<PAGE>   1

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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

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

                                   FORM 10-Q
                            ------------------------

(MARK ONE)

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

               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999

                                       OR

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

         FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .

                         COMMISSION FILE NUMBER 0-28402

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

                              ARADIGM CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                  CALIFORNIA                                     94-3133088
(STATE OR OTHER JURISDICTION OF INCORPORATION       (I.R.S. EMPLOYER IDENTIFICATION NO.)
               OR ORGANIZATION)
</TABLE>

                              3929 POINT EDEN WAY
                               HAYWARD, CA 94545
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)

                                 (510) 265-9000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

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

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

<TABLE>
<S>                                            <C>
          COMMON STOCK, NO PAR VALUE                         14,749,277 SHARES
                   (CLASS)                           (OUTSTANDING AT NOVEMBER 2, 1999)
</TABLE>

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<PAGE>   2

                              ARADIGM CORPORATION

                                     INDEX

<TABLE>
<CAPTION>
                                                                       PAGE
                                                                       NO.
                                                                       ----
<S>      <C>                                                           <C>
                       PART I. FINANCIAL INFORMATION
ITEM 1.  Financial Statements
         Statements of Operations (Unaudited)
         Three months ended September 30, 1999 and 1998..............    3
         Nine months ended September 30, 1999 and 1998...............    4
         Balance Sheets
         September 30, 1999 (Unaudited) and December 31, 1998........    5
         Statements of Cash Flows (Unaudited)
         Nine months ended September 30, 1999 and 1998...............    6
         Notes to Unaudited Financial Statements.....................    7

ITEM 2.  Management's Discussion and Analysis of Financial Condition     9
           and Results of Operations.................................

ITEM 3.  Quantitative and Qualitative Disclosure About Market Risk...   13

                        PART II. OTHER INFORMATION
ITEM 1.  Legal Proceedings...........................................   14
ITEM 6.  Exhibits and Reports on Form 8-K............................   14
Signature............................................................   15
Exhibits
</TABLE>

                                        2
<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
                                                                    SEPTEMBER 30,
                                                              --------------------------
                                                                 1999           1998
                                                              -----------    -----------
                                                                     (UNAUDITED)
<S>                                                           <C>            <C>
Contract revenues...........................................  $     5,017    $     4,090
Expenses:
  Research and development..................................        9,155          6,123
  General and administrative................................        2,227          1,810
                                                              -----------    -----------
Total expenses..............................................       11,382          7,933
                                                              -----------    -----------
Loss from operations........................................       (6,365)        (3,843)
Interest income.............................................          500            529
Interest and other expense..................................         (183)          (172)
                                                              -----------    -----------
Net loss....................................................  $    (6,048)   $    (3,486)
                                                              ===========    ===========
Basic and diluted net loss per share........................  $     (0.41)   $     (0.29)
                                                              ===========    ===========
Shares used in computing basic and diluted net loss per
  share.....................................................   14,693,081     12,093,166
                                                              ===========    ===========
</TABLE>

                            See accompanying notes.

                                        3
<PAGE>   4

                              ARADIGM CORPORATION

                            STATEMENTS OF OPERATIONS
             (IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)

<TABLE>
<CAPTION>
                                                                  NINE MONTHS ENDED
                                                                    SEPTEMBER 30,
                                                              --------------------------
                                                                 1999           1998
                                                              -----------    -----------
                                                                     (UNAUDITED)
<S>                                                           <C>            <C>
Contract revenues...........................................  $    12,154    $    10,919
Expenses:
  Research and development..................................       24,362         16,131
  General and administrative................................        6,148          6,839
                                                              -----------    -----------
Total expenses..............................................       30,510         22,970
                                                              -----------    -----------
Loss from operations........................................      (18,356)       (12,051)
Interest income.............................................        1,494          1,340
Interest and other expense..................................         (691)          (389)
                                                              -----------    -----------
Net loss....................................................  $   (17,553)   $   (11,100)
                                                              ===========    ===========
Basic and diluted net loss per share........................  $     (1.25)   $     (0.96)
                                                              ===========    ===========
Shares used in computing basic and diluted net loss per
  share.....................................................   14,037,563     11,524,320
                                                              ===========    ===========
</TABLE>

                            See accompanying notes.

                                        4
<PAGE>   5

                              ARADIGM CORPORATION

                                 BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)

                                     ASSETS

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,    DECEMBER 31,
                                                                  1999             1998
                                                              -------------    ------------
                                                               (UNAUDITED)
<S>                                                           <C>              <C>
Current assets:
Cash and cash equivalents...................................    $ 26,428         $ 10,765
  Short-term investments....................................      14,399           20,271
  Receivables...............................................       2,747              774
  Inventories and other current assets......................         738              729
                                                                --------         --------
          Total current assets..............................      44,312           32,539
Property and equipment, net.................................      13,445           12,196
Notes receivable from officers..............................         128              135
Other assets................................................         168               79
                                                                --------         --------
          Total assets......................................    $ 58,053         $ 44,949
                                                                ========         ========
                           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................    $  2,922         $  1,979
  Accrued clinical and cost of other studies................          15              633
  Accrued compensation......................................       2,614            1,261
  Deferred revenue..........................................       7,902            9,873
  Other accrued liabilities.................................         680              891
  Current portion of capital lease obligations and equipment
     loans..................................................       1,826            1,282
                                                                --------         --------
          Total current liabilities.........................      15,959           15,919
Notes payable...............................................       2,273               --
Noncurrent portion of deferred revenue......................       4,071            2,800
Capital lease obligations, less current portion.............       6,030            4,570
Commitments and contingencies
Shareholders' equity:
  Common stock, no par value, 40,000,000 shares authorized;
     issued and outstanding shares: September 30,
     1999 -- 14,703,853; December 31, 1998 -- 12,163,616....      99,245           73,768
Shareholder notes receivable................................        (246)            (288)
Deferred compensation.......................................        (419)            (541)
Accumulated deficit.........................................     (68,860)         (51,279)
                                                                --------         --------
          Total shareholders' equity........................      29,720           21,660
                                                                --------         --------
          Total liabilities and shareholders' equity........    $ 58,053         $ 44,949
                                                                ========         ========
</TABLE>

                            See accompanying notes.
                                        5
<PAGE>   6

                              ARADIGM CORPORATION

                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               NINE MONTHS ENDED
                                                                 SEPTEMBER 30,
                                                              --------------------
                                                                1999        1998
                                                              --------    --------
                                                                  (UNAUDITED)
<S>                                                           <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................................  $(17,553)   $(11,100)
  Adjustments to reconcile net loss to cash used in
     operating activities:
     Depreciation and amortization..........................     1,733       1,204
     Warrant expenses for services received.................        --         323
     Amortization of deferred compensation..................       122         172
     Changes in assets and liabilities:
       Receivables..........................................    (1,973)     (2,706)
       Inventories and other current assets.................        (9)         31
       Other assets.........................................       (89)         --
       Accounts payable.....................................       943        (305)
       Accrued liabilities..................................       524       1,349
       Deferred revenue.....................................      (700)      5,157
                                                              --------    --------
Cash used in operating activities...........................   (17,002)     (5,875)
                                                              --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures, net.................................    (2,982)     (6,784)
  Purchases of available-for-sale investments...............   (10,575)    (31,457)
  Proceeds from maturities of available-for-sale
     investments............................................    16,419      19,010
                                                              --------    --------
Cash provided by (used in) investing activities.............     2,862     (19,231)
                                                              --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of common stock, net...............    25,477      17,336
  Notes payable.............................................     2,273          --
  Proceeds from repayments of shareholder notes.............        42          64
  Notes receivable from officers............................         7          82
  Proceeds from equipment loans.............................     3,294       2,865
  Payments on lease obligations and equipment loans.........    (1,290)       (609)
                                                              --------    --------
Cash provided by financing activities.......................    29,803      19,738
                                                              --------    --------
Net increase (decrease) in cash and cash equivalents........    15,663      (5,368)
Cash and cash equivalents at beginning of period............    10,765      15,517
                                                              --------    --------
Cash and cash equivalents at end of period..................  $ 26,428    $ 10,149
                                                              ========    ========
SUPPLEMENTAL INVESTING AND FINANCING ACTIVITIES
  Common stock repurchased upon cancellation of shareholder
     notes..................................................  $     --    $     17
</TABLE>

                            See accompanying notes.
                                        6
<PAGE>   7

                              ARADIGM CORPORATION

                  NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1999

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 are 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 reimbursements for costs incurred under the agreements and,
accordingly, are generally deferred when received and recognized as

                                        7
<PAGE>   8
                              ARADIGM CORPORATION

            NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
                               SEPTEMBER 30, 1999

revenue based on actual efforts expended over the remaining terms of the
agreements. Costs of contract revenue approximate such revenue and are included
in research and development expenses. Refundable development and license fee
payments are deferred until the specified performance criteria are achieved.

  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 September 30,
1999 and 1998, 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. In June 1998, pursuant to the terms of a development
and commercialization agreement, the Company received $5 million from the sale
of newly-issued shares of its common stock to Novo Nordisk A/S. In March 1999,
the Company completed a private offering of shares of common stock for gross
proceeds of $25.5 million to a 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 inventorship on certain Aradigm intellectual property pertaining to the
development and commercialization of a pulmonary delivery system for insulin
analogs. The complaint sought a declaration that Lilly scientists were
co-inventors of a patent application filed by the Company relating to pulmonary
delivery of an insulin analog or, in the alternative, enforcement of an alleged
agreement to grant Lilly a nonexclusive license under such patent application.
The complaint also contained certain other allegations and sought unspecified
damages and injunctive relief. In April 1999, Aradigm filed a motion for summary
judgment dismissing all of Lilly's causes of action which is still pending
before the court. However, as the allegations of the complaint are focused on
insulin lyspro, the Company does not believe this litigation will have any
effect on its on-going program to develop a pulmonary delivery system for
regular insulin. Management further 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.

                                        8
<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 9, 1999.

     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 September 30, 1999, the Company had an
accumulated deficit of $68.9 million. The Company has not been profitable since
inception and expects to incur additional operating losses over 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 had any material product sales and does
not anticipate receiving significant revenue from product sales in 1999. 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 enters into
development contracts with pharmaceutical corporate partners. These
collaborative agreements provide for reimbursement of research and development
expenses as well as 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 partner sales of product 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
enter into any such agreements or that any such collaborative agreements will
generate sufficient product or contract research revenue to allow the Company to
become profitable or to sustain profitability.

RESULTS OF OPERATIONS

  Three Months Ended September 30, 1999 and 1998

     Contract Revenue. Contract revenue for the three-month period ended
September 30, 1999 increased to $5.0 million from $4.1 million for the same
period in 1998. The increase was due primarily to increased research and
development spending by the Company and a corresponding increase in
reimbursement by corporate partners. The Company is developing pulmonary
delivery systems with SmithKline Beecham, plc, to manage acute and breakthrough
pain using opiod analgesics, and with Novo Nordisk A/S, to manage diabetes

                                        9
<PAGE>   10

using insulin and other blood glucose regulating compounds. Costs associated
with contract research revenue are included in research and development expense.

     As of May 21, 1999, the Company entered into a collaborative development
agreement with Genentech, Inc. to incorporate Genentech's Pulmozyme product with
Aradigm's pulmonary delivery system. Certain expense reimbursements received
from Genentech under this agreement are subject to repayment if the product does
not receive approval from the Food and Drug Administration ("FDA"). Development
expenses incurred are reimbursed by Genentech in the form of loans supported by
promissory notes bearing interest at two percent over the prime rate. Once FDA
approval is received, the Company will receive a milestone payment that is
larger than the loan principal and accrued interest, allowing the loan to be
fully paid at that time. The Company will also receive certain milestone
payments at various points of product development.

     Research and Development Expenses. Research and development expenses for
the three-month period ended September 30, 1999 increased to $9.2 million from
$6.1 million for the same period in 1998. This increase was attributable
primarily to the hiring of additional scientific personnel and expenses
associated with the expansion of research and development efforts to support the
Company's increased partner-funded product development activities. 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. The increase in research and development
expenditures cannot be predicted accurately as it depends in part upon future
success in pursuing existing development collaborations, as well as obtaining
new collaborative agreements.

     General and Administrative Expenses. General and administrative expenses
for the three-month period ended September 30, 1999 increased to $2.2 million
from $1.8 million for the same period in 1998. The increase resulted primarily
from additional personnel and leased headquarters to support the Company's
expansion of research, development and manufacturing activities, and increased
efforts to develop collaborative relationships with corporate partners.

     Interest Income. Interest income for the three-month period ended September
30, 1999 decreased to $500,000 from $529,000 for the same period in 1998. The
decrease was due to the Company's maintaining smaller cash and investment
balances.

     Interest and Other Expense. Interest and other expense for the three-month
period ended September 30, 1999 increased to $183,000 from $172,000 for the same
period in 1998. This increase was a result of higher outstanding capital lease
and equipment loan balances under the Company's equipment lines of credit.

  Nine Months Ended September 30, 1999 and 1998

     Contract Revenue. Contract revenue for the nine-month period ended
September 30, 1999 increased to $12.2 million from $10.9 million for the same
period in 1998. Revenue increases of $5.6 million resulted from expansion of the
Company's partner-funded project development program, primarily the Novo Nordisk
agreement that was signed in June 1998. These increases were partially offset by
a $4.3 million decrease in revenues associated with the SmithKline Beecham
program as a result of certain device development costs being absorbed by the
Company in the first half of 1999.

     Research and Development Expenses. Research and development expenses for
the nine-month period ended September 30, 1999 increased to $24.4 million from
$16.1 million for the same period in 1998. This increase was attributable
primarily to the hiring of additional scientific personnel and expenses
associated with the expansion of research and development efforts to support the
Company's increased partner-funded product development activities.

     General and Administrative Expenses. General and administrative expenses
for the nine-month period ended September 30, 1999 decreased to $6.1 million
from $6.8 million for the same period in 1998. This

                                       10
<PAGE>   11

decrease resulted from the termination of the Company's program to market and
sell the SmartMist(R) Respiratory Management System.

     Interest Income. Interest income for the nine-month period ended September
30, 1999 increased to $1.5 million from $1.3 million for the same period in
1998. These increases were due to the Company's maintaining larger cash and
investment balances.

     Interest and Other Expense. Interest and other expense for the nine-month
period ended September 30, 1999 increased to $691,000 from $389,000 for the same
period in 1998. These increases are a result of higher outstanding capital lease
and equipment loan balances under the Company's equipment lines of credit.

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
financing of equipment acquisitions, contract research revenue and interest
earned on investments. As of September 30, 1999, the Company had received
approximately $99.2 million in net proceeds from sales of its capital stock. In
April 1999, the Company obtained an additional $3.0 million equipment line of
credit, of which $1.3 million remains available to the Company as of September
30, 1999. As of September 30, 1999, the Company had cash, cash equivalents and
investments of approximately $40.8 million.

     Net cash used in operating activities in the nine months ended September
30, 1999 was $17.0 million compared to $5.9 million in the same period in 1998.
The increase in cash used during 1999 resulted primarily from an increase in
operating losses and a decrease in deferred revenue.

     Net cash provided by investing activities in the nine months ended
September 30, 1999 was $2.9 million, compared to net cash used of $19.2 million
in the same period in 1998. The increase in cash resulted primarily from less
capital spending and a decrease in the purchase of short-term investments.

     Net cash provided by financing activities in the nine months ended
September 30, 1999 was $29.8 million, compared to $19.7 million in the same
period in 1998. The increase resulted primarily from the Company's receipt of
proceeds from the completion of a private placement of common stock in March
1999, which raised net proceeds of approximately $25.5 million.

     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 and the results of 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
and the results thereof, 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 an anticipated 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 partnerships with SmithKline Beecham, plc, Novo
Nordisk A/S and Genentech Inc. and projected interest income will enable the
Company to maintain current and planned operations through at least mid-2000.
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 and, if
required, there can be no assurance that additional financing will

                                       11
<PAGE>   12

be available on acceptable terms, if 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 manufacturing requirements of the AERx system. The
Company may seek additional funding through collaborations or through public or
private equity or debt financing. 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.

     Year 2000. As the year 2000 approaches, a "Year 2000" issue has arisen
because many existing application software programs, operating systems and
manufacturing equipment containing computer-related components (collectively,
"Systems") were designed to use only the last two digits to represent a year
(e.g., the year 1998 is represented by "98" on the system or in the program). As
a result, the year 1999 (i.e., "99") could be the maximum date value Systems
will be able to process accurately. If not corrected, the Year 2000 problem
could cause system failures or miscalculations resulting in inaccuracies in
computer output or disruptions of operations, including, but not limited to,
inaccurate processing of financial, personnel and other information as well as
the temporary inability to process transactions or engage in similar normal
business activities.

     The Company implemented a strategy to address the potential exposures
related to the impact of the Year 2000 problem on its Systems and appointed a
project manager to lead the Company's assessment of the Year 2000 problem. The
Company completed an inventory of its key internal financial, informational and
operational systems, including manufacturing control systems, identified those
areas that may be affected by the Year 2000 problem, and upgraded such Systems.
The Company believes that all required remediation programs have been completed.

     In addition to the risks associated with the Company's own Systems, the
Company has relationships with, and is to varying degrees dependent upon, a
large number of third parties ("Third Parties") that provide information, goods
and services to the Company. If significant numbers of these Third Parties
experience failures in their own Systems due to the Year 2000 problem, it could
affect the Company's ability to process transactions or engage in similar normal
business activities. The Company is in the process of determining the impact, if
any, on its operations if key Third Parties fail to take necessary actions. The
Company has initiated formal communications with significant Third Parties to
assess their Year 2000 compliance and determine the extent to which the Company
may be vulnerable to those Third Parties' failure to remedy their own Year 2000
issues.

     The total cost associated with becoming Year 2000 compliant is not known at
this time. To date, the Company has not incurred, and does not anticipate that
it will incur, significant operating expenses that would be material to the
Company's results of operations, cash flows or financial position. While the
Company has completed modifications of its business-critical Systems, if
modifications by Third Parties are not completed in a timely manner, the Year
2000 problem could have a material adverse effect on the results of operations,
cash flows and financial position of the Company. The Company cannot predict the
extent of any such impact. There can be no assurance that the Company or any
Third Party will not encounter any unforeseen problems with respect to any
Systems, which unforeseen problems could have a material adverse effect on the
results of operations, cash flows and financial position of the Company. The
Company is in the process of developing contingency plans to deal with any major
Year 2000 non-compliance.

                                       12
<PAGE>   13

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

  Market Risk Disclosure

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

     The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For investment
securities and debt obligations, the table presents principal cash flows and
related weighted-average interest rates by expected maturity dates.
Additionally, the Company has assumed its available-for-sale securities,
comprised of corporate notes and commercial paper, are similar enough to
aggregate those securities for presentation purposes. The weighted-average
interest rate was calculated using the weighted-average fixed rates under all
contracts with lessors.

                           INTEREST RATE SENSITIVITY
                PRINCIPAL (NOMINAL) AMOUNT BY EXPECTED MATURITY

<TABLE>
<CAPTION>
                                                                                                   FAIR VALUE
                                                                                                       AT
        DISCLOSURE           1999      2000     2001     2002     2003     THEREAFTER    TOTAL      9/30/99
        ----------          ------    ------    -----    -----    -----    ----------    ------    ----------
<S>                         <C>       <C>       <C>      <C>      <C>      <C>           <C>       <C>
Cash and cash
  equivalents.............  21,530         0        0        0        0        0         21,530      26,428
Average interest rate.....    5.27%        0        0        0        0        0
Short-term investments....       0    14,417        0        0        0        0         14,417      14,399
Average interest rate.....       0      5.60%       0        0        0        0
Long-term debt, including
  current portion:
  Fixed rate payment......     323     2,030    2,257    2,427      820        0          7,857
  Average interest rate...   12.94%    13.00%   13.13%   13.12%   12.16%       0
</TABLE>

                                       13
<PAGE>   14

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     Reference is hereby made to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, as initially filed with the Securities
and Exchange Commission on March 9, 1999 and Note 1 of Notes to Unaudited
Financial Statements.

ITEM 6. EXHIBITS

     (a) Exhibits

<TABLE>
        <C>    <S>
        27.1   Financial Data Schedule
</TABLE>

     (b) Reports on Form 8-K

        The Company did not file any reports on Form 8-K during the quarter
        ended September 30, 1999.

                                       14
<PAGE>   15

                                   SIGNATURE

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

Dated November 15, 1999

                                          ARADIGM CORPORATION
                                          (Registrant)

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

                                                 /s/ DAVID L. JOHNSON
                                          --------------------------------------
                                                     David L. Johnson
                                             Interim Chief Financial Officer

                                       15
<PAGE>   16

                              ARADIGM CORPORATION

                                   FORM 10-Q

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                             DESCRIPTION
    -------                            -----------
    <C>        <S>
     27.1      Financial Data Schedule
</TABLE>