<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 JUNE 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                          14,690,764 shares
                   (Class)                            (Outstanding at July 27, 1999)
</TABLE>

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<PAGE>   2

                              ARADIGM CORPORATION

                                     INDEX

<TABLE>
<CAPTION>
                                                                         PAGE NO.
                                                                         --------
<S>        <C>                                                           <C>
                          PART 1. FINANCIAL INFORMATION

Item 1.    Financial Statements

           Statements of Operations (Unaudited)
           Three months ended June 30, 1999 and 1998...................       3
           Six months ended June 30, 1999 and 1998.....................       4
           Balance Sheets
           June 30, 1999 (Unaudited) and December 31, 1998.............       5
           Statements of Cash Flows (Unaudited)
           Six months ended June 30, 1999 and 1998.....................       6
           Notes to Unaudited Financial Statements.....................       7

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

Item 7a.   Quantitative and Qualitative Disclosures About Market
           Risk........................................................      13

                           PART II. OTHER INFORMATION

Item 1.    Legal Proceedings...........................................      14

Item 4.    Submission of Matters to a Vote of Security Holders.........      14

Item 6.    Exhibits and Reports on Form 8-K............................      15

Signature..............................................................      16

Exhibits...............................................................      17
</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
                                                                       JUNE 30,
                                                              --------------------------
                                                                 1999           1998
                                                              -----------    -----------
                                                                     (UNAUDITED)
<S>                                                           <C>            <C>
Contract revenues...........................................  $     3,551    $     4,077
Expenses:
  Research and development..................................        7,620          5,602
  General and administrative................................        2,312          2,673
                                                              -----------    -----------
Total expenses..............................................        9,932          8,275
                                                              -----------    -----------
Loss from operations........................................       (6,381)        (4,198)
Interest income.............................................          574            493
Interest and other expense..................................         (220)          (127)
                                                              -----------    -----------
Net loss....................................................  $    (6,027)   $    (3,832)
                                                              ===========    ===========
Basic and diluted net loss per share........................  $     (0.41)   $     (0.32)
                                                              -----------    -----------
Shares used in computing basic and diluted net loss per
  share.....................................................   14,661,100     11,869,000
                                                              ===========    ===========
</TABLE>

                            See accompanying notes.

                                        3
<PAGE>   4

                              ARADIGM CORPORATION

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

<TABLE>
<CAPTION>
                                                                   SIX MONTHS ENDED
                                                                       JUNE 30,
                                                              --------------------------
                                                                 1999           1998
                                                              -----------    -----------
                                                                     (UNAUDITED)
<S>                                                           <C>            <C>
Contract revenues...........................................  $     7,137    $     6,829
Expenses:
  Research and development..................................       15,207         10,009
  General and administrative................................        3,921          5,028
                                                              -----------    -----------
Total expenses..............................................       19,128         15,037
                                                              -----------    -----------
Loss from operations........................................      (11,991)        (8,208)
Interest income.............................................          994            811
Interest and other expense..................................         (508)          (217)
                                                              -----------    -----------
Net loss....................................................  $   (11,505)   $    (7,614)
                                                              ===========    ===========
Basic and diluted net loss per share........................  $     (0.84)   $     (0.68)
                                                              -----------    -----------
Shares used in computing basic and diluted net loss per
  share.....................................................   13,704,372     11,239,000
                                                              ===========    ===========
</TABLE>

                            See accompanying notes.

                                        4
<PAGE>   5

                              ARADIGM CORPORATION

                                 BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)

                                     ASSETS

<TABLE>
<CAPTION>
                                                               JUNE 30,      DECEMBER 31,
                                                                 1999            1998
                                                              -----------    ------------
                                                              (UNAUDITED)
<S>                                                           <C>            <C>
Current assets:
  Cash and cash equivalents.................................   $ 25,571        $ 10,765
  Short-term investments....................................     17,079          20,271
  Receivables...............................................      2,731             774
  Inventories and other current assets......................        810             729
                                                               --------        --------
          Total current assets..............................     46,191          32,539
Property and equipment, net.................................     12,030          12,196
Notes receivable from officers..............................        122             135
Other assets................................................        169              79
                                                               --------        --------
          Total assets......................................   $ 58,512        $ 44,949
                                                               ========        ========

                          LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................   $  1,067        $  1,979
  Accrued clinical and cost of other studies................         --             633
  Accrued compensation......................................      1,958           1,261
  Deferred revenue..........................................      7,877           9,873
  Other accrued liabilities.................................        305             891
  Current portion of capital lease obligations and equipment
     loans..................................................      1,494           1,282
                                                               --------        --------
          Total current liabilities.........................     12,701          15,919
Noncurrent portion of deferred revenue......................      4,305           2,800
Capital lease obligation, less current portion..............      5,926           4,570
Commitments and contingencies
Shareholders' equity:
  Common stock, no par value, 40,000,000 shares authorized;
     issued and outstanding shares: June 30,
     1999 -- 14,683,264; December 31, 1998 -- 12,163,616....     99,120          73,768
Shareholder notes receivable................................       (247)           (288)
Deferred compensation.......................................       (459)           (541)
Accumulated deficit.........................................    (62,834)        (51,279)
                                                               --------        --------
          Total shareholders' equity........................     35,580          21,660
                                                               --------        --------
          Total liabilities and shareholders' equity........   $ 58,512        $ 44,949
                                                               ========        ========
</TABLE>

                            See accompanying notes.

                                        5
<PAGE>   6

                              ARADIGM CORPORATION

                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                SIX MONTHS ENDED
                                                                    JUNE 30,
                                                              --------------------
                                                                1999        1998
                                                              --------    --------
                                                                  (UNAUDITED)
<S>                                                           <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss..................................................  $(11,505)   $ (7,614)
  Adjustments to reconcile net loss to cash (used in)
     provided by operating activities:
     Depreciation and amortization..........................     1,050         781
     Warrant expenses for services received.................        --         323
     Amortization of deferred compensation..................        81         131
     Changes in assets and liabilities:
       Receivables..........................................    (1,957)       (894)
       Inventories and other current assets.................       (81)        (97)
       Other assets.........................................       (90)         --
       Accounts payable.....................................      (912)        386
       Accrued liabilities..................................      (522)        737
       Deferred revenue.....................................      (491)      7,336
                                                              --------    --------
Cash provided by (used in) operating activities.............   (14,427)      1,089
                                                              --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures......................................      (884)     (4,950)
  Sale (purchases) of available-for-sale investments........       109     (16,682)
  Proceeds from maturities of available-for-sale
     investments............................................     3,035      11,160
                                                              --------    --------
Cash provided by (used in) investing activities.............     2,260     (10,472)
                                                              --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of common stock, net...............    25,352      17,302
  Proceeds from repayments of shareholder notes.............        40          72
  Notes receivable from officers............................        13          77
  Proceeds from equipment loans.............................     2,243       2,457
  Payments on lease obligations and equipment loans.........      (675)       (356)
                                                              --------    --------
Cash provided by financing activities.......................    26,973      19,552
                                                              --------    --------
Net increase in cash and cash equivalents...................    14,806      10,169
Cash and cash equivalents at beginning of period............    10,765      15,517
                                                              --------    --------
Cash and cash equivalents at end of period..................  $ 25,571    $ 25,686
                                                              ========    ========
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
                                 JUNE 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 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 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)
                                 JUNE 30, 1999

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. 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 June 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 an 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 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 June 30, 1999, the Company had an
accumulated deficit of $62.8 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's strategy is to enter
into development contracts with pharmaceutical corporate partners. The Company
anticipates that these collaborative agreements will provide for reimbursement
of research and development expenses and 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 JUNE 30, 1999 AND 1998

     Contract Revenue. Contract revenue for the three-month period ended June
30, 1999 decreased to $3.6 million from $4.1 million for the same period in
1998. This decrease in revenue was mainly due to some of the device development
costs being absorbed by the Company. 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

                                        9
<PAGE>   10

compounds. Costs of contract research revenue approximate such revenue and 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 to Genentech, if
the product does not receive FDA approval. The expenses incurred under this
project will be reimbursed by Genentech in the form of the notes payable bearing
the interest rate of two percent over the prime rate. Once the FDA approval is
received, the note and the accrued interest will be forgiven in its entirety.
Upon signing of the Genentech agreement, the Company received $250,000 of
milestone and will receive additional milestone payments totaling $1.75 million
during the various stages of such study plus another $2 million when the product
receives FDA approval.

     Research and Development Expenses. Research and development expenses for
the three-month period ended June 30, 1999 increased to $7.6 million from $5.6
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 June 30, 1999 decreased to $2.3 million from
$2.7 million for the same period in 1998. This decrease resulted from the
termination of the Company's program to market and sell the SmartMist(R)
Respiratory Management System in mid-1998. The Company expects to incur greater
general and administrative expenses in the future to support its expansion of
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,
1999 increased to $574,000 from $493,000 for the same period in 1998. 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
receipts of gross proceeds from the private offerings of common stock for
approximately $12 million in April 1998 and $25.5 million in March 1999.

     Interest Expense. Interest expense for the three-month period ended June
30, 1999 increased to $220,000 from $127,000 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.

     SIX MONTHS ENDED JUNE 30, 1999 AND 1998

     Contract Revenue. Contract revenue for the six month period ended June 30,
1999 increased to $7.1 million from $6.8 million for the same period in 1998.
The overall increase is mainly due to expansion of the Company's partner-funded
project development program, primarily the Novo Nordisk agreement that was
signed in June 1998.

     Research and Development Expenses. Research and development expenses for
the six-month period ended June 30, 1999 increased to $15.2 million from $10.0
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.

                                       10
<PAGE>   11

     General and Administrative Expenses. General and administrative expenses
for the six-month period ended June 30, 1999 decreased to $3.9 million from $5.0
million for the same period in 1998. This 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 six-month period ended June 30,
1999 increased to $994,000 from $811,000 for the same period in 1998. 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
receipts of gross proceeds from the private offerings of common stock for
approximately $12 million in April 1998 and $25.5 million in March 1999.

     Interest Expense. Interest expense for the six-month period ended June 30,
1999 increased to $508,000 from $217,000 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 June 30, 1999, the Company had received
approximately $99.1 million in net proceeds from sales of its capital stock. In
April 1999, the Company obtained a $3.0 million equipment line of credit, of
which $1.3 million remains available to the Company through October 31, 1999. As
of June 30, 1999, the Company had cash, cash equivalents and investments of
approximately $42.6 million.

     Net cash used in operating activities in the six months ended June 30, 1999
was $14.4 million compared to net cash provided of $1.1 million in the same
period in 1998. The increase in cash used resulted primarily from increases in
account receivables, deferred revenue and accrued liabilities as well as a
higher net loss in 1999.

     Net cash provided by investing activities in the six months ended June 30,
1999 was $2.3 million compared to net cash used of $10.5 million in the same
period in 1998. The increase in cash was mainly contributed to less spending in
capital expenditure and decrease in the purchase of short term investments.

     Net cash provided by financing activities in the three months ended June
30, 1999 was $27.0 million compared to net cash provided of $19.6 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.

                                       11
<PAGE>   12

     The Company expects that its existing capital resources, committed funding
from its existing corporate partnerships with SmithKline Beecham, Novo Nordisk
A/S and Genentech 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 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 is currently implementing a strategy to address the potential
exposures related to the impact of the Year 2000 problem on its Systems and has
appointed a project manager to lead the Company's assessment of the Year 2000
problem. The Company has completed an initial inventory of its key internal
financial, informational and operational systems, including manufacturing
control systems, to identify those areas that may be affected by the Year 2000
problem, and has begun upgrading such Systems as may be affected. The Company
currently estimates that any required remediation programs will be completed by
the third quarter of fiscal 1999.

     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 financial position, results of operations or cash flows. While the
Company plans to complete modifications of its business-critical Systems prior
to the Year 2000, if such modifications or modifications by Third Parties are
not completed in a timely manner, the Year 2000 problem could have a material
adverse effect on the operations 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 operations and financial position of the Company. The
Company currently has

                                       12
<PAGE>   13

no contingency plans to deal with any major Year 2000 non-compliance, though
such plans will be developed over the coming quarters.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  Market Risk Disclosures

     In the normal course of business, the financial position of the Company is
routinely subject to 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 the 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 ComDisco and TransAmerica.

<TABLE>
<CAPTION>
                                                                                             FAIR VALUE
         DISCLOSURE             1999    2000    2001    2002    2003   THEREAFTER   TOTAL    AT 6/30/99
         ----------            ------   -----   -----   -----   ----   ----------   ------   ----------
<S>                            <C>      <C>     <C>     <C>     <C>    <C>          <C>      <C>
Cash and Cash Equivalents....   9,180       0       0       0    0         0         9,180     25,571
Average interest rate........    2.70%      0       0       0    0         0
Short-term investment........  20,264       0       0       0    0         0        20,264     17,079
Average interest rate........    5.50%      0       0       0    0         0
Long-term debt, including
  current portion:
  Fixed rate payment.........   1,282   1,387   1,557   1,626    0         0         5,852
  Average interest rate......   12.00%  12.00%  13.50%  13.50%   0         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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) The Annual Meeting of shareholders of Aradigm Corporation was held on May
    21, 1999.

(b) Frank H. Barker, Wayne I. Roe, Reid M. Rubsamen, 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 respects thereto were as follows:

<TABLE>
    <S>                      <C>                   <C>                          <C>        <C>
    (1) The election of Frank H. Barker as Director to hold office until the next Annual Meeting of
        Shareholders and until his successor is elected and qualified:
         For:                11,591,611            Against:                       463,887

    (2) The election of Wayne I. Roe as Director to hold office until the next Annual Meeting of
        Shareholders and until his successor is elected and qualified:
         For:                11,598,111            Against:                       463,387

    (3) The election of Reid M. Rubsamen as Director to hold office until the next Annual Meeting of
        Shareholders and until his successor is elected and qualified:
         For:                11,602,236            Against:                       459,262

    (4) The election of Richard P. Thompson as Director to hold office until the next Annual Meeting
        of Shareholders and until his successor is elected and qualified:
         For:                11,602,236            Against:                       459,262

    (5) The election of Virgil D. Thompson as Director to hold office until the next Annual Meeting of
        Shareholders and until his successor is elected and qualified:
         For:                11,597,111            Against:                       464,387

    (6) Approval of an amendment to the 1996 Equity Incentive Plan, increasing the total number of
        shares of Common Stock authorized for issuance by 1,820,000 shares:
         For:                 6,854,567            Against:                     2,820,887
        Withheld:                 3,193            Broker Non-Votes:            2,365,865

    (7) Approval of an amendment to the Employee Stock Purchase Plan, increasing the total number of
        shares of common stock authorized for issuance by 180,000 shares:
         For:                 9,599,503            Against:                        71,170
        Withheld:                 2,868            Broker Non-Votes:            2,410,971

    (8) Ratification of the selection of Ernst & Young LLP as independent auditors of the company for
        its fiscal year ended December 31, 1999:
         For:                12,007,199            Against:                        35,963
        Withheld:                 1,350
</TABLE>

                                       14
<PAGE>   15

ITEM 6. EXHIBITS

(a) Exhibits

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                            DESCRIPTION
    -------                           -----------
    <C>       <S>
     10.1*    1996 Equity Incentive Plan, as amended.
     10.2*    Employee Stock Purchase Plan, as amended.
     27.1     Financial Data Schedule
</TABLE>

---------------
* Filed as an exhibit to the Company's Proxy Statement filed April 19, 1999 and
  incorporated herein by reference

(b) Reports on Form 8-K

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

                                       15
<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 12, 1999

                                          ARADIGM CORPORATION
                                          (Registrant)

                                          /s/ Richard P. Thompson

                                          --------------------------------------
                                          Richard P. Thompson
                                          Chief Executive Officer

                                          /s/ Mark A. Olbert

                                          --------------------------------------
                                          Mark A. Olbert
                                          Chief Financial Officer

                                       16
<PAGE>   17

                              ARADIGM CORPORATION
                                   FORM 10-Q

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                            DESCRIPTION
    -------                           -----------
    <C>       <S>
     10.1*    1996 Equity Incentive Plan, as amended.
     10.2*    Employee Stock Purchase Plan, as amended.
     27.1     Financial Data Schedule
</TABLE>

---------------
* Filed as an exhibit to the Company's Proxy Statement filed April 19, 1999 and
  incorporated herein by reference

                                       17