<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

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

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


                         Commission File Number 0-21185


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

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


                   2320 SCIENTIFIC DRIVE, WILMINGTON, NC 28405
               (Address of principal executive office) (Zip code)


                                 (910) 254-7000
              (Registrant's telephone number, including area code)


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

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



<PAGE>   2


                       Applied Analytical Industries, Inc.
                                Table of Contents



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


                                                                        Page No.
                                                                        --------
PART I.  FINANCIAL INFORMATION

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

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations.                             11

Item 3.  Quantitative and Qualitative Disclosures About Market Risk       15


PART II. OTHER INFORMATION

Item 3.  Defaults Upon Senior Securities                                  15

Item 6.  Exhibits and Reports on Form 8-K.                                16


SIGNATURES                                                                17

Exhibit Index                                                             18



                                       2


<PAGE>   3


PART I.  FINANCIAL INFORMATION

Item 1.   Financial Statements.

                       Applied Analytical Industries, Inc.
                   Condensed Consolidated Statement of Income
                    (In thousands, except per share amounts)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                    Three months ended                  Nine months ended
                                                                       September 30,                       September 30,
                                                               ----------------------------        ---------------------------
                                                                   1999            1998                1999            1998
                                                               ------------    ------------        -----------     -----------

<S>                                                          <C>             <C>                <C>             <C>
Net sales                                                     $     22,715    $     25,164        $    70,521     $    69,948
                                                               ------------    ------------        -----------     -----------

Operating costs and expenses:
   Direct costs                                                     12,661          12,655             39,519          35,274
   Selling                                                           3,030           2,525              9,105           7,456
   General and administrative                                        5,794           6,069             16,883          16,120
   Research and development                                          2,776           1,372              8,735           4,739
   Transaction, integration, and restructuring costs                   --              --               6,400             --
                                                               ------------    ------------        -----------     -----------
                                                                    24,261          22,621             80,642          63,589
                                                               ------------    ------------        -----------     -----------

   Income (loss) from operations                                    (1,546)          2,543            (10,121)          6,359

Other income (expense):
   Interest income (expense), net                                     (274)             82               (708)            343
   Other, net                                                            3             119                (46)            100
                                                               ------------    ------------        -----------     -----------
                                                                      (271)            201               (754)            443
                                                               ------------    ------------        -----------     -----------

Income (loss) before income taxes                                   (1,817)          2,744            (10,875)          6,802
Provision (benefit) for income taxes                                  (359)            831             (2,681)          2,283
                                                               ------------    ------------        -----------     -----------
Net income (loss)                                             $     (1,458)   $      1,913        $    (8,194)    $     4,519
                                                               ============    ============        ===========     ===========


Basic earnings (loss) per share                               $      (0.08)   $       0.11        $     (0.48)    $      0.26
                                                               ============    ============        ===========     ===========
Weighted average shares outstanding                                 17,205          17,109             17,203          17,104
                                                               ============    ============        ===========     ===========

Diluted earnings (loss) per share                             $      (0.08)   $       0.11        $     (0.48)    $      0.26
                                                               ============    ============        ===========     ===========
Weighted average shares outstanding                                 17,205          17,666             17,203          17,693
                                                               ============    ============        ===========     ===========
</TABLE>



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


                                       3


<PAGE>   4

                      Applied Analytical Industries, Inc.
                      Condensed Consolidated Balance Sheet
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                     September 30,        December 31,
                                                                         1999                  1998
                                                                 -----------------     -----------------
                                                                   (Unaudited)
<S>                                                             <C>                   <C>
                            ASSETS

Current assets:
Cash and cash equivalents                                       $             625     $          12,299
Accounts receivable                                                        27,779                26,138
Work-in-progress                                                           16,796                15,570
Prepaid and other current assets                                           13,467                 7,902
                                                                 -----------------     -----------------
          Total current assets                                             58,667                61,909
Property and equipment, net                                                43,672                38,802
Goodwill and other intangibles                                             13,719                15,509
Other assets                                                                3,161                 3,288
                                                                 -----------------     -----------------
          Total assets                                          $         119,219     $         119,508
                                                                 =================     =================

              LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current maturities of long-term debt
   and short-term debt                                          $          19,616     $           7,038
Accounts payable                                                            6,917                 7,169
Customer advances                                                           5,269                 6,818
Accrued wages and benefits                                                  3,335                 4,522
Other accrued liabilities                                                   7,441                 7,836
                                                                 -----------------     -----------------
          Total current liabilities                                        42,578                33,383
Long-term debt                                                              5,547                 7,749
Other liabilities                                                           4,812                 3,254
Commitments and contingencies                                                 --                    --
Stockholders' equity:
  Common stock                                                                 17                    17
  Paid-in capital                                                          69,633                69,570
  Retained earnings/accumulated (deficit)                                  (2,541)                5,653
  Accumulated other comprehensive losses                                     (795)                  (53)
  Stock subscriptions receivable                                              (32)                  (65)
                                                                 -----------------     -----------------
          Total stockholders' equity                                       66,282                75,122
                                                                 -----------------     -----------------
          Total liabilities and stockholders' equity            $         119,219     $         119,508
                                                                 =================     =================
</TABLE>



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


                                       4

<PAGE>   5

                       Applied Analytical Industries, Inc.
                 Condensed Consolidated Statement of Cash Flows
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                     Nine months ended
                                                                                        September 30,
                                                                               -------------------------------
                                                                                  1999              1998
                                                                               ------------     --------------
<S>                                                                           <C>              <C>
Net income/(loss)                                                             $     (8,194)    $        4,519
Adjustments to reconcile net income/(loss) to net cash provided
    (used) by operating activities:
    Depreciation and amortization                                                    5,719              4,299
    Other non-cash items                                                                (6)              (484)
    Changes in assets and liabilities:
    Trade and other receivables                                                     (1,986)            (4,086)
    Work-in-progress                                                                (1,532)            (3,642)
    Prepaid and other assets, net                                                   (5,555)            (1,973)
    Accounts payable                                                                   (80)               291
    Customer advances                                                               (1,347)               323
    Other accrued liabilities                                                          628                208
                                                                               ------------     --------------
Net cash provided by (used in) operating activities:                               (12,353)              (545)
Cash flows from investing activities:
Purchase of property and equipment                                                 (10,453)            (8,238)
Other                                                                                  (45)            (3,047)
                                                                               ------------     --------------
Net cash used in investing activities                                              (10,498)           (11,285)
Cash flows from financing activities:
Net (payments) proceeds on short-term debt                                          13,043                840
Net (payments) proceeds on long-term debt                                           (1,761)            (1,783)
Other                                                                                  (22)               157
                                                                               ------------     --------------
Net cash provided by (used in) financing activities                                 11,260               (786)
                                                                               ------------     --------------
Net decrease in cash and cash equivalents                                          (11,591)           (12,616)
Effect of exchange rate changes on cash                                                (83)                34
Cash and cash equivalents, beginning of period                                      12,299             27,716
                                                                               ------------     --------------
Cash and cash equivalents, end of period                                      $        625     $       15,134
                                                                               ============     ==============
Supplemental information, cash paid for:
     Interest                                                                 $        430     $          424
     Income taxes                                                             $         33     $        1,402
</TABLE>



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


                                       5


<PAGE>   6

                       Applied Analytical Industries, Inc.
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

1.  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
applicable Securities and Exchange Commission regulations for interim financial
information. These financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The consolidated financial information as of December 31,
1998 has been derived from audited financial statements. It is presumed that
users of this interim financial information have read or have access to the
audited financial statements for the preceding fiscal year. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for fair presentation have been included. Operating results
for the interim periods presented are not necessarily indicative of the results
that may be expected for the full year.

2.  Mergers and acquisitions

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

<TABLE>
<CAPTION>
                                              Three months ended                    Nine months ended
                                                  September 30,                        September 30,
                                         ------------------------------       -----------------------------
                                             1999             1998               1999             1998
                                         -------------    -------------       ------------     ------------
<S>                                    <C>              <C>                 <C>              <C>
          Net sales:
          AAI                           $      18,118    $      20,138       $     56,506     $     56,677
          MTRA                                  4,597            5,026             14,015           13,271
                                         -------------    -------------       ------------     ------------
                                        $      22,715    $      25,164       $     70,521     $     69,948
                                         =============    =============       ============     ============

          Net income (loss):
          AAI                           $      (1,603)   $       1,413       $     (8,805)    $      3,792
          MTRA                                    145              500                611              727
                                         -------------    -------------       ------------     ------------
                                        $      (1,458)   $       1,913       $     (8,194)    $      4,519
                                         =============    =============       ============     ============
</TABLE>


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

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


                                       6

<PAGE>   7

3.  Earnings Per Share

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

<TABLE>
<CAPTION>
                                                                   Three months ended               Nine months ended
                                                                      September 30,                    September 30,
                                                               ----------------------------     ----------------------------
                                                                  1999    (1)     1998             1999    (1)      1998
                                                               -----------     ------------     -----------      -----------
<S>                                                            <C>              <C>             <C>              <C>
      Basic Earnings per Share:
         Weighted average number of shares                         17,205           17,109          17,203           17,104

      Effect of Dilutive Securities:
         Employee and Director stock options                            0              546               0              589
                                                               -----------     ------------     -----------      -----------

      Diluted Earnings per Share:
         Adjusted weighted average number of
         shares and assumed conversions                            17,205           17,655          17,203           17,693
                                                               ===========     ============     ===========      ===========


  (1) Weighted Average Number of Shares Not
         Included in Diluted EPS Since Antidilutive                   493                0             535                0
                                                               ===========     ============     ===========      ===========
</TABLE>


4.  Comprehensive Income

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

<TABLE>
<CAPTION>
                                                      Three months ended                   Nine months ended
                                                         September 30,                        September 30,
                                                        (In thousands)                       (In thousands)
                                                -----------------------------        -----------------------------
                                                    1999            1998                1999             1998
                                                -------------    ------------        ------------     ------------

<S>                                            <C>              <C>                 <C>              <C>
Net income (loss)                              $      (1,458)   $      1,913        $     (8,194)    $      4,519
Other comprehensive income (loss):
  Currency translation adjustments                       209             (55)               (795)             (61)
                                                -------------    ------------        ------------     ------------
Comprehensive income (loss)                    $      (1,249)   $      1,858        $     (8,989)    $      4,458
                                                =============    ============        ============     ============
</TABLE>



                                       7

<PAGE>   8

5.  Financial Information by Business Segment and Geographic Area (In
    thousands):

<TABLE>
<CAPTION>
                                                   Three months ended                        Nine months ended
                                                      September 30,                            September 30,
                                              -----------------------------            ------------------------------
                                                 1999             1998                     1999             1998
                                              ------------    -------------            -------------    -------------
<S>                                          <C>             <C>                      <C>              <C>
Net sales:
Clinical                                     $      6,906    $       7,052            $      19,041    $      19,111
Pharmaceutic                                       13,712           16,370                   44,865           45,333
Internal Product Development                        2,097            1,742                    6,615            5,504
                                              ------------    -------------            -------------    -------------
                                             $     22,715    $      25,164            $      70,521    $      69,948
                                              ============    =============            =============    =============

United States                                $     19,094    $      19,667            $      57,083    $      55,032
Non-U.S.                                            4,255            5,798                   15,511           15,774
Less inter-geographic sales                          (634)            (301)                  (2,073)            (858)
                                              ------------    -------------            -------------    -------------
                                             $     22,715    $      25,164            $      70,521    $      69,948
                                              ============    =============            =============    =============

Income (loss) from operations:
Clinical                                     $        (34)   $       1,064            $         108    $       1,817
Pharmaceutic                                          298            1,828                    2,766            5,023
Internal Product Development                         (399)             370                   (2,719)             764
Corporate                                          (1,411)            (719)                  (3,876)          (1,245)
Corporate Restructuring Charges                         0                0                   (6,400)               0
                                              ------------    -------------            -------------    -------------
                                             $     (1,546)   $       2,543            $     (10,121)   $       6,359
                                              ============    =============            =============    =============

United States                                $       (769)   $       2,150            $     (10,470)   $       6,384
Non-U.S.                                             (777)             393                      349              (25)
                                              ------------    -------------            -------------    -------------
                                             $     (1,546)   $       2,543            $     (10,121)   $       6,359
                                              ============    =============            =============    =============
</TABLE>



6.  Income Tax Expense

The Company's effective tax rate has been affected by losses in Europe. These
losses have created a tax asset which has been reserved against, thus no tax
benefit is shown related to the European losses. In the future, as European
operations become profitable, the reserves against these deferred assets will
reverse and will either reduce future tax expense or goodwill. Tax benefits have
been recognized on US losses representing refunds available from prior periods
or the benefit of loss carryforwards to future periods.


                                       8


<PAGE>   9

7.  Transaction, Integration and Restructuring Costs

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

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

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

<TABLE>
<CAPTION>
                                                                Total             Paid to
                                                               Expense             Date
                                                           --------------     --------------
<S>                                                       <C>                <C>
          Transaction costs                               $        1,913     $        1,913
          Personnel separation costs                               1,919                785
          Facility and other costs                                 2,568              1,480
                                                           --------------     --------------
                                                          $        6,400     $        4,178
                                                           ==============     ==============
</TABLE>


8.  Transactions with Related Parties

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

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

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

Total payments for scanning and validation services provided to AAI by Pharmcomm
were approximately $287,000, $214,000, and $436,000 for the years ended December
31, 1996, 1997, and 1998, respectively. For the nine months ended September 30,
1999, AAI has paid Pharmcomm approximately $268,000 excluding the advance
payment for services discussed above.


                                       9


<PAGE>   10

The Company also has work-in-process and receivables due from Aesgen, Inc.
("Aesgen") and Endeavor Pharmaceuticals Inc. ("Endeavor"). Both Endeavor and
Aesgen were organized by AAI and its principal shareholders, and continue to be
related parties. The total amount of work-in-process and receivables at
September 30, 1999 related to Aesgen was approximately $569,000 and the amount
related to Endeavor was approximately $2,570,000.

9.  Debt

At September 30, 1999, the Company was not in compliance with a financial
covenant in connection with a credit arrangement with a bank. The credit
arrangement represents a revolving line of credit (the "Revolver") and certain
off-balance sheet leases (the "Leases"). The Revolver is the primary mechanism
used by the Company to fund capital purchases and operating cash needs. The
balance owed on the Revolver at September 30, 1999 was $13,069,000 and is
secured by all accounts receivable of the Company and substantially all of the
Company's personal property.

Covenant compliance on the Revolver is also required under the Leases which are
secured by real estate made up of a headquarters building in Wilmington, N.C., a
laboratory and clinic facility in Research Triangle Park, N.C. and land
purchased for future construction of a laboratory facility in Shawnee, Kansas.
The Leases are operating leases which allow for the purchase of the facilities
at the end of the lease term at fair market value or the balance of the debt
secured by the facilities. At September 30, 1999, the balance of the debt
secured by the leases was approximately $12,878,000.

The lender has agreed to waive its rights or remedies through November 30, 1999
as a result of the company's failure to comply with this debt covenant. The
lender has agreed to amend and extend the credit facility from November 30,
1999 to May 31, 2000. Since 1996, the company and the lender have been in the
practice of renewing the credit facility annually as of May 31. Borrowings
under this amended and extended credit facility will be subject to additional
financial covenants and security in the form of fixed assets and receivables.
During the extension period, total availability under the credit facility has
been increased to $25 million subject to covenant restrictions; borrowing is
limited to a percentage of the value of pledged security and compliance with
certain additional covenants. The applicable interest rate on the Revolver will
be LIBOR plus 2.25% per annum and the unused commitment fee will be 0.375% per
annum.

10. Contingencies

The Company has started a dispute resolution process, seeking to collect
approximately $3.6 million of billings plus interest on past due amounts from a
customer. Even though the process was initiated to protect the Company's
interests, there can be no assurance that the Company will ultimately be
successful in such collection efforts.


                                       10

<PAGE>   11

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

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

Results of Operations - Third Quarter 1999 compared to Third Quarter 1998

Net sales for the third quarter of 1999 decreased 10% to $22.7 million compared
to $25.2 million in 1998. Pharmaceutic revenues were $13.7 million in 1999, down
16% from $16.4 million in 1998 and Clinical revenues were down 2% to $6.9
million in the third quarter of 1999 from $7.1 million in the same period of
1998. 1999 revenues include full period results from the acquisition of KCAS,
which had minimal impact on third quarter 1998 revenues after its acquisition on
September 15, 1998. Revenues from Internal Product Development were $2.1 million
in 1999 compared to $1.7 million last year, reflecting an increase of 21%. The
increase in internal product development revenues was due to the signing of two
new development agreements in the quarter, progress made on existing contracts,
and royalties generated on a product already marketed. The Company expects that
product development revenues will increase in future quarters as additional
agreements are signed but expects that revenues from these contract signings
will be volatile until royalty streams earned from launched products exceeds the
development fees earned. However, there can be no assurance that the company
will be successful in executing additional product development agreements and
increase its future revenue or that the products developed will be commercially
successful.

Pharmaceutic and Clinical sales declined from the amounts in the third quarter
of 1998 due to a number of factors. Management believes that the rate of new
contract signings slowed in the early part of 1999 due to the relative size of
the contracts being negotiated, market consolidation and the lack of focused
selling efforts. Due to the lead time required to begin work on a project, fewer
signings early in the year resulted in less work in the laboratories later in
the year. Management has taken specific steps to increase selling efforts by
increasing the number of professionals devoted to the customer focused selling
approach used in the past. Management believes that with the integration of the
European and US clinical businesses and the increased attention to customer
focused selling, growth will return to historical trends. In the third quarter
of 1999, the Company had adequate capacity to meet its current commitments and
projected growth. The North Brunswick, New Jersey facility is fully operational
and has added to the Company's pharmaceutic capacity. As demand increases, the
existing capacity will be more fully utilized and no further expansion is
anticipated.

Overall gross margin was approximately 44% for the third quarter of 1999
compared to 50% for the same period of 1998. The decrease in gross margin
percentage was due to a decrease in the volume of work without a corresponding
decrease in the related direct costs. Cost of sales was essentially flat in the
third quarter compared with the third quarter of 1998, which reflects the
Company's progress in controlling costs. Major changes in cost of sales include
increases due to full period expenses for KCAS in 1999 which was acquired on
September 15, 1998 and an increase due to the addition of the


                                       11


<PAGE>   12

North Brunswick, New Jersey facility. During the third quarter of 1999, the
company changed its estimated useful lives of certain operating equipment to
reflect more accurately the historical useful lives of the equipment. The effect
of the change has been reflected as a reduction in Cost of Goods Sold for the
third quarter of approximately $250,000.

Selling, general and administrative costs as a percentage of net sales increased
to approximately 38% in 1999 compared to 34% for the same quarter in 1998,
reflecting an increase of approximately $250,000. The increase is made up of
increased selling efforts partially offset by savings in general and
administrative areas. In the third quarter of 1999, some of the general and
administrative savings were realized from the Company's restructuring efforts
started in the second quarter of 1999. During the first quarter of 1999, the
Company increased the size of its salesforce by adding additional technical
support and expertise from its operating units. This increase in selling
activities combined with a decrease in overall revenues resulted in an increase
in selling, general and administrative costs as a percentage of sales. However,
these additions have added to the Company's ability to present the highly
technical aspects of its work to the scientific customer base. Management
expects this investment in selling expertise to increase the ability to sign
additional business and help identify potential customer needs for future growth
opportunities. Due to the lead time required to have work available after the
increase in salesforce, the expected increase in sales due to the increased
sales efforts did not occur in the third quarter. However, management is
committed to the increased selling efforts in order to stimulate demand and
return the Company to its historical rate of revenue growth. The Company expects
to continue its efforts at controlling selling, general and administrative
expenses by maintaining such growth at rates equal to or less than overall net
sales growth and will reduce these costs if required to size them to the
available revenue.

Research and development expenses were approximately 12% of net sales in the
third quarter of 1999, compared with approximately 5% of sales for the same
period in 1998. In the third quarter of 1999, research and development expenses
were approximately $1.4 million higher than the third quarter of 1998. This
increase resulted from an overall increase in the resources devoted to
furthering the Company's internal product development strategy. Internal product
development revenues, which are the resulting benefit of research expenses,
increased to $2.1 million from approximately $1.7 million for the third quarter
of 1998. This increase includes the upfront payments received for signing two
new development contracts. Internal product development revenues are inherently
volatile and contribute to the volatile nature of the Company's earnings.
Management expects internal product development revenues to exceed research and
development expenses in the future as prior investments in research continue to
provide revenues.

Income from operations was a loss of $1.5 million in the third quarter of 1999
and income of $2.5 million for the same period of 1998. The decrease was due to
a decrease in fee for service revenues in the Pharmaceutic business, after the
impact of acquisitions, an increase in facility costs related to the facility in
North Brunswick, New Jersey and an increase in selling, general and
administrative expenses.

For the nine months ended September 30, 1999, revenues increased $.6 million to
$70.5 million in 1999 from $69.9 million in 1998. The increase resulted from a
$.5 million decrease in Pharmaceutic revenues, a $0.1 million decrease in
clinical revenues and a $1.1 million increase in internal product development
revenues. Operating income for the first nine months of 1999 was a loss of $10.1
million compared with income of $6.4 million in 1998. The 1999 loss includes a
$6.4 million charge to operating income related to the consolidation,
integration and acquisition costs of MTRA. The charge also includes certain
costs to restructure existing operations, reduce staff and excess facility
costs.


                                       12

<PAGE>   13

Liquidity and Capital Resources

The Company has historically funded its business through operating cash flows,
proceeds from borrowings and the issuance of equity securities. Working capital
was approximately $16.1 million at September 30, 1999 compared to approximately
$28.5 million at December 31, 1998. The decrease is due to a reduction in
available cash and an increase in short-term borrowings under a revolving credit
facility.

At September 30, 1999, the Company was not in compliance with a financial
covenant in connection with the credit facility. The lender has agreed to waive
its rights or remedies through November 30, 1999 as a result of the company's
failure to comply with this debt covenant. The lender has agreed to amend and
extend the credit facility from November 30, 1999 to May 31, 2000. Since 1996,
the company and the lender have been in the practice of renewing the credit
facility annually as of May 31. Borrowings under this amended and extended
credit facility will be subject to additional financial covenants and security
in the form of fixed assets and receivables. During the extension period, total
availability under the credit facility has been increased to $25 million subject
to covenant restrictions; borrowing is limited to a percentage of the value of
pledged security and compliance with certain additional covenants. The
applicable interest rate on the Revolver will be LIBOR plus 2.25% per annum and
the unused commitment fee will be 0.375% per annum.


Capital expenditures were approximately $10.5 million during the first nine
months of 1999 compared to approximately $8.2 million during the same period
last year. The Company anticipates total capital expenditures for 1999 to be
approximately $12 million.

AAI expects that near term growth can be accommodated utilizing existing
facilities. The Company is reducing capital expenditures and operating costs in
order to increase cash flow available to reduce reliance on bank facilities and
reduce borrowing costs. The Company may from time to time seek to supplement
cash flow from operations with the issuance of equity securities and additional
borrowings. At some point in the future there may be opportunities that require
additional external financing, and the Company may from time-to-time seek to
obtain funds through the public or private issuance of equity or debt
securities. While the Company remains confident that it can secure additional
financing if necessary, there can be no assurances that such financing will be
available or that the terms will be acceptable to the Company.

Year 2000 Disclosure

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

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

In 1996, the Company developed a strategic plan to identify the IT systems
needed to accomplish the Company's overall growth plans. As part of this process
potential Y2K issues were considered and


                                       13

<PAGE>   14

addressed through an enterprise resource planning process. The Company's Board
of Directors authorized spending to implement portions of this strategic plan
over several years.

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

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

The cost of bringing the Company in full compliance should not result in a
material increase in the recent levels of capital spending or any material
one-time expenses. The Company has not been tracking the direct cost of solving
potential Y2K issues. Since 1996, the Company has expensed approximately $8.8
million for all IT items. It is not reasonably possible to determine what
portion of such spending was directly related to correcting Y2K issues. The
future spending on IT items is expected to be approximately $3 million per year.
The Company has not segregated the direct costs associated with Y2K issues in
its IT capital spending plans. However, all current capital additions are Y2K
compliant. Prior to the merger with MTRA, the systems of MTRA were evaluated for
Y2K readiness. MTRA's separate systems are included in AAI's plans and all
significant systems will be replaced or Y2K compliant in accordance with AAI's
previously established timeline.

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

While it is difficult to classify AAI's state of readiness, the company believes
that its it will have implemented its internal plans and will be able to avoid
any material Y2K issues in December 1999. The company was 88% complete with the
remediation and testing of systems identified as non-compliant during the final
assessment at September 30, 1999 and is confident that it will be complete by
year end. Management is in constant communication with the task force and has
made and will continue to make reports to the Company's Board of Directors.


                                       14

<PAGE>   15

Forward Looking Statements

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


Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The Company, as a result of global operating activities, is exposed to risks
associated with changes in foreign exchange rates. As foreign exchange rates
change, the U. S. Dollar equivalent of revenues and expensed denominated in
foreign currencies change and can have an adverse impact on the Company's
operating results. To seek to minimize its risk from foreign exchange movement,
the Company uses local debt to fund its foreign operations. If foreign exchange
rates were to change 10%, year to date operating results would have changed by
$92,000 due to the change in reported results from European operations through
September 30, 1999.

The Company is also exposed to changes in interest rates on its variable rate
debt instruments and leases tied to LIBOR. If interest rates were to change 1%,
annual interest expense on variable rate debt and leases tied to interest rates
would change approximately $310,000 or $78,000 per quarter.


PART II. OTHER INFORMATION

Item 3.  Defaults Upon Senior Securities

At September 30, 1999, the Company was not in compliance with a financial
covenant in connection with a credit arrangement with a bank. The credit
arrangement represents a revolving line of credit (the "Revolver") and certain
off-balance sheet leases (the "Leases"). The Revolver is the primary mechanism
used by the Company to fund capital purchases and operating cash needs. The
balance owed on the Revolver at September 30, 1999 was $13,069,000 and is
secured with equipment and receivables.


                                       15

<PAGE>   16

Covenant compliance on the Revolver is also required under the Leases which are
secured by real estate made up of a headquarters building in Wilmington, N.C., a
laboratory and clinic facility in Research Triangle Park, N.C. and land
purchased for future construction of a laboratory facility in Shawnee, Kansas.
The Leases are operating leases which allow for the purchase of the facilities
at the end of the lease term at fair market value or the balance of the debt
secured by the facilities. The balance owed on the debt secured by the leases
was approximately $12,878,000 at September 30, 1999.

The lender has agreed to waive its rights or remedies through November 30, 1999
as a result of the company's failure to comply with this debt covenant. The
lender has agreed to amend and extend the credit facility from November 30,
1999 to May 31, 2000. Since 1996, the company and the lender have been in the
practice of renewing the credit facility annually as of May 31. Borrowings
under this amended and extended credit facility will be subject to additional
financial covenants and security in the form of fixed assets and receivables.
During the extension period, total availability under the credit facility has
been increased to $25 million subject to covenant restrictions; borrowing is
limited to a percentage of the value of pledged security and compliance with
certain additional covenants. The applicable interest rate on the Revolver will
be LIBOR plus 2.25% per annum and the unused commitment fee will be 0.375% per
annum.



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

Exhibits:

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

Reports on Form 8-K:

The Company has recently filed the following Form 8-K's:
         Dated July 30, 1999, to file a press release reporting the Company's
expected loss for the quarter ended June 30, 1999;
         Dated August 2, 1999, to file a press release reporting the Company's
results of operations for the quarter ended June 30, 1999;


                                       16


<PAGE>   17

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

                                    Applied Analytical Industries, Inc.

Date:    November 15, 1999          By:  /s/   FREDERICK D. SANCILIO
                                         --------------------------------------
                                               Frederick D. Sancilio, Ph.D.
                                    Chairman of the Board and Chief Executive
                                    Officer (Principal Executive Officer)

Date:    November 15, 1999          By:  /s/  EUGENE T. HALEY
                                         --------------------------------------
                                              Eugene T. Haley
                                    Executive Vice President and Chief Financial
                                    Officer (Principal Financial Officer)



                                       17


<PAGE>   18

                       APPLIED ANALYTICAL INDUSTRIES, INC.
                                  Exhibit Index

Exhibit No.                          Description
-----------                          -----------

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

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

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

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

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

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

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

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

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

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


                                       18


<PAGE>   19

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

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

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

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

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

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

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

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

  10.14       - Amendment No. 1 to the Employment Agreement dated November 17,
                1995 between the Company and Frederick D. Sancilio
                (incorporated by reference to Exhibit 10.14 to the Company's
                Quarterly Report on Form 10-Q for the quarter ended June 30,
                1999)

  10.15       - Amendment and Forbearance Agreement dated August 26, 1999
                between the Company and the Bank of America, N.A.

  10.16       - Pledge Agreement dated August 26, 1999 between the Company and
                the Bank of America, N.A.

  10.17       - Security Agreement dated August 26, 1999 between the Company
                and the Bank of America, N.A.


                                       19

<PAGE>   20

  27          - Financial Data Schedule (for SEC use only)


                                       20