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

                                    FORM 10-Q

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

            For the quarterly period ended September 30, 1998

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

            For the transition period from ________ to ________

                         Commission File Number 0-28402

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

               California                              94-3133088
     -------------------------------      ------------------------------------
     (State or other jurisdiction of      (I.R.S. Employer Identification No.)
      incorporation or organization)

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

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

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

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

       Common Stock, no par value                   12,150,867 shares
       --------------------------           ---------------------------------
                 (Class)                    (Outstanding at November 5, 1998)
<PAGE>   2
                               ARADIGM CORPORATION

                                      INDEX

                          PART I. FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                        Page No.
                                                                        --------
<S>                                                                     <C>
ITEM 1.  FINANCIAL STATEMENTS

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

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

Statements of Cash Flows (Unaudited)
         Nine months ended September 30, 1998 and 1997                      6

Notes to Unaudited Financial Statements                                     7

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

                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS                                                 14

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                  14

         Signature                                                         15

         Exhibits                                                          16
</TABLE>


                                       2
<PAGE>   3
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                               ARADIGM CORPORATION

                            STATEMENTS OF OPERATIONS

             (In thousands, except share and per share information)

<TABLE>
<CAPTION>
                                                       Three months ended
                                                          September 30,
                                                  -----------------------------
                                                      1998             1997
                                                  ------------     ------------
                                                           (unaudited)
<S>                                               <C>              <C>         
Contract revenues                                 $      4,090     $        894
Expenses:
     Research and development                            6,123            3,483
     General and administrative                          1,810            1,967
                                                  ------------     ------------
Total expenses                                           7,933            5,450

                                                  ------------     ------------
Loss from operations                                    (3,843)          (4,556)

Interest income                                            529              265
Interest expense                                          (172)             (35)
                                                  ------------     ------------
Net loss                                          $     (3,486)    $     (4,326)
                                                  ============     ============
Basic and diluted net loss per share              $      (0.29)    $      (0.42)
                                                  ------------     ------------

Shares used in computing basic and diluted
     net loss per share                             12,093,166       10,212,517
                                                  ============     ============
</TABLE>

                             See accompanying notes.


                                       3
<PAGE>   4
                               ARADIGM CORPORATION

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

<TABLE>
<CAPTION>
                                                       Nine months ended
                                                         September 30,
                                                -------------------------------
                                                    1998               1997
                                                ------------       ------------
                                                           (unaudited)
<S>                                             <C>                <C>
Contract revenues                               $     10,919       $      1,634
Expenses:
     Research and development                         16,131              9,281
     General and administrative                        6,839              4,409
                                                ------------       ------------
Total expenses                                        22,970             13,690
                                                ------------       ------------
Loss from operations                                 (12,051)           (12,056)

Interest income                                        1,340                989
Interest expense                                        (389)               (71)
                                                ------------       ------------
Net loss                                        $    (11,100)      $    (11,138)
                                                ============       ============
Basic and diluted net loss per share            $      (0.96)      $      (1.09)
                                                ------------       ------------
Shares used in computing basic and diluted
     net loss per share                           11,524,320         10,207,750
                                                ============       ============
</TABLE>


                             See accompanying notes.


                                       4
<PAGE>   5
                               ARADIGM CORPORATION

                                 BALANCE SHEETS
                    (In thousands, except share information)

<TABLE>
<CAPTION>
                                                      September 30,   December 31,
                                                           1998           1997
                                                      -------------   ------------
                                                       (unaudited)
<S>                                                   <C>             <C>
ASSETS
Current assets:
     Cash and cash equivalents                           $ 10,149       $ 15,517
     Short-term investments                                21,248          8,788
     Receivables                                            2,967            261
     Inventories and other current assets                     898            929
                                                         --------       --------
       Total current assets                                35,262         25,495

Property and equipment, net                                 9,997          4,417
Notes receivable from officers                                221            303
Other assets                                                   79             79
                                                         --------       --------
         Total assets                                    $ 45,559       $ 30,294
                                                         ========       ========

LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:

     Accounts payable                                    $  1,200       $  1,505
     Accrued clinical and other studies                       113             --
     Accrued compensation                                   1,878            728
     Deferred revenue                                      11,496          6,339
     Other accrued liabilities                                428            342
     Current portion of capital lease
       obligations and equipment loans                      1,155            582
                                                         --------       --------
         Total current liabilities                         16,270          9,496

Noncurrent portion of capital lease
  obligations and equipment loans                           3,822          2,139

Commitments and contingencies

Shareholders' equity:
     Common stock, no par value, 40,000,000
       shares authorized; issued and
       outstanding shares: September 30, 1998 -
       12,096,500; December 31, 1997 - 10,632,133          73,267         54,976
Shareholder notes receivable                                 (305)          (386)
Deferred compensation                                        (581)          (104)
Accumulated deficit                                       (46,914)       (35,827)
                                                         --------       --------
       Total shareholders' equity                          25,467         18,659
                                                         --------       --------
         Total liabilities and shareholders' equity      $ 45,559       $ 30,294
                                                         ========       ========
</TABLE>

                             See accompanying notes.


                                       5
<PAGE>   6
                               ARADIGM CORPORATION

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

<TABLE>
<CAPTION>
                                                                Nine months ended
                                                                  September 30,
                                                            -------------------------
                                                              1998             1997
                                                            --------         --------
                                                                   (unaudited)
<S>                                                         <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                  $(11,100)        $(11,138)
  Adjustments to reconcile net loss to
  cash used in operating activities:
     Depreciation and amortization                             1,204              472
     Warrant expense for services received                       323               --
     Amortization of deferred compensation                       172              154
     Changes in assets and liabilities:
       Receivables                                            (2,706)          (1,110)
       Inventories and other current assets                       31             (414)
       Other assets                                               --               (4)
       Accounts payable                                         (305)             (40)
       Accrued liabilities                                     1,349              174
       Deferred revenue                                        5,157             (169)
                                                            --------         --------
Cash used in operating activities                             (5,875)         (12,075)
                                                            --------         --------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures                                        (6,784)          (2,132)
  Purchases of available-for-sale investments                (31,457)         (19,163)
  Proceeds from maturities of available-for-
    sale investments                                          19,010           24,719
                                                            --------         --------
Cash (used in) provided by investing activities              (19,231)           3,424
                                                            --------         --------
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from issuance of common stock, net                17,336              164
   Proceeds from repayments of shareholder notes                  64               52
   Notes receivable from officers                                 82               --
   Proceeds from equipment loans                               2,865            1,437
   Payments on lease obligations and equipment loans            (609)            (215)
                                                            --------         --------
Cash provided by financing activities                         19,738            1,438
                                                            --------         --------
Net decrease in cash and cash equivalents                     (5,368)          (7,213)
Cash and cash equivalents at beginning of period              15,517           18,554
                                                            --------         --------
Cash and cash equivalents at end of period                  $ 10,149         $ 11,341
                                                            ========         ========
SUPPLEMENTAL INVESTING AND FINANCING ACTIVITIES
   Common stock repurchased upon cancellation
     of shareholder notes                                   $     17         $      9
   Acquisition of equipment under capital leases            $     --         $    257
</TABLE>

                             See accompanying notes.


                                       6
<PAGE>   7
                               ARADIGM CORPORATION

                   NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
                               September 30, 1998

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation

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

In the opinion of management, the financial statements reflect all adjustments,
which are of a normal recurring nature, necessary for a fair presentation. The
accompanying financial statements should be read in conjunction with the
financial statements and notes thereto included with the Company's Annual Report
on Form 10-K. The results of the Company's operations for the interim periods
presented are not necessarily indicative of operating results for the full
fiscal year or any future interim periods.

Use of Estimates

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

Cash Equivalents and Investments

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

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

Depreciation and Amortization

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

Revenue Recognition

Contract revenues consist of revenue from collaboration agreements and
feasibility studies. The Company recognizes revenue ratably under the agreements
as costs are incurred. Deferred revenue represents the portion of research
payments received that has not been earned. In accordance with


                                       7
<PAGE>   8
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 revenue
based on actual efforts expended over the remaining terms of the agreements.
Non-refundable signing or license fee payments that are not dependent on future
performance under collaborative agreements are recognized as revenue when
received. Costs of contract revenue approximate such revenue and are included in
research and development expenses.

Common Stock and Net Loss Per Share

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

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

Contingencies

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

Recent Accounting Pronouncements

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

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

SFAS 131 requires that the Company report financial and descriptive information
about its reportable operating segments. The Company is evaluating the impact,
if any, of SFAS 131 on its financial statement disclosures, but does not believe
the additional disclosure will be material to the financial statements.

In March 1998, the Financial Accounting Standards Board issued Statement of 
Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions 
and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 does not change the 
recognition of measurement of pension or postretirement benefit plans, but 
revises and standardizes disclosure requirement for pension and other 
postretirement benefits. The adoption of SFAS 132 has no impact on the 
Company's results of operations or financial condition.

In June 1998, the Financial Accounting Standards Board issued Statement of 
Financial Accounting Standards No. 133, "Accounting for Derivative Financial 
Instruments and for Hedging Activities" ("SFAS 133") which provides a 
comprehensive and consistent standard for the recognition and measurement of 
derivatives and hedging activities. SFAS 133 is effective for years beginning 
after June 15, 1999 and is not anticipated to have an impact on the Company's 
results of operations or financial conditions when adopted.

                                       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 24, 1998.

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

OVERVIEW

         Since its inception in 1991, Aradigm has been engaged in the
development of pulmonary drug delivery systems. As of September 30, 1998, the
Company had an accumulated deficit of $46.9 million. The Company has been
unprofitable since inception and expects to incur additional operating losses
over at least the next several years as the Company's research and development
efforts, preclinical and clinical testing activities and manufacturing scale-up
efforts expand and as the Company plans and builds its late-stage clinical and
early commercial production capabilities. To date, Aradigm has not had any
material product sales and does not anticipate receiving significant revenue
from product sales in 1998. The sources of working capital have been equity
financing, financing of equipment acquisitions, interest earned on investments
of cash and revenues from research and feasibility agreements and development
contracts.

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


                                       9
<PAGE>   10

RESULTS OF OPERATIONS

         Three and Nine Months Ended September 30, 1998 and 1997

         Contract Revenue. Contract revenue for the three-month period ended
September 30, 1998 increased to $4.1 million from $894,000 for the same period
in 1997. Contract revenue for the nine-month period ended September 30, 1998
increased to $10.9 million from $1.6 million for the same period in 1997. These
increases in revenue were due primarily to increased partner-funded product
development activities. The Company is developing pulmonary delivery systems
with SmithKline Beecham, plc, to manage acute and breakthrough pain using
narcotic analgesics, and Novo Nordisk A/S, to manage diabetes using insulin and
other blood glucose regulating compounds. Costs of contract research revenue
approximate such revenue and are included in research and development expense.

         Research and Development Expenses. Research and development expenses
for the three-month period ended September 30, 1998 increased to $6.1 million
from $3.5 million for the same period in 1997. Research and development expenses
for the nine-month period ended September 30, 1998 increased to $16.1 million
from $9.3 million for the same period in 1997. These increases were attributable
primarily to the hiring of additional scientific personnel and expenses
associated with the expansion of research and development efforts 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, builds and scales up a late-stage clinical
and early-stage commercial manufacturing facility. The increase in research and
development expenditures cannot be predicted accurately as it depends in part
upon future success in obtaining new collaborative agreements.

         General and Administrative Expenses. General and administrative
expenses for the three-month period ended September 30, 1998 decreased to $1.8
million from $2.0 million for the same period in 1997. This decrease resulted
from comparatively lower business development expense related to the negotiation
of collaborative partnership agreements in the three-month period ended
September 30, 1998 than that for the same period in 1997. However, general and
administrative expenses for the nine-month period ended September 30, 1998
increased to $6.8 million from $4.4 million for the same period in 1997. This
increase was attributable primarily to support of the Company's increased
research efforts, additional facilities expense, administrative staffing and
business development activities. The Company expects to incur greater general
and administrative expenses in the future as it expands its research,
development and manufacturing activities and increases its efforts to develop
collaborative relationships with corporate partners.

         Interest Income. Interest income for the three-month period ended
September 30, 1998 increased to $529,000 from $265,000 for the same period in
1997. Interest income for the nine-month period ended September 30, 1998
increased to $1.3 million from $989,000 for the same period in 1997. These
increases were due to the Company maintaining larger cash and investment
balances. The higher cash and investment balances are a result of the Company's
receipt of research funding and milestone payments from collaborative partners,
the completion of a private placement of the Company's Common Stock in April
1998, which raised net proceeds of $12.0 million, and Novo Nordisk A/S making a
$5.0 million equity investment in Aradigm at a 25% premium-to-market price in
conjunction with the June 1998 development agreement between the Company and
Novo Nordisk A/S to develop insulin products using Aradigm's non-invasive
pulmonary drug delivery system.


                                       10
<PAGE>   11
         Interest Expense. Interest expense for the three-month period ended
September 30, 1998 increased to $172,000 from $35,000 for the same period in
1997. Interest expense for the nine-month period ended September 30, 1998
increased to $389,000 from $71,000 for the same period in 1997. These increases
are a result of higher outstanding capital lease and equipment loan balances
under the Company's equipment lines of credit.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has financed its operations since inception primarily
through private placements and public offerings of its capital stock, proceeds
from financings of equipment acquisitions, contract research revenue and
interest earned on investments. As of September 30, 1998, the Company had
received approximately $72.4 million in net proceeds from sales of its capital
stock. In October 1998, the Company was negotiating an additional $6.0 million
equipment line of credit. As of September 30, 1998, the Company had cash, cash
equivalents and investments of approximately $31.4 million. The Company also has
the right to sell $5.0 million of common stock to each of SmithKline Beecham,
plc and to Novo Nordisk A/S when certain conditions have been met.

         Net cash used in operating activities in the nine months ended
September 30, 1998 was $5.9 million compared to $12.1 million in the same period
in 1997. The decrease in cash used resulted primarily from increases in deferred
revenue and accrued liabilities offset partially by an increase in receivables
and a decrease in accounts payable.

         Net cash used in investing activities in the nine months ended
September 30, 1998 was $19.2 million compared to net cash provided of $3.4
million in the same period in 1997. The decrease resulted primarily from the
Company's increased net purchases of short-term investments and increased 
expenditures made for capital equipment.

         Net cash provided by financing activities in the nine months ended
September 30, 1998 was $19.7 million compared to $1.4 million in the same period
in 1997. The increase resulted primarily from the Company's receipt of proceeds
from the completion of a private placement of Common Stock in April 1998, which
raised net proceeds of $12 million, a $5 million equity investment by Novo
Nordisk A/S at a 25% premium-to-market price in June 1998, and the net receipt
of proceeds from equipment loans.

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

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


                                       11
<PAGE>   12
         The Company expects that its existing capital resources, committed
funding from its existing corporate partnership with SmithKline Beecham and Novo
Nordisk A/S and projected interest income will enable the Company to maintain
current and planned operations through at least 1999. However, there can be no
assurance that the Company will not need to raise substantial additional capital
to fund its operations prior to such time. There can be no assurance that
additional financing will be available on acceptable terms or at all. The
Company's cash requirements, however, may vary materially from those now planned
because of results of research and development efforts, including capital
expenditures and funding preclinical and clinical trials and manufacturing
capacity for preclinical, clinical and full scale manufacturing requirements of
the AERx system. The Company may seek additional funding through collaborations
or through public or private equity or debt financings. However, there cannot be
any assurance that additional financing can be obtained on acceptable terms, or
at all. If additional funds are raised by issuing equity securities, dilution to
shareholders may result. If adequate funds are not available, the Company may be
required to delay, to reduce the scope of, or to eliminate one or more of its
research and development programs, or to obtain funds through arrangements with
collaborative partners or other sources that may require the Company to
relinquish rights to certain of its technologies or products that the Company
would not otherwise relinquish.

         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 developing 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 begun and intends to complete by the first quarter of
fiscal 1999 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. Plans for
implementing and testing any necessary modifications to these key Systems to
ensure Year 2000 compliance are in the final stages of development. 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 has not yet determined 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 


                                       12
<PAGE>   13
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 no contingency plans to deal
with any major Year 2000 non-compliance, though such plans will be developed
over the coming quarters.


                                       13
<PAGE>   14

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

               Reference is hereby made to the Company's Quarterly Report on
         Form 10Q for the fiscal quarter ended June 30, 1998, as filed with the
         Securities and Exchange Commission on August 14, 1998.

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

(a)      Exhibits

         27.1     Financial Data Schedule

         27.2     Restated Financial Data Schedule

(b)      Reports on Form 8-K

         The Company filed a Current Report on Form 8-K dated September 2, 1998.
         On August 4, 1998, the Board of Directors of the Company approved the
         adoption of a Share Purchase Rights Plan, which provided for a dividend
         distribution of one Preferred Share Purchase Right (a "Right") for each
         outstanding share of common stock of the Company, payable on September
         8, 1998 to shareholders of record on that date. Each Right entitles the
         registered holder to purchase from the Company one one-hundredth of a
         Preferred Share (subject to adjustment) upon the occurrence of certain
         events. In connection with the adoption of the Share Purchase Rights
         Plan, the Company entered into a Rights Agreement with BankBoston, N.A.
         dated August 31, 1998, which agreement sets forth the description and
         terms of the Preferred Share Purchase Rights.


                                       14
<PAGE>   15
                                    SIGNATURE

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

Dated: November 13, 1998

                                       ARADIGM CORPORATION
                                       (Registrant)

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


                                       15
<PAGE>   16
                               ARADIGM CORPORATION
                                    FORM 10-Q
                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit Number        Description
--------------        -----------
<S>                   <C>
    27.1              Financial Data Schedule 
    27.2              Restated Financial Data Schedule
</TABLE>

----------


                                       16