<PAGE>   1
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC  20549

                                   FORM 10-Q

(Mark One)

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

         For the quarterly period ended June 30, 1998

                                       OR

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

         For the transition period from ________ to ________

                         Commission File Number 0-28402

                              ARADIGM CORPORATION
             (Exact name of registrant as specified in its charter)

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


                  26219 Eden Landing Road, Hayward, CA  94545
          (Address of principal executive offices including zip code)


                                 (510) 783-0100
              (Registrant's telephone number, including area code)


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

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

       Common Stock, no par value                  12,091,500 shares 
     -------------------------------         -------------------------------
                (Class)                     (Outstanding at August 1, 1998)

<PAGE>   2

                               ARADIGM CORPORATION


                                      INDEX


<TABLE>
<CAPTION>

                          PART I. FINANCIAL INFORMATION
                                                                                          Page No.
<S>        <C>                                                                           <C>
ITEM 1.     FINANCIAL STATEMENTS                                                           

Statements of Operations (Unaudited)
            Three months ended June 30, 1998 and 1997                                          3
            Six months ended June 30, 1998 and 1997                                            4

Balance Sheets
            June 30, 1998 (Unaudited) and December 31, 1997                                    5

Statements of Cash Flows (Unaudited)
           Six months ended June 30, 1998 and 1997                                             6

Notes to Unaudited Financial Statements                                                        7

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
            OF OPERATIONS                                                                      9

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                                                                              12


                           PART II. OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS                                                                 13

ITEM 2.     CHANGES IN SECURITIES AND USE OF PROCEEDS                                         13

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                                                                              13

ITEM 5.     OTHER MATTERS                                                                     14

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K                                                  15

            Signature                                                                         16

            Exhibits                                                                          17
</TABLE>
<PAGE>   3
PART I.      FINANCIAL INFORMATION

ITEM 1.      FINANCIAL STATEMENTS



                               ARADIGM CORPORATION

                            STATEMENTS OF OPERATIONS
             (In thousands, except share and per share information)



<TABLE>
<CAPTION>
                                                       Three months ended
                                                            June 30,
                                              ------------------------------------
                                                  1998                    1997
                                              ------------           ------------ 
                                                          (unaudited)
<S>                                             <C>                     <C>
Contract revenues                             $      4,077           $        170
Expenses:
     Research and development                        5,602                  3,274
     General and administrative                      2,673                  1,527
                                              ------------           ------------ 
Total expenses                                       8,275                  4,801

                                              ------------           ------------ 
Loss from operations                                (4,198)                (4,631)

Interest income                                        493                    342
Interest expense                                      (127)                   (22)
                                              ------------           ------------ 
Net loss                                      $     (3,832)          $     (4,311)
                                              ============           ============ 

Basic and diluted net loss per share          $      (0.32)          $      (0.42)
                                              ------------           ------------ 

Shares used in computing basic and
     diluted net loss per share                 11,868,752             10,201,495
                                              ============           ============ 
</TABLE>





                            See accompanying notes.
<PAGE>   4

                               ARADIGM CORPORATION

                            STATEMENTS OF OPERATIONS
             (In thousands, except share and per share information)



<TABLE>
<CAPTION>
                                                        Six months ended
                                                           June 30,
                                              ------------------------------------
                                                 1998                     1997
                                              ------------           ------------ 
                                                         (unaudited)
<S>                                           <C>                    <C>
Contract revenues                             $      6,829           $        740
Expenses:
     Research and development                       10,009                  5,799
     General and administrative                      5,028                  2,442
                                              ------------           ------------ 
Total expenses                                      15,037                  8,241

                                              ------------           ------------ 
Loss from operations                                (8,208)                (7,501)

Interest income                                        811                    724
Interest expense                                      (217)                   (36)
                                              ------------           ------------ 
Net loss                                      $     (7,614)          $     (6,813)
                                              ============           ============ 

Basic and diluted net loss per share          $      (0.68)          $      (0.67)
                                              ------------           ------------ 

Shares used in computing basic and
     diluted net loss per share                 11,239,897             10,205,370
                                              ============           ============ 
</TABLE>





                            See accompanying notes.
<PAGE>   5
                               ARADIGM CORPORATION

                                 BALANCE SHEETS
                    (In thousands, except share information)

<TABLE>
<CAPTION>
                                                                     June 30,         December 31,
                                                                      1998               1997
                                                                  -----------         -----------
                                                                  (unaudited)
<S>                                                                <C>               <C>
ASSETS
Current assets:
     Cash and cash equivalents                                      $ 25,686           $ 15,517
     Short-term investments                                           14,290              8,788
     Receivables                                                       1,155                261
     Inventories                                                         242                520
     Other current assets                                                784                409
                                                                    --------           --------
       Total current assets                                           42,157             25,495

Property and equipment, net                                            8,586              4,417
Notes receivable from officers                                           215                303
Other assets                                                              79                 79
                                                                    --------           --------
                  Total assets                                      $ 51,037           $ 30,294
                                                                    ========           ========

LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                               $  1,891           $  1,505
     Accrued clinical and other studies                                   --                 --
     Accrued compensation                                              1,173                728
     Deferred revenue                                                 13,675              6,339
     Other accrued liabilities                                           634                342
     Current portion of capital lease obligations and
       equipment loans                                                 1,067                582
                                                                    --------           --------
          Total current liabilities                                   18,440              9,496

Noncurrent portion of capital lease obligations and
     equipment loans                                                   3,755              2,139
Commitments and contingencies
Shareholders' equity:
     Common stock, no par value, 40,000,000 shares
       authorized; issued and outstanding shares: June 30,
       1998 - 12,091,500; December 31, 1997 - 10,632,133
                                                                      73,233             54,976
Shareholder notes receivable                                            (308)              (386)
Deferred compensation                                                   (622)              (104)
Accumulated deficit                                                  (43,461)           (35,827)
                                                                    --------           --------
       Total shareholders' equity                                     28,842             18,659
                                                                    --------           --------
          Total liabilities and shareholders' equity                $ 51,037           $ 30,294
                                                                    ========           ========
</TABLE>

                            See accompanying notes.
<PAGE>   6
                              ARADIGM CORPORATION

                            STATEMENTS OF CASH FLOWS
                Increase (decrease) in cash and cash equivalents
                                 (In thousands)




<TABLE>
<CAPTION>
                                                                   Six months ended
                                                                        June 30,
                                                              ----------------------------
                                                                1998               1997
                                                              --------           -------- 
                                                                      (unaudited)

<S>                                                          <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                    $ (7,614)          $ (6,813)
  Adjustments to reconcile net loss to
  cash used in operating activities:
    Depreciation and amortization                                  781                280
    Warrant expense for services received                          323                 --
    Amortization of deferred compensation                          131                102
    Changes in assets and liabilities:
      Receivables                                                 (894)                --
      Inventories and other current assets                         (97)              (365)
      Accounts payable                                             386                543
      Accrued liabilities                                          737               (455)
      Deferred revenue                                           7,336               (129)
                                                              --------           -------- 
Cash provided by (used in) operating activities                  1,089             (6,837)
                                                              --------           -------- 
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures                                          (4,950)            (1,399)
  Purchases of available-for-sale investments                  (16,682)           (17,986)
  Proceeds from maturities of available-for-sale investments    11,160             21,020
                                                              --------           -------- 
Cash (used in) provided by investing activities                (10,472)             1,635
                                                              --------           -------- 
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of common stock, net                   17,302                 30
  Proceeds from repayments of shareholder notes                     72                 52
  Notes receivable from officers                                    77                (22)
  Proceeds from equipment loans                                  2,457                 --
  Payments on lease obligations and equipment loans               (356)              (156)
                                                              --------           -------- 
Cash provided by (used in) financing activities                 19,552                (96)
                                                              --------           -------- 
Net increase (decrease) in cash and cash equivalents            10,169             (5,298)
Cash and cash equivalents at beginning of period                15,517             18,554
                                                              --------           -------- 
Cash and cash equivalents at end of period                    $ 25,686           $ 13,256
                                                              ========           ======== 


SUPPLEMENTAL INVESTING AND FINANCING ACTIVITIES
  Common stock repurchased upon cancellation of
    shareholder notes                                         $     17           $      9
  Acquisition of equipment under capital leases               $     --           $    150
</TABLE>


                            See accompanying notes.
<PAGE>   7
                              ARADIGM CORPORATION

                  NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
                                 June 30, 1998

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation
Aradigm Corporation (the "Company") was incorporated in California in January
1991.  Since inception, Aradigm has been engaged in the development and
commercialization of non-invasive pulmonary drug delivery systems.  The Company
does not anticipate receiving significant revenue from the sale of products in
the upcoming year. Principal activities to date have included obtaining
financing, recruiting management and technical personnel, securing operating
facilities, conducting research and development, and expanding commercial
production capabilities.  These factors indicate that the Company's ability to
continue its research, development and commercialization activities is
dependent upon the ability of management to obtain additional financing as
required.

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 periods.

Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.

Cash Equivalents and Investments
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.  The Company places
its cash and cash equivalents in money market funds, commercial paper and
corporate master notes.  The Company's short-term investments consist of
corporate notes with maturities ranging from three to twelve months.

The Company classifies its investments as available-for-sale.
Available-for-sale investments are recorded at fair value with unrealized gains
and losses reported in the statement of shareholders' equity.  Fair values of
investments are based on quoted market prices, where available.  Realized gains
and losses, which have been immaterial to date, are included in interest and
other income and are derived using the specific identification method for
determining the cost of investments sold.  Dividend and interest income is
recognized when earned.

Depreciation and Amortization
The Company records property and equipment at cost and calculates depreciation
using the straight-line method over the estimated useful lives of the
respective assets, generally four to seven years. Machinery and equipment
acquired under capital leases is amortized over the useful lives of the assets.
Leasehold improvements are amortized over the shorter of the term of the lease
or useful life of the improvement.

Revenue Recognition
Contract revenues consist of revenue from collaboration agreements and
feasibility studies. The Company recognizes revenue ratably under the
agreements as costs are incurred. Deferred revenue represents the portion of
research payments received that has not been earned.  In accordance with
contract terms, up-front and milestone payments from collaborative research
agreements are considered

<PAGE>   8

reimbursements for costs incurred under the agreements and, accordingly, are
generally deferred when received and recognized as revenue based on actual
efforts expended over the remaining terms of the agreements.  Non-refundable
signing or license fee payments that are not dependent on future performance
under collaborative agreements are recognized as revenue when received.  Costs
of contract revenue approximate such revenue and are included in research and
development expenses.

Common Stock and Net Loss Per Share
Basic net loss per share has been computed using the weighted average number of
shares of common stock outstanding during the period.  At June 30, 1998 and
1997, outstanding stock options and other stock equivalents are not included as
their effect would be antidilutive.

In April 1998, the Company raised $12 million through a private sale of 1.1
million newly-issued shares of its common stock to a select group of
institutional investors.

Contingencies
In June of 1998, Eli Lilly and Company ("Lilly") filed a complaint against the
Company in the United States District Court for the Southern District of
Indiana.  The complaint made various allegations against the Company, arising
from the Company's decision to enter into an exclusive collaboration with Novo
Nordisk A/S, addressing the development and commercialization of a pulmonary
delivery system for insulin and insulin analogs.  The complaint seeks a
declaration that Lilly scientists are 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 an
nonexclusive license under such patent application.  The complaint also
contains certain other allegations and seeks unspecified damages and injunctive
relief. Management believes that Lilly's claims are without merit and that
this litigation will not have a material adverse effect on the Company's
results of operations, cash flows or financial position.  The Company recently
filed an answer denying all material allegations of the complaint.

Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," and Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," which
require additional disclosures to be adopted beginning in the first quarter of
1998 and on December 31, 1998, respectively.

Under SFAS 130, the Company is required to display comprehensive income and its
components as part of the Company's full set of financial statements.
Comprehensive income is comprised of net income and other comprehensive income.
The measurement and presentation of net income will not change.  Other
comprehensive income includes certain changes in equity of the Company that are
excluded from net income.  Specifically, SFAS 130 requires unrealized holding
gains and losses on the Company's available-for-sale securities, which are
currently reported separately in shareholders' equity, to be included in other
comprehensive income.  During the first two quarters of 1998 and 1997, total
comprehensive income did not differ materially from net income reported for
those periods.

SFAS 131 requires that the Company report financial and descriptive information
about its reportable operating segments.  The Company is evaluating the impact,
if any, of SFAS 131 on its financial statement disclosures, but does not
believe the additional disclosure will be material to the financial statements.
<PAGE>   9
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 the Company's management, as well as assumptions made
by, and information currently available to, the Company's management.  The
Company's 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 24, 1998.

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

OVERVIEW

         Since its inception in 1991, Aradigm has been engaged in the
development of pulmonary drug delivery systems. As of June 30, 1998, the
Company had an accumulated deficit of $43.5 million. The Company has been
unprofitable since inception and expects to incur additional operating losses
over at least the next several years as the Company's research and development
efforts, preclinical and clinical testing activities and manufacturing scale-up
efforts expand and as the Company plans and builds its late-stage clinical and
early commercial production capabilities.  To date, Aradigm has not sold any
products and does not anticipate receiving significant revenue from product
sales in 1998.  The sources of working capital have been equity financing,
financing of equipment acquisitions, interest earned on investments of cash and
revenues from research and feasibility agreements and development contracts.

         The Company has performed and has been compensated for expenses
incurred during initial feasibility work and for work performed under
collaborative agreements. Once feasibility is demonstrated, the Company's
strategy is to enter into development contracts with pharmaceutical corporate
partners. The Company anticipates that these partners will pay for research and
development expenses and will make additional payments to the Company as it
achieves certain significant milestones. The Company also expects to receive
royalties from its corporate partners based on revenues from product sales and
to receive revenue from the manufacturing of unit dose packets and hand-held
devices.  However, there can be no assurance that the Company will be able to
generate sufficient product or contract research revenue to become profitable
or to sustain profitability.
<PAGE>   10
RESULTS OF OPERATIONS

         Three and Six Months Ended June 30, 1998 and 1997

         Contract Revenue.  Contract revenue for the three-month period ended
June 30, 1998 increased to $4.1 million from $170,000 for the same period in
1997. Contract revenue for the six-month period ended June 30, 1998 increased
to $6.8 million from $740,000 for the same period in 1997.  These increases in
revenue were due primarily to increased partner-funded product development
activities.  The Company is developing pulmonary delivery systems with
SmithKline Beecham, plc, to manage acute and breakthrough pain using narcotic
analgesics, and Novo Nordisk A/S, to manage diabetes using insulin and other
blood glucose regulating compounds.  Costs of contract research revenue
approximate such revenue and are included in research and development expense.

         Research and Development Expenses.  Research and development expenses
for the three-month period ended June 30, 1998 increased to $5.6 million from
$3.3 million for the same period in 1997. Research and development expenses for
the six-month period ended June 30, 1998 increased to $10.0 million from $5.8
million for the same period in 1997.  These increases were attributable
primarily to the hiring of additional scientific personnel and expenses
associated with the expansion of research and development efforts on the AERx
system. These expenses represent proprietary research expenses as well as the
costs related to contract research revenue and include salaries and benefits of
scientific and development personnel, laboratory supplies, consulting services
and the expenses associated with the development of manufacturing processes.
The Company expects research and development spending to increase significantly
over the next few years as the Company continues to expand its development
activities under collaborative agreements and plans, builds and scales up a
late-stage clinical and early-stage commercial manufacturing facility.  The
increase in research and development expenditures cannot be predicted
accurately as it depends in part upon future success in obtaining new
collaborative agreements.

         General and Administrative Expenses.  General and administrative
expenses for the three-month period ended June 30, 1998 increased to $2.7
million from $1.5 million for the same period in 1997. General and
administrative expenses for the six-month period ended June 30, 1998 increased
to $5.0 million from $2.4 million for the same period in 1997.  These increases
were attributable primarily to support of the Company's increased research
efforts, additional facilities expense, administrative staffing, business
development and marketing activities.  The Company expects to incur greater
general and administrative expenses in the future as it expands its research,
development and manufacturing activities and increases its efforts to develop
collaborative relationships with corporate partners.

         Interest Income.  Interest income for the three-month period ended
June 30, 1998 increased to $493,000 from $342,000 for the same period in 1997.
Interest income for the six-month period ended June 30, 1998 increased to
$811,000 from $724,000 for the same period in 1997.  These increases were due
to the Company maintaining larger cash and investment balances. The higher cash
and investment balances are a result of the Company's receipt of research
funding and milestone payments from collaborative partners, the completion of a
private placement of the Company's Common Stock in April 1998 which raised net
proceeds of $12.0 million, and Novo Nordisk A/S making a $5.0 million equity
investment in Aradigm at a 25% premium-to-market price in conjunction with the
June 1998 development agreement between the Company and Novo Nordisk A/S to
develop insulin products using Aradigm's non-invasive pulmonary drug delivery
system.


         Interest Expense.  Interest expense for the three-month period ended
June 30, 1998 increased to $127,000 from $22,000 for the same period in 1997.
Interest expense for the six-month period ended June 30, 1998 increased to
$217,000 from $36,000 for the same period in 1997.  These increases are a
result of higher outstanding capital lease and equipment loan balances under
the Company's equipment lines of credit.
<PAGE>   11
LIQUIDITY AND CAPITAL RESOURCES

         The Company has financed its operations since inception primarily
through private placements and public offerings of its capital stock, proceeds
from financings of equipment acquisitions, contract research revenue and
interest earned on investments. As of June 30, 1998, the Company had received
approximately $72.3 million in net proceeds from sales of its capital stock.
The Company also has a $5.0 million equipment line of credit, of which
approximately $438,000 remains available for purchases through September 1998.
As of June 30, 1998, the Company had cash, cash equivalents and investments of
approximately $40.0 million.  The Company also has the right to sell $5 million
of common stock to each of SmithKline Beecham, plc, and Novo Nordisk A/S.

         Net cash provided by operating activities in the six months ended June
30, 1998 was $1.1 million compared to net cash used of $6.8 million in the same
period in 1997.  The increase resulted primarily from increases in deferred
revenue, accounts payable, accrued liabilities and receivables offset partially
by an increase in net loss of $800,000.

         Net cash used in investing activities in the six months ended June 30,
1998 was $10.5 million compared to net cash provided of $1.6 million in the
same period in 1997.  The decrease resulted primarily from the Company's
expenditures made for capital equipment and decreased receipts of net proceeds
from investment maturities.

         Net cash provided by financing activities in the six months ended June
30, 1998 of $19.6 million resulted primarily from the Company's receipt of
proceeds from the issuance of common stock and net receipt of proceeds from
equipment loans.  Net cash used in financing activities in the six months ended
June 30, 1997 of $96,000 resulted primarily from the Company's repayment of
capital lease obligations.

         The development of the Company's technology and proposed products will
require a commitment of substantial funds to conduct the costly and
time-consuming research and preclinical and clinical testing activities
necessary to develop and refine such technology and proposed products and to
bring any such products to market.  The Company's future capital requirements
will depend on many factors, including continued progress in the research and
development of the Company's technology and drug delivery systems, the ability
of the Company to establish and maintain favorable collaborative arrangements
with others, progress with preclinical studies and clinical trials, the time
and costs involved in obtaining regulatory approvals, the cost of development
and the rate of scale-up of the Company's production technologies, the cost
involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims and the need to acquire licenses or other rights to new technology.

         The Company expects its cash requirements to increase due to expected
increases in expenses related to the further research and development of its
technologies resulting from a larger number of collaborative partnerships,
process development for the manufacture of AERx systems, and general and
administrative costs.  These expenses include, but are not limited to,
increases in personnel and personnel-related costs, purchases of capital
equipment, construction of prototype devices and facilities expansion including
the planning and building of a late-stage clinical and early-stage commercial
manufacturing facility.

         The Company expects that its existing capital resources, committed
funding from its existing corporate partnership with SmithKline Beecham and
Novo Nordisk AS and projected interest income will enable the Company to
maintain current and planned operations through at least 1999.  However, there
can be no assurance that the Company will not need to raise substantial
additional capital to fund its operations prior to such time.  There can be no
assurance that additional financing will be available on acceptable terms or at
all.  The Company's cash requirements, however, may vary materially from those
now planned because of results of research and development efforts, including
capital expenditures and funding preclinical and clinical trials and
manufacturing capacity for preclinical, clinical and full scale
<PAGE>   12

manufacturing requirements of the AERx system. The Company may seek additional
funding through collaborations or through public or private equity or debt
financings. However, there cannot be any assurance that additional financing
can be obtained on acceptable terms, or at all. If additional funds are raised
by issuing equity securities, dilution to shareholders may result. If adequate
funds are not available, the Company may be required to delay, to reduce the
scope of, or to eliminate one or more of its research and development programs,
or to obtain funds through arrangements with collaborative partners or other
sources that may require the Company to relinquish rights to certain of its
technologies or products that the Company would not otherwise relinquish.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

           Not applicable.










<PAGE>   13
PART II.         OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

                 In June of 1998, Eli Lilly and Company ("Lilly") filed a
           complaint against the Company in the United States District Court
           for the Southern District of Indiana.  The complaint made various
           allegations against the Company, arising from the Company's decision
           to enter into an exclusive collaboration with Novo Nordisk A/S,
           addressing the development and commercialization of a pulmonary
           delivery system for insulin and insulin analogs.  Management
           believes that Lilly's claims are without merit and that this
           litigation will not have a material adverse effect on the results of
           operations, cash flows or financial position.  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 of 1996.  The Company and Lilly had
           also conducted negotiations concerning a long-term supply agreement
           under which Lilly would supply bulk insulin to the Company for
           commercialization in the Company's AERx Diabetes Management System,
           and a separate agreement under which the Company would license
           certain intellectual property to Lilly.  These negotiations were
           terminated after the Company proceeded with its agreement with Novo
           Nordisk A/S.  The complaint seeks a declaration that Lilly
           scientists are 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
           an nonexclusive license under such patent application.  The
           complaint also contains allegations of misappropriation of trade
           secrets, breach of fiduciary duty, conversion and unjust enrichment
           and seeks unspecified damages and injunctive relief.  The Company
           recently filed an answer denying all material allegations of the
           complaint.

ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS

           Changes in Securities

                 Pursuant to a Common Stock Purchase Agreement between the
           Company, Deutsche Vermogensbildungsgesellschaft mbH (DVG), FB
           Invemed Fund, L.P., GSAM Oracle Fund, Haussmann Holdings, N.V.,
           Oracle Institutional Partners, L.P., Oracle Offshore Limited, Oracle
           Partners, L.P., and State of Oregon (collectively, the
           "Purchasers"), dated April 3, 1998 (the "Purchase Agreement"), the
           Company issued 1,111,100 shares of Common Stock (the "Private
           Placement Shares") of the Company to the Purchasers in exchange for
           an aggregate purchase price of $11,999,880.  The Private Placement
           Shares were issued in reliance on Rule 506 of Regulation D of the
           Securities Act of 1933, as amended.  In connection with the Purchase
           Agreement, the Company also issued a warrant to purchase 69,433
           shares of Common Stock of the Company (the "Invemed Warrant") to
           Invemed Fund, L.P.  The Invemed Warrant has an exercise price of
           $12.42 per share and will be exercisable until June 16, 2003.  The
           Invemed Warrant was issued in reliance on Rule 506 of Regulation D
           of the Securities Act of 1933, as amended.

              Pursuant to a Stock Purchase Agreement between the Company and
           Novo Nordisk A/S ("Novo"), dated June 2, 1998, the Company issued
           312,396 shares of Common Stock (the "Novo Shares") of the Company to
           Novo in exchange for an aggregate purchase price of $5,000,015.13.
           The Novo Shares were issued in reliance on Rule 506 of Regulation D
           of the Securities Act of 1933, as amended.

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

(a)        The Annual Meeting of Shareholders of Aradigm Corporation was held
           on May 15, 1998.

(b)        Burton J. McMurtry, Reid M. Rubsamen, Gordon W. Russell, Fred E.
           Silverstein, Richard P. Thompson and Virgil D. Thompson were elected
           to the Board of Directors to hold office until the next Annual
           Meeting of Shareholders and until their successors are elected and
           qualified.

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

           (i)       The election of Burton J. McMurtry as a Director to hold
                     office until the next Annual Meeting of Shareholders and
                     until his successor is elected and qualified:
<PAGE>   14
                     For:  7,860,099       Withheld:  989,280

           (ii)      The election of Reid M. Rubsamen as a Director to hold
                     office until the next Annual Meeting of Shareholders and
                     until his successor is elected and qualified:
                     For:  8,842,180       Withheld:  7,199

           (iii)     The election of Gordon W. Russell as a Director to hold
                     office until the next Annual Meeting of Shareholders and
                     until his successor is elected and qualified:
                     For:  8,842,180       Withheld:  7,199

           (iv)      The election of Fred E. Silverstein as a Director to hold
                     office until the next Annual Meeting of Shareholders and
                     until his successor is elected and qualified:
                     For:  8,842,180       Withheld:  7,199

           (v)       The election of Richard P. Thompson as a Director to hold
                     office until the next Annual Meeting of Shareholders and
                     until his successor is elected and qualified:
                     For:  8,699,571       Withheld:  7,199

           (vi)      The election of Virgil D. Thompson as a Director to hold
                     office until the next Annual Meeting of Shareholders and
                     until his successor is elected and qualified:
                     For:  8,699,571       Withheld:  7,199

           (vii)     Approval of an amendment to the 1996 Equity Incentive
                     Plan, increasing the total number of shares of Common
                     Stock authorized for issuance by 1,000,000 shares.
                     For:  5,038,245
                     Against:  1,169,835
                     Abstain:  1,077,923
                     Broker Non-Votes:  1,420,767

           (viii)    Approval of an amendment to the Employee Stock Purchase
                     Plan, increasing the total number of shares of Common
                     Stock authorized for issuance by 150,000 shares.
                     For:  7,235,178
                     Against:  48,096
                     Abstain:  2,729
                     Broker Non-Votes:  1,420,767

           (ix)      Approval of an amendment to the Company's Bylaws, setting
                     the range of directors from five to nine.
                     For:  8,688,645
                     Against:  13,146
                     Abstain:  4,979
                     Broker Non-Votes:  0

           (x)       Ratification of the selection of Ernst & Young LLP as
                     independent auditors of the Company for its fiscal year
                     ending December 31, 1998.
                     For:   8,552,196
                     Against:  7,400
                     Abstain:  147,174
                     Broker Non-Votes:  0
<PAGE>   15
ITEM 5.    OTHER INFORMATION

                 Pursuant to the Company's bylaws, shareholders who wish to
           bring matters or propose nominees for director at the Company's 1999
           annual meeting of stockholders must provide specified information to
           the Company not later than the close of business on the sixtieth
           (60th) day nor earlier than the close of business on the ninetieth
           (90th) day prior to the first anniversary of the preceding year's
           annual meeting (unless such matters are included in the Company's
           proxy statement pursuant to Rule 14a-8 under the Securities Exchange
           Act of 1934, as amended).


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

                (a)       Exhibits


<TABLE>
<CAPTION>
                          Item             Description
                          ----             -----------
                          <S>              <C>
                          3.1              Bylaws of the Company, as amended

                          10.22            Common Stock Purchase Agreement between the Company, Deutsche
                                           Vermogensbildungsgesellschaft mbH (DVG), FB Invemed Fund, L.P., GSAM Oracle Fund,
                                           Haussmann Holdings, N.V., Oracle Institutional Partners, L.P., Oracle Offshore Limited,
                                           Oracle Partners, L.P., and State of Oregon, dated April 3, 1998

                          10.23*           Development and License Agreement by and between Aradigm Corporation and Novo Nordisk
                                           A/S

                          27.1             Financial Data Schedule

                          27.2             Restated Financial Data Schedule
</TABLE>

                          _____________

                          *   Confidential treatment requested.

                (b)       Reports on Form 8-K

                          The Company did not file any reports on Form 8-K
                          during the quarter ended June 30, 1998.

<PAGE>   16

                                    SIGNATURE



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

Dated:  August 14, 1998

                                    ARADIGM CORPORATION
                                    (Registrant)


                                    /s/ Mark A. Olbert
                                    ------------------------------------------
                                    Mark A. Olbert
                                    Vice President, Finance and Administration
                                    and Chief Financial Officer



<PAGE>   17


                               ARADIGM CORPORATION
                                    FORM 10-Q
                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
Exhibit Number             Description
--------------             -----------
<S>                        <C>
3.1                        Bylaws of the Company, as amended

10.22                      Common Stock Purchase Agreement between the Company, Deutsche Vermogensbildungsgesellschaft mbH (DVG),
                           FB Invemed Fund, L.P., GSAM Oracle Fund, Haussmann Holdings, N.V., Oracle Institutional Partners, L.P.,
                           Oracle Offshore Limited, Oracle Partners, L.P., and State of Oregon, dated April 3, 1998

10.23*                     Development and License Agreement by and between Aradigm Corporation and Novo Nordisk A/S

27.1                       Financial Data Schedule

27.2                       Restated Financial Data Schedule
</TABLE>

__________________

*        Confidential treatment requested.