4,385              9,418            8,245
                                         -------------    -------------       ------------     ------------
                                        $      21,691    $      23,811       $     47,806     $     44,784
                                         =============    =============       ============     ============

Net income (loss):
AAI                                            (3,200)           1,306             (7,202)           2,379
MTRA                                              227              142                466              229
                                         -------------    -------------       ------------     ------------
                                        $      (2,973)   $       1,448       $     (6,736)    $      2,608
                                         =============    =============       ============     ============
</TABLE>

The accompanying consolidated financial statements include operations of the
combined entities for the three months ended June 30, 1999 and 1998.

In connection with the merger, the Company has recorded a non-recurring charge
to operating income reflecting the costs to complete the transaction, integrate
the businesses and realign its workforce to its new combined operating
structure. The items included in this charge are detailed in Note 7.


                                       6

<PAGE>   7

3. EARNINGS PER SHARE

The weighted average shares used in the calculation of diluted earnings per
share represents the weighted average shares outstanding plus the dilutive
impact of outstanding stock options. The following table presents the changes
in the weighted shares outstanding.

<TABLE>
<CAPTION>
                                                                      Three months ended                Six months ended
                                                                           June 30,                         June 30,
                                                                 -----------------------------     -----------------------------
                                                                    1999    (1)      1998             1999    (1)      1998
                                                                 -----------      ------------     -----------      ------------
<S>                                                              <C>              <C>              <C>              <C>
      Basic Earnings per Share:
         Weighted average number of shares                           17,205            17,105          17,202            17,102

      Effect of Dilutive Securities:
         Employee and Director stock options                              0               552               0               607
                                                                 -----------      ------------     -----------      ------------

      Diluted Earnings per Share:
         Adjusted weighted average number of
         shares and assumed conversions                              17,205            17,657          17,202            17,709
                                                                 ===========      ============     ===========      ============

   (1)Weighted Average Number of Shares Not
         Included in Diluted EPS Since Antidilutive                     519                 0             567                 0
                                                                 ===========      ============     ===========      ============
</TABLE>

4. COMPREHENSIVE INCOME

Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources. The
following table presents the components of the Company's comprehensive income.

<TABLE>
<CAPTION>
                                                      Three months ended                   Six months ended
                                                            June 30,                            June 30,
                                                        (In thousands)                       (In thousands)
                                                ------------------------------       -----------------------------
                                                    1999             1998               1999             1998
                                                -------------    -------------       ------------     ------------
<S>                                            <C>              <C>                 <C>              <C>
Net income (loss)                              $      (2,973)   $       1,448       $     (6,736)    $      2,608
Other comprehensive income (loss):
  Currency translation adjustments                      (370)              13             (1,004)              (1)
                                                -------------    -------------       ------------     ------------
Comprehensive income (loss)                    $      (3,343)   $       1,461       $     (7,740)    $      2,607
                                                =============    =============       ============     ============
</TABLE>


                                       7
<PAGE>   8

5. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA
   (In thousands):

<TABLE>
<CAPTION>
                                                   Three months ended                        Six months ended
                                                        June 30,                                  June 30,
                                              -----------------------------            ------------------------------
                                                 1999             1998                     1999             1998
                                              ------------    -------------            -------------    -------------
<S>                                          <C>             <C>                      <C>              <C>
Net sales:
Clinical                                     $      5,875    $       6,107            $      12,135    $      12,059
Pharmaceutic                                       15,195           15,477                   31,153           28,963
Internal Product Development                          621            2,227                    4,518            3,762
                                              ------------    -------------            -------------    -------------
                                             $     21,691    $      23,811            $      47,806    $      44,784
                                              ============    =============            =============    =============

United States                                $     17,918    $      18,729            $      37,989    $      35,365
Non-U.S.                                            4,208            5,190                   11,256            9,976
Less inter-geographic sales                          (435)            (108)                  (1,439)            (557)
                                              ------------    -------------            -------------    -------------
                                             $     21,691    $      23,811            $      47,806    $      44,784
                                              ============    =============            =============    =============

Income (loss) from operations:
Clinical                                     $       (215)   $         447            $         142    $         753
Pharmaceutic                                        1,065            2,157                    2,468            3,195
Internal Product Development                       (3,330)             261                   (2,320)             394
Corporate                                          (1,413)            (579)                  (2,465)            (526)
Corporate Restructuring Charges                         0                0                   (6,400)               0
                                              ------------    -------------            -------------    -------------
                                             $     (3,893)   $       2,286            $      (8,575)   $       3,816

United States                                $     (3,030)   $       2,787            $      (9,701)   $       4,234
Non-U.S.                                             (863)            (501)                   1,126             (418)
                                              ------------    -------------            -------------    -------------
                                             $     (3,893)   $       2,286            $      (8,575)  $        3,816
                                              ============    =============            =============    =============
</TABLE>

6. INCOME TAX EXPENSE

The Company's effective tax rate has been affected by losses in Europe. These
losses have created a tax asset which has been reserved against, thus no tax
benefit is shown related to the European losses. In the future, as European
operations become profitable, the reserves against these deferred assets will
reverse and will either reduce future tax expense or goodwill.


                                       8
<PAGE>   9

7. TRANSACTION, INTEGRATION AND RESTRUCTURING COSTS

In connection with the Company's merger with MTRA, certain expenses of the
transaction, costs to integrate the two organizations and reorganize the
combined business have been accrued and recorded as an expense. The expenses
were recorded in the first quarter of 1999 and are included in the condensed
consolidated statement of income for the six months ended June 30, 1999.

Transaction costs are comprised of amounts owed to investment bankers and
advisors as a percentage of the total merger consideration and other expenses
directly related to the completion of the transaction, including financial
reviews and legal fees. Personnel separation costs include the separation of
approximately 58 employees in the US and Europe to combine the clinical
operations of the companies and realign the workforce in the new organization.
Facility and other costs include lease payments required under non-cancelable
leases for vacant properties and the write off of leasehold improvements and
equipment which will become redundant or obsolete due to the transaction. Other
costs include integration costs directly related to the merger and other costs
resulting from actions taken to merge the operations.

The following table presents the components of the expense recorded and the
amounts paid through June 30, 1999.


                                                   Total          Paid to
                                                  Expense          Date
                                                -----------     -----------
     Transaction costs                         $    1,913      $      596
     Personnel separation costs                     1,919             467
     Facility and other costs                       2,568           1,123
                                                ===========     ===========
                                               $    6,400      $    2,186
                                                ===========     ===========

8. TRANSACTIONS WITH RELATED PARTIES

In the second quarter of 1999, the Company advanced $300,000 to Pharmcomm, Inc.
("Pharmcomm"), a company whose principal stockholders include Dr. Frederick
Sancilio, Mr. James Waters and Mr. William Underwood, all directors of AAI.
One other stockholder of Pharmcomm is a member of AAI management.

The advance payment was for services to be rendered by Pharmcomm during 1999 and
2000 for scanning and indexing services required as part of AAI's regulatory
compliance and record retention policies. The services will be performed by
Pharmcomm at market rates after considering the timing of the advance payment.
AAI has engaged Pharmcomm to perform these services since 1996 and has
compensated Pharmcomm at market rates pursuant to written agreements for the
services.

Pharmcomm also provides computer validation services to AAI at market rates.
These validation services are required for compliance with regulatory
requirements.

Total payments for scanning and validation services provided to AAI by Pharmcomm
were approximately $287,000, $214,000, and $436,000 for the years ended December
31, 1996, 1997,


                                       9

<PAGE>   10


and 1998, respectively. For the six months ended June 30, 1999, AAI has paid
Pharmcomm approximately $266,000 excluding the advance payment for services
discussed above.

The Company also has work-in-process and receivables due from Aesgen, Inc.
("Aesgen") and Endeavor Pharmaceuticals Inc. ("Endeavor"). Both Endeavor and
Aesgen were organized by AAI and its principal shareholders, and continue to be
related parties. The total amount of work-in-process and receivables at June 30,
1999 related to Aesgen was approximately $661,000 and the amount related to
Endeavor was approximately $1,778,000.

9. DEBT

At June 30, 1999, the Company was not in compliance with a financial covenant in
connection with a credit arrangement with a bank. The credit arrangement
represents a revolving line of credit (the "Revolver") and certain off-balance
sheet leases (the "Leases"). The Revolver is the primary mechanism used by the
Company to fund capital purchases and operating cash needs. The balance owed on
the Revolver at June 30, 1999 was $13,267,000 and is unsecured. The current
Revolver agreement expires on August 31, 1999. If the Revolver is not renewed,
the balance outstanding becomes payable in 60 equal monthly installments.

Covenant compliance on the Revolver is also required under the Leases which are
secured by real estate made up of a headquarters building under construction in
Wilmington, N.C., a laboratory and clinic facility in Research Triangle Park,
N.C. and land purchased for future construction of a laboratory facility in
Shawnee, Kansas. The Leases are operating leases which allow for the purchase of
the facilities at the end of the lease term at fair market value or the balance
of the debt secured by the facilities.

On August 16, 1999, the bank agreed to forebear until November 30, 1999 from
exercising any rights or remedies as a result of the Company's failure to
comply with this financial covenant. The bank has also committed to extend the
Revolver through November 30, 1999, subject to the Company securing the
Revolver with collateral and agreeing to certain additional covenants. During
the term of the extension, the applicable interest rate on the Revolver will be
increased to LIBOR plus 2.25% per annum with the unused commitment fee
increased to 0.375% per annum.

10. CONTINGENCIES

The Company has started a dispute resolution process, seeking to collect
approximately $2.5 million of billings plus interest on past due amounts from a
customer. Even though the process was initiated to protect the Company's
interests and the Company expects to be successful in its efforts, there can be
no assurance that the Company will ultimately be successful in such collection
efforts.


                                       10


<PAGE>   11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

The Company's quarterly results have been, and are expected to continue to be,
subject to fluctuations. Quarterly results can fluctuate as a result of a number
of factors, including without limitation, the commencement, completion or
cancellation of large contracts, progress of ongoing contracts, achieving
expected levels of licensing and royalty revenues, potential acquisitions, the
timing of start-up expenses for new facilities, timing and level of research and
development expenditures and changes in the mix of services. Since a large
percentage of the Company's operating costs are relatively fixed, variations in
the timing and progress of large contracts or the recognition of licensing and
royalty revenues (on projects for which associated expense may have been
recognized in prior periods) can materially affect quarterly results.
Accordingly, the Company believes that comparisons of its quarterly financial
results may not be meaningful.

RESULTS OF OPERATIONS - SECOND QUARTER 1999 COMPARED TO SECOND QUARTER 1998

Net sales for the second quarter of 1999 decreased 9% to $21.7 million compared
to $23.8 million in 1998. Pharmaceutic revenues were $15.2 million in 1999, down
2% from $15.5 million in 1998 and Clinical revenues were down 4% to $5.9 million
in the first quarter of 1999 from $6.1 million in the same period of 1998.
Revenues from Internal Product Development were $0.6 million in 1999 compared to
$2.2 million last year, reflecting a 72% decrease. The decrease in internal
product development revenues was due to the lack of originating new product
development contracts in the quarter and the relative maturity of existing
development projects. The Company expects that product development revenues will
increase in future quarters as additional agreements are signed but expects that
revenues from these contract signings will be volatile until royalty streams
earned from launched products exceeds the development fees earned. However,
there can be no assurance that the company will be successful in executing
additional product development agreements and increase its future revenue.

Pharmaceutic and Clinical sales were less than in prior quarters, and declined
from the amounts in the second quarter of 1998 due to a number of factors.
Management believes that the rate of new contract signings slowed in the second
quarter due to the relative size of the contracts being negotiated, market
consolidation and the lack of focused selling efforts. However, management has
taken specific steps to increase selling efforts by increasing the number of
professionals devoted to the customer focused selling approach used in the past.
Management believes that with the integration of the European and US clinical
businesses and the increased attention to customer focused selling, growth will
return to historical trends. In the second quarter of 1999, the Company's North
Brunswick, New Jersey facility was fully operational and added to pharmaceutic
capacity. This capacity was utilized almost exclusively in internal product
development activities. As demand increases, the additional capacity provided by
this facility will be used to perform pharmaceutic testing in the fee for
service business.

Overall gross margin was approximately 43% for the second quarter of 1999
compared to 51% for the same period of 1998. The gross margin from Pharmaceutic
work was approximately 7% for the second quarter of 1999 compared to 14% for the
same period of 1998. The difference in gross margin percentage is attributable
to a decrease in the volume of work and increased costs for additional
facilities and capacity and the mix of services provided. Gross margins in the
Clinical business decreased to 4% for the second quarter of 1999 from 7% for the
same period of 1998. The


                                       11

<PAGE>   12

decrease in gross margin percentage was due to a decrease in the volume of
clinical work without a corresponding decrease in the related direct costs.

Selling, general and administrative costs as a percentage of net sales increased
to approximately 43% in 1999 compared to 33% for the same quarter in 1998.
During the first quarter of 1999, the Company increased the size of its
salesforce by adding additional technical support and expertise from its
operating units. This increase in selling activities combined with a decrease in
overall revenues resulted in an increase in general and administrative costs as
a percentage of sales. However, these additions have added to the Company's
ability to present the highly technical aspects of its work to the scientific
customer base. Management expects this investment in selling expertise to
increase the ability to sign additional business and help identify potential
customer needs for future growth opportunities. Due to the lead time required to
have work available after the increase in salesforce, the expected increase in
sales due to the increased sales efforts did not materialize. However,
management is committed to the increased selling efforts in order to stimulate
demand and return the Company to its historical rate of revenue growth. The
Company expects to continue its efforts at controlling selling, general and
administrative expenses by maintaining such growth at rates equal to or less
than overall net sales growth and will reduce these costs if required to size
them to the available revenue.

Research and development expenses were approximately 19% of net sales in the
second quarter of 1999, compared with approximately 8% of sales for the same
period in 1998. In the second quarter of 1999, research and development expenses
were approximately $2.1 million higher than the second quarter of 1998. This
increase resulted from the dedication of certain facilities to research efforts
and an overall increase in the resources devoted to furthering the Company's
internal product development strategy. Internal product development revenues,
which are the resulting benefit of research expenses, declined to approximately
$600,000 from approximately $2.2 million for the second quarter of 1998. This
decrease resulted from the lack of signing new development contracts and the
timing of milestones and progress on existing contracts. Internal product
development revenues are inherently volatile and contribute to the volatile
nature of the Company's earnings. Management expects internal product
development revenues to exceed research and development expenses in the future
as prior investments in research continue to provide revenues.

Income from operations was a loss of $3.9 million in the second quarter of 1999
and income of $2.3 million for the same period of 1998. The decrease was due to
a decrease in fee for service revenues in the Pharmaceutic business, after the
impact of acquisitions, an increase in facility costs related to the facility in
North Brunswick, New Jersey and an increase in selling, general and
administrative expenses.

For the six months ended June 30, 1999, revenues increased $3.0 million to $47.8
million in 1999 from $44.8 million in 1998. The increase was due to an $2.1
million increase in Pharmaceutic revenues, an $0.1 million increase in clinical
revenues and a $0.8 million increase in internal product development revenues.
Operating income for the first six months of 1999 was a loss of $8.6 million
compared with income of $3.8 million in 1998. The loss includes a $6.4 million
charge to operating income related to the consolidation, integration and
acquisition costs of MTRA. The charge also includes certain costs to restructure
existing operations, reduce staff and excess facility costs.


                                       12


<PAGE>   13

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically funded its business through operating cash flows,
proceeds from borrowings and the issuance of equity securities. Working capital
was approximately $18.4 million at June 30, 1999 compared to approximately $28.5
million at December 31, 1998.

The Company was not in compliance with a financial covenant in connection with
the credit facility. The credit facility expires on August 31, 1999. The lender
has committed to forebear and extend the credit facility through November 30,
1999, subject to the Company securing the credit facility with collateral and
agreeing to certain additional covenants. During the term of the extension, the
applicable interest rate on the credit facility will be increased to LIBOR plus
2.25% per annum with the unused commitment fee increased to 0.375% per annum.

Capital expenditures were approximately $6.7 million during the first six months
of 1999 compared to approximately $5.3 million during the same period last year.
The Company anticipates total capital expenditures for 1999 to be approximately
$12 million.

AAI expects that near term growth can be accommodated utilizing existing
facilities. The Company expects future operations to fund capital expenditures
currently in progress but may from time to time seek to supplement cash flow
from operations with the issuance of equity securities and additional
borrowings. The Company believes that such sources of cash and financing
alternatives will be sufficient to fund operations for the current and
foreseeable future and to pay existing debt and other capital obligations. The
Company regularly evaluates acquisition or growth opportunities. At some point
in the future there may be opportunities that require additional external
financing, and the Company may from time-to-time seek to obtain funds through
the public or private issuance of equity or debt securities. There can be no
assurances that such financing will be available on terms acceptable to the
Company.

YEAR 2000 DISCLOSURE

The Company has an active program to assess and where required, remediate,
issues associated with Year 2000 ("Y2K") issues. Generally defined, Y2K issues
arise from computer programs which use only two digits to refer to the year and
which may experience problems when the two digits become "00" in the year 2000.
In addition, imbedded hardware microprocessors may contain time and two-digit
year fields in executing their functions. Much literature has been devoted to
the possible effects such programs may experience in the Year 2000, although
significant uncertainty exists as to the scope and effect the Y2K issues will
have on industry and the Company.

The Company has recognized the need to address the Y2K issue in a comprehensive
and systematic manner and has taken steps to assess the possible Y2K impact on
the Company. The Company has completed a 100% assessment of all its information
technology ("IT") and non-IT systems for Y2K issues. In addition, the Company
has inquired of all its significant vendors and clients their assessment of Y2K
issues on their operations.

In 1996, the Company developed a strategic plan to identify the IT systems
needed to accomplish the Company's overall growth plans. As part of this process
potential Y2K issues were considered and addressed through an enterprise
resource planning process. The Company's Board of Directors authorized spending
to implement portions of this strategic plan over several years.


                                       13

<PAGE>   14

In 1997, the Company established an internal multi-discipline task force to
specifically address Y2K issues by implementation of the strategic plans. The
task force has inventoried IT and non-IT systems and made preliminary
assessments as to Y2K compliance. In those instances where a system would be
replaced or eliminated through the implementation of our strategic plan before
being impacted by Y2K issues, no further action was deemed necessary. All
mission-critical systems not being addressed have been further assessed and
protocols have been developed to test compliance. This testing is ongoing. As
issues are identified they are remedied as soon as possible. In addition, as
upgrades are made to the Company's proprietary software, Company employees are
revising the computer code to ensure Y2K compliance. All Company purchase orders
for new equipment and systems contain representations regarding Y2K compliance.
Based on currently available information, the non-IT systems used by the Company
are not expected to cause significant problems or expense to the Company. While
AAI relies heavily on its technical equipment, Company studies have found that
much of it can be upgraded or, for items that are not mission-critical, can
continue to be operated if they are not linked to other systems.

The Company has communicated with its major customers and suppliers and is not
aware of any such business associates that will cause a material third-party
risk to the Company.

The cost of bringing the Company in full compliance should not result in a
material increase in the recent levels of capital spending or any material
one-time expenses. The Company has not been tracking the direct cost of solving
potential Y2K issues. Since 1996, the Company has expensed approximately $8.0
million for all IT items. It is not reasonably possible to determine what
portion of such spending was directly related to correcting Y2K issues. The
future spending on IT items is expected to be approximately $3 million per year.
The Company has not segregated the direct costs associated with Y2K issues in
its IT capital spending plans. However, all current capital additions are Y2K
compliant. Prior to the merger with MTRA, the systems of MTRA were evaluated for
Y2K readiness. MTRA's separate systems are included in AAI's plans and all
significant systems will be replaced or Y2K compliant in accordance with AAI's
previously established timeline.

The failure of either the Company, its vendors or clients to correct the systems
affected by Y2K issues could result in a disruption or interruption of business
operations. The Company uses computer programs and systems in essentially all of
its operations to collect, assimilate and analyze data. Failure of such programs
and systems could affect the Company's ability to perform contracts to test,
develop, or manufacture pharmaceutical and biotechnology products or perform
clinical trials, thereby causing delays in the development and commercialization
of pharmaceutical and biotechnology products. Similarly, failure of
vendor-provided products and services could result in delay in the Company's
ability to develop pharmaceutical products. Although the Company does not
believe that any of the foregoing worst-case scenarios will occur, there can be
no assurance that unexpected Y2K problems of the Company's and its vendors' and
clients' operations will not have a material adverse effect on the Company.

While it is difficult to classify AAI's state of readiness, the company believes
that its it will have implemented its internal plans and will be able to avoid
any material Y2K issues in September 1999. The company was 78% complete with the
remediation and testing of systems identified as non-compliant during the
assessment at June 30, 1999. Management is in constant communication with the
task force and has made and will continue to make reports to the Company's Board
of Directors.


                                       14


<PAGE>   15

FORWARD LOOKING STATEMENTS

This quarterly report may contain certain forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that are based on the
Company's belief and assumptions, as well as information currently available to
the Company. When or if used herein, the words "anticipate," "estimate,"
"expect," and similar expressions may identify forward-looking statements.
Although the Company believes that the expectations reflected in any such
forward-looking statements are reasonable, there can be no assurance that such
expectations will prove to be correct. Any such statements are subject to
certain risks and uncertainties. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results, performance or financial condition may vary materially from
those anticipated, estimated or expected. Key factors that may have a direct
bearing on the Company's results, performance and financial condition include,
but are not limited to, the Company's dependence on and effect of government
regulation; its management of growth and acquisition risks, including its
integration of acquired operations; the level of outsourcing of research,
development and testing activities in the pharmaceutical and biotechnology
industries; its ability to accurately assess and remediate potential year 2000
problems; its dependence on key personnel, and its dependence on third-party
marketing and distribution of internally developed drugs.



PART II. OTHER INFORMATION

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

At June 30, 1999, the Company was not in compliance with a financial covenant in
connection with a credit arrangement with a bank. The credit arrangement
represents a revolving line of credit (the "Revolver") and certain off-balance
sheet leases (the "Leases"). The Revolver is the primary mechanism used by the
Company to fund capital purchases and operating cash needs. The balance owed on
the Revolver at June 30, 1999 was $13,267,000 and is unsecured. The current
Revolver agreement expires on August 31, 1999.

Covenant compliance on the Revolver is also required under the Leases which are
secured by real estate made up of a headquarters building under construction in
Wilmington, N.C., a laboratory and clinic facility in Research Triangle Park,
N.C. and land purchased for future construction of a laboratory facility in
Shawnee, Kansas. The Leases are operating leases which allow for the purchase of
the facilities at the end of the lease term at fair market value or the balance
of the debt secured by the facilities.

On August 16, 1999, the bank agreed to forebear until November 30, 1999 from
exercising any rights or remedies as a result of the Company's failure to
comply with this financial covenant. The bank has also committed to extend the
Revolver through November 30, 1999, subject to the Company securing the
Revolver with collateral and agreeing to certain additional covenants. During
the term of the extension, the applicable interest rate on the Revolver will be
increased to LIBOR plus 2.25% per annum with the unused commitment fee
increased to 0.375% per annum.


                                       15

<PAGE>   16

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 19, 1999, the Company held its annual meeting of stockholders. The total
number of shares outstanding as of the record date, April 8, 1999, was
17,205,391. The matters voted on at the meeting and the results are as follows:

Election of Directors - Terms to expire in 2002:

                                    Joseph H. Gleberman        John M. Ryan

         Votes For                     11,741,126               11,748,196
         Votes Against                          0                        0
         Votes Withheld                   131,370                  124,300
         Abstentions                            0                        0

Ratify the appointment of Ernst & Young LLP as independent auditors for the
Company for the year ending December 31, 1999:

         Votes For                     11,872,478
         Votes Against                          0
         Votes Withheld                         0
         Abstentions                           18

No other matters were voted on at the meeting.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

EXHIBITS:

A list of the exhibits required to be filed as part of this Report on Form 10-Q
is set forth in the "Exhibit Index", which immediately precedes such exhibits,
and is incorporated herein by reference.

REPORTS ON FORM 8-K:

The Company has recently filed the following Form 8-K's:

         Dated June 1 1999, to amend a previous filing announcing the Company's
acquisition of Medical and Technical Research Associates, Inc. as of March 16,
1999.

         Dated July 30, 1999, to file a press release reporting the Company's
expected loss for the quarter ended June 30, 1999;

         Dated August 2, 1999, to file a press release reporting the Company's
results of operations for the quarter ended June 30, 1999;


                                       16

<PAGE>   17

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

                            APPLIED ANALYTICAL INDUSTRIES, INC.


Date:  August 16, 1999      By:  /s/   FREDERICK D. SANCILIO
                                 ---------------------------------------------
                                       Frederick D. Sancilio, Ph.D.
                            Chairman of the Board and Chief Executive Officer
                            (Principal Executive Officer)



Date:  August 16, 1999      By:  /s/  EUGENE T. HALEY
                                 ---------------------------------------------
                                      Eugene T. Haley
                            Executive Vice President and Chief Financial Officer
                            (Principal Financial Officer)



                                       17

<PAGE>   18

                       APPLIED ANALYTICAL INDUSTRIES, INC.
                                  EXHIBIT INDEX

EXHIBIT

     NO.                                     DESCRIPTION
     ---                                     -----------

     3.1          - Amended and Restated Certificate of Incorporation of
                    the Company (incorporated by reference to Exhibit 3.1 to
                    the Company's Quarterly Report on Form 10-Q for the
                    quarter ended September 30, 1996)

     3.2          - Restated By-laws of the Company (incorporated by reference
                    to Exhibit 3.2 to the Company's Registration Statement on
                    Form S-1 (Registration No. 333-5535))

     4.1          - Articles Fourth, Seventh, Eleventh and Twelfth of the form
                    of Amended and Restated Certificate of Incorporation of the
                    Company (included in Exhibit 3.1)

     4.2          - Article II of the form of Restated By-laws of the Company
                    (included in Exhibit 3.2)

     4.3          - Specimen Certificate for shares of Common Stock, $.001 par
                    value, of the Company (incorporated by reference to
                    Exhibit 4.3 to the Company's Registration Statement on
                    Form S-1 (Registration No. 333-5535))

    10.1          - Employment Agreement dated November 17, 1995 between the
                    Company and Frederick D. Sancilio (incorporated by reference
                    to Exhibit 10.1 to the Company's Registration Statement on
                    Form S-1 (Registration No. 333-5535))

    10.2          - Applied Analytical Industries, Inc. 1995 Stock Option Plan
                    (incorporated by reference to Exhibit 10.3 to the Company's
                    Registration Statement on Form S-1 (Registration
                    No. 333-5535))

    10.3          - Applied Analytical Industries, Inc. 1996 Stock Option Plan
                    (incorporated by reference to Exhibit 10.4 to the Company's
                    Registration Statement on Form S-1 (Registration
                    No. 333-5535))

    10.4          - Applied Analytical Industries, Inc. 1997 Stock Option Plan,
                    as amended on May 8, 1998, (incorporated by reference to
                    Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
                    for the quarter ended June 30, 1998)

    10.5          - Stockholder Agreement dated as of November 17, 1995 among
                    the Company, GS Capital Partners II, L.P., GS Capital
                    Partners II Offshore, L.P., Goldman, Sachs & Co.
                    Verwaltungs GmbH, Stone Street Fund 1995, L.P., Bridge
                    Street Fund 1995, L.P., Noro-Moseley Partners III, L.P.,
                    Wakefield Group Limited Partnership, James L. Waters,
                    Frederick D. Sancilio and the parties listed on Schedule 1
                    thereto (incorporated by reference to Exhibit 10.5 to the
                    Company's Registration Statement on Form S-1 (Registration
                    No. 333-5535))


                                       18

<PAGE>   19

    10.6          - Lease Agreement dated as of March 7, 1994 between 5051 New
                    Centre Drive, L.L.C., as landlord, and the Company, as
                    tenant (incorporated by reference to Exhibit 10.10 to the
                    Company's Registration Statement on Form S-1 (Registration
                    No. 333-5535))

    10.7          - Development Agreement dated as of April 25, 1994 between the
                    Company and Endeavor Pharmaceuticals Inc. (formerly,
                    GenerEst, Inc.) (incorporated by reference to Exhibit 10.12
                    to the Company's Registration Statement on Form S-1
                    (Registration No. 333-5535))

    10.8          - Development Agreement dated as of April 4, 1995 between the
                    Company and Aesgen, Inc. (incorporated by reference to
                    Exhibit 10.13 to the Company's Registration Statement on
                    Form S-1 (Registration No. 333-5535))

    10.9          - Loan Agreement dated as of December 30, 1996 between
                    NationsBank, N.A. and the Company (incorporated by reference
                    to Exhibit 10.14 to the Company's Annual Report on Form 10-K
                    for the year ended December 31, 1996)

    10.10         - Amendment No. 1, dated as of February 13, 1998, to the Loan
                    Agreement dated as of December 30, 1996 between
                    NationsBank, N.A. and the Company, (incorporated by
                    reference to exhibit 10.10 of the Company's Quarterly Report
                    on Form 10-Q for the quarter ended March 31, 1998)

    10.11         - Underwriting Agreement dated September 19, 1996 between the
                    Company and Goldman Sachs & Co., Cowen & Company and Lehman
                    Brothers, Inc., as representatives of the underwriters
                    listed on Schedule 1 thereto (incorporated by reference to
                    Exhibit 10.17 to the Company's Quarterly Report on
                    Form 10-Q for the quarter ended September 30, 1996)

    10.12         - Partnership Agreement dated as of October 2, 1998 between
                    the Company, First Security Bank, N. A. and the Various
                    Banks and Other Lending Institutions Which are Parties
                    Hereto from time to time, as the Holders and as the Lenders
                    and NationsBank, N. A. (incorporated by reference to
                    Exhibit 10.12 to the Company's Annual Report on Form 10-K
                    for the year ended December 31, 1998)

    10.13         - Security Agreement dated as of October 2, 1998 between First
                    Security Bank, N. A., and NationsBank, N. A. (incorporated
                    by reference to Exhibit 10.13 to the Company's Annual Report
                    on Form 10-K for the year ended December 31, 1998)

    10.14         - Amendment No. 1 to the Employment Agreement dated
                    November 17, 1995 between the Company and Frederick D.
                    Sancilio

    10.15         - Letter of guarantee from Frederick D. Sancilio dated June
                    17, 1999

    27            - Financial Data Schedule (for SEC use only)


                                       19