United States
             Securities and Exchange Commission
                 Washington, D.C. 20549
                   
                                FORM 10-K/A
       [X] Annual Report Pursuant to Section 13 or 15(d) of
       the Securities Exchange Act of 1934 (Fee Required)
       For the Fiscal Year Ended December 31, 1997
                            or
       [ ] Transition Report Pursuant to Section 13 or 15(d)
       of the Securities Exchange Act of 1934 (Fee Not
       Required) For the Transition Period From
       to           .
       
              Commission File Number: 0-28402

                    ARADIGM CORPORATION

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

       26219 Eden Landing Road, Hayward,  CA  94545 (Address
           of principal executive offices)
           
Registrant's telephone number, including area code: (510)
783-0100

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value

   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  by check mark if disclosure of delinquent
filers pursuant  to  Item  405  of Regulation S-K  is  not
contained herein, and will
not be contained, to the best of registrant's knowledge,  in
definitive  proxy  or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
    As  of  January 30, 1998, there were 10,632,133 shares
of common  stock  outstanding.   The aggregate  market value
of voting  stock  held  by non-affiliates of the Registrant
was approximately $47,846,983 based upon the closing price
of the common  stock on January 30, 1998 on The Nasdaq Stock
Market. Shares  of  common  stock held by each officer,
director  and holder of five percent or more of the
outstanding Common stock have  been excluded in that such
persons may be deemed  to  be affiliates.   This
determination of affiliate status  is  not necessarily a
conclusive determination for other purposes.

<PAGE 1>

Item 6.    SELECTED FINANCIAL DATA
               Years Ended December 31,
                1997        1996            1995
         (In thousands, except per share amounts)
Statements of
Operations
Data:

Contract and   $3,685       $730         $155
license
revenues

Operating
expenses:
  Research and  12,732       7,981        3,440
development
  General and   6,732        2,958        2,334
administrative
   Total       19,464       10,939       5,774
expenses
Loss from      (15,779)     (10,209)     (5,619)
operations
Interest       1,329        1,179        206
income
Interest       (234)        (52)         (20)
expense
Net loss       $(14,684)   $(9,082)    $(5,433)

Basic and      $ (1.43)    $(1.49)     $(5.41)
diluted net
loss per share
(1)
Shares used in
computing      10,280       6,098        1,004
basic and
diluted net
loss per share
(1)

Balance Sheet
Data:

Cash, cash     $24,305      $28,534      $12,117
equivalents
and
investments
Working        15,999       23,486       11,594
capital
Total assets   30,294       30,733       13,306
Noncurrent
portion of
capital lease
obligations
and equipment
loans           2,139          350          327
Accumulated    (35,827)     (21,144)    (12,069)
deficit
Total          18,659       27,886        12,121
shareholders'
equity

Years Ended    1994        1993
December 31,
(In thousands,
except per
share amounts)

Statements of
Operations
Data:

Contract and   $125        $-
license
revenues

Operating
expenses:
 Research and  2,198       926
development
 General and   1,664       741
administrative
   Total       3,862       1,667
expenses
Loss from      (3,737)     (1,667)
operations
Interest       38          13
income
Interest       (34)        (1)
expense
Net loss       $(3,733)    $(1,655)
Basic and      $(4.40)     $(2.12)
diluted net
loss per share
(1)
Shares used in
computing      849         780
basic and
diluted net
loss per share
(1)

Balance Sheet
Data:

Cash, cash     $6,087     $1,932
equivalents
and
investments
Working        5,739       1,781
capital
Total assets   6,343       2,055
Noncurrent
portion of
capital lease
obligations
and equipment
loans               -           - 
Accumulated    (6,636)     (2,903)
deficit
Total          5,960       1,888
shareholders'
equity



 (1)  See Note 1 of Notes to Financial Statement
  for an explanation of shares used in computing
  basic and diluted net loss per share.

<PAGE 2>
  
Item  7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    The following discussion of the financial
condition and results  of  operations  of  the
Company should  be read  in conjunction  with
the Financial Statements  and the  related Notes
thereto included elsewhere in this Form 10-K.
Except for historical information contained
herein, the  discussion  in this section contains
forwardlooking statements,  including, without
limitation, statements regarding timing and
results of clinical trials,  the establishment of
corporate  partnering arrangements, the
anticipated commercial introduction  of  the
Company's products  and the timing  of  the
Company's  cash requirements. These forward-
looking statements involve certain risks and
uncertainties that could cause actual results  to
differ       materially   from  those in     such
forward-looking statements.
Potential  risks  and  uncertainties include,
without  limitation, those mentioned in  this
report  and  in particular,  the  factors
described in Part  II,  under  the heading "Risk
Factors".

<PAGE 3>
Overview

  Since its inception in 1991, Aradigm has been
engaged in the  development  of pulmonary drug
delivery systems. As  of December  31, 1997, the
Company had an accumulated deficit  of $35.8
million.  The Company  has been  unprofitable
since inception  and  expects to incur additional
operating losses over at least the next several
years as the Company's research and  development
efforts, preclinical and clinical  testing
activities  and manufacturing scale-up efforts
expand  and  as the Company plans and builds its
late-stage clinical and early commercial
production capabilities.  To date, Aradigm has
not sold any products   and  does  not
anticipate   receiving significant  revenue from
products 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.  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 received from product
sales and to receive revenue from the
manufacturing of unit dose packets and hand-held
devices. However, there can be no assurance that
the Company will be able to generate sufficient
product or contract research revenue to become
profitable or to sustain profitability.

<PAGE 4>
Results of Operations

  Years Ended December 31, 1997, 1996 and 1995
                        
Contract  and  License  Revenue.
    The  Company reported revenues  from
contracts
and license fees of $3.7 million  in 1997
compared to $730,000 in 1996 and $155,000 in
1995. The increase  in  1997 revenue was due
primarily to a development and commercialization
agreement that was  executed   with SmithKline
Beecham  in September 1997 to develop and
commercialize  a pulmonary  delivery system  for
providing breakthrough pain relief using narcotic
analgesics. Under the terms of  the agreement,
Aradigm  could receive up to approximately  $30
million  in milestones  and development payments
by  the  time the first product  is
commercialized. Additional milestones and
development costs would be  paid  if SmithKline
Beecham and Aradigm decided to develop additional
narcotic analgesics for delivery with the AERx
Pain Management System.  Included in 1996
revenues were $500,000  of  license fees  from a
human clinical feasibility testing agreement and
$230,000  of  contract research revenues.  1995
revenues were derived entirely from contract
research agreements.  Costs of development
contract research revenue approximate such
revenue and are included in research and
development expense.

<PAGE 5>
    Research   and   Development  Expenses.
Research and development  expenses  have
increased each  year  since the Company's
inception;  these expenses were  $12.7 million
in 1997  compared  to $8.0 million in 1996 and
$3.4  million  in 1995. Research and development
expenses in 1997, 1996 and 1995   represented
65%,  73%  and  60%  of  total expenses,
respectively.   Research  and development
expenses  in  1997 increased  by 60% over 1996,
attributable primarily to  hiring of additional
scientific personnel and  expenses associated
with the expansion of research and development
efforts on  the AERx system.   Research and
development  expenses  in  1996 increased by 132%
over 1995, similarly attributable to hiring
additional  scientific personnel, increased
costs associated with the expansion of research
and development efforts on  the AERx  and
SmartMist
systems  and initiation  of  additional clinical
testing of the AERx and SmartMist systems.
  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.

<PAGE 6>

    General   and   Administrative  Expenses.
General and administrative expenses were $6.7
million in 1997 compared to $3.0  million in 1996
and $2.3 million in 1995.  General and
administrative expenses increased by 128% in 1997
compared  to 1996  and 27% in 1996 compared to
1995, attributable primarily to  support  of  the
Company's increased  research  efforts,
additional facilities   expense,  administrative
staffing, business  development  and marketing
activities. The Company expects  to incur greater
general and administrative expenses in  the
future as it expands its research, development
and manufacturing activities and increases  its
efforts  to develop collaborative relationships
with corporate partners.
    Interest  Income.  Interest  income
increased to $1.3 million  in  1997  from $1.2
million in 1996 and $206,000  in 1995. Interest
income in 1997 was consistent with that in 1996
due  to  similar average cash balances during
those two years. Interest  income increased
significantly in 1996 compared  to 1995
primarily due to increased average cash balances
in 1996 resulting  from the sales of preferred
stock in December  1995 and common stock  in
June  1996  in  conjunction  with the Company's
initial public offering.
    Interest Expense.  Interest expense was
$234,000 in 1997 compared  to  $52,000  in  1996
and $20,000  in 1995. These increases  resulted
primarily from higher outstanding capital lease
and equipment  loan balances  under  the
Company's equipment lines of credit.
  Net Operating Loss Tax Carryforwards.  As of
December 31, 1997,   the  Company  had  federal
net  operating loss tax carryforwards   of
approximately   $35.0   million. These
carryforwards  will  expire  beginning  in  the
year 2006. Utilization of net operating loss
carryforwards may be subject to  substantial
annual limitation due to the ownership  change
limitation provided for by the Internal Revenue
Code of  1986. The  annual  limitation may result
in the expiration  of  net operating loss
carryforwards before utilization.

<PAGE 7>

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 December
31, 1997, the Company had received approximately
$54.0 million in net proceeds from sales of  its
capital stock. The Company also has a $5.0
million equipment line  of credit, of which
approximately $2.9 million  remains available
for  purchases through  September  1998.   As of
December 31, 1997, the Company had cash, cash
equivalents and short-term investments of
approximately $24.3 million.

     Net  cash  used  in operating activities  in
1997, was $7.8  million compared to $7.1 million
in 1996.  This increase resulted primarily  from
an increase  in   net loss of $5.6  million and
increases in current assets, largely offset by
net increases in accrued liabilities and deferred
revenue. Net cash used in operating activities in
1996 was $7.1 million compared  to  $5.2  million
in 1995.  This increase  resulted primarily  from
an  increase in net loss  of  $3.6  million
partially  offset  by an increase in accrued
liabilities  and accounts payable reduced by a
net increase in current assets.
    Net  cash used in investing activities in
1997 was $463,000 compared  to $11.9 million in
1996. This resulted primarily from the Company's
receipt of net proceeds from investment
maturities partially  offset  by expenditures
made for capital equipment.  Net  cash  used in
investing activities in 1996 was $11.9  million
compared  to $535,000  in   1995. The increase
resulted primarily  from  the Company's  net
purchase of investments and additional capital
expenditures.

<PAGE 8>
     Net  cash provided by financing activities
in 1997 was $6.4  million  primarily  from the
receipt of proceeds from equipment loans and
issuances of common stock partially offset by
repayment of capital lease obligations.  Net cash
provided by financing  activities in 1996 of
$24.3 million was  due primarily  to  the receipt
of net proceeds from the  Company's initial
public  offering.   Net cash provided  by
financing activities for 1995 was $11.7 million,
primarily a  result of $11.6 million in net
proceeds from the issuance of preferred stock.

   The development of the Company's technology
and proposed products  will  require a commitment
of substantial funds  to conduct the costly and
timeconsuming 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.

<PAGE 9>

     The  Company expects that its existing
capital resources, committed funding from its
existing corporate partnership with SmithKline
Beecham and projected interest income will
enable the Company to maintain current and
planned operations through at  least  1998.
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, manufacturing scaleup in
connection with the commercialization of the
SmartMist system, 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.

<PAGE 10>

As  the  year  2000  approaches, an issue
impacting all companies  has  emerged  regarding
how  existing application software  programs and
operating systems can accommodate  this date
value.  In brief, many existing application
software products in the marketplace were
designed to accommodate only a  two  digit  date
position which represents the year (e.g., "95"
is  stored on the system and represents the year
1995). As  a result, the year 1999 (i.e., "99")
could be the maximum date  value systems  will
be  able to accurately  process. Management is
in  the process of working with  its  software
vendors to assure that the Company is prepared
for  the  year 2000. Management does not
anticipate that the  Company will incur
significant operating expenses or be
required to invest heavily in computer  system
improvements  to  be  year  2000 compliant.
Risk Factors
   Except for historical information contained
herein, the discussion in this section contains
forward-looking statements, including, without
limitation, statements regarding timing  and
results  of  clinical trials, the establishment
of corporate  partnering  arrangements, the
anticipated commercial introduction of the
Company's products and  the  timing of the
Company's cash requirements.  These forward-
looking statements involve certain risks and
uncertainties that  could  cause  actual  results
to differ materially from those in such forward-
looking statements.

<PAGE 11>

Early Stage of Company
   Aradigm,  incorporated in January 1991, is  in
an early stage of development, has a limited
history of operations  and has  generated only
limited revenues to date. The Company  has only
one product, the SmartMist Respiratory Management
System, cleared  for  commercial sale,  and
virtually  all  of its potential  products  are
in an early  stage  of  research or development.
There  can be no assurance  that  the Company's
research and development efforts will be
successful, that  any potential  products  will
be proven safe and  effective,  that regulatory
clearance or approval for the sale of any  of
its potential  products  will be obtained or
that  the SmartMist system  or  any  of the
Company's potential products  can be manufactured
in commercial quantities or at an acceptable cost
or marketed successfully.
History of Losses; Anticipated Future Losses
   The  Company has not been profitable since
inception and, through  December 31, 1997, has
incurred a cumulative deficit of approximately
$35.8  million.  The Company  expects to continue
to incur substantial losses over at least  the
next several  years  as  the  Company's  research
and development efforts,   preclinical   and
clinical testing activities, marketing and
manufacturing scale-up efforts expand and as the
Company  plans and builds its late stage clinical
and  early commercial  production capabilities.
To achieve and  sustain profitable operations,
the Company, alone or with others, must
successfully   market and  sell the  SmartMist
Respiratory Management System and develop, obtain
regulatory approval for, manufacture, introduce,
market and sell products utilizing the Company's
AERx technologies. There can be no assurance
that the  Company can generate sufficient product
revenue to become profitable or to sustain
profitability.

<PAGE 12>

Uncertainty of Successful Product Development
 The  Company's  AERx systems are at  an  early
stage of development   and  are  being  tested
using  patient operated prototypes.   The AERx
systems  will  require   substantial additional
development, preclinical and clinical testing and
investment  before  they  can  be commercialized.
To further develop  its  AERx  systems,  the
Company  must address  many engineering  and
design issues, including ensuring  that  the
device has  the ability to deliver a reproducible
amount of drug into the bloodstream and can be
manufactured successfully as  a  hand-held
system. No assurance can be made  that  the
Company   will be  successful  in addressing
these  design, engineering   and manufacturing
issues. Additionally,  the Company  may need to
formulate and will need to package drugs for
delivery  by its AERx systems. There can be no
assurance that the  Company will be able to
successfully formulate and package such drugs.
The Company will need to demonstrate  that drugs
delivered  by  its  AERx systems remain safe and
efficacious  and  that over time and under
differing storage conditions,  such drugs will
not be subject  to physical or chemical
instability or other problems that would prohibit
the AERx systems from being commercially viable.
While development efforts are at different stages
for different products,  there can be no
assurance that the Company will be successful in
any of  its product development efforts, or that
the Company will not  abandon some or all of its
proposed products. Failure by the Company to
successfully develop its potential products in a
timely manner would have a material adverse
effect  on the Company.

<PAGE 13>

Uncertainty of Successful Product
Commercialization

     The  Company's  success in commercializing
its products will  be dependent upon many
factors, including acceptance by health  care
professionals and patients.  Acceptance  of the
Company's products will largely depend on
demonstrating that the Company's products are
competitive with alternate delivery systems  with
respect to safety, efficacy, ease of  use  and
price.  The Company believes that market
acceptance  of  its SmartMist   system  will
depend largely  upon health care professionals
and  third-party payors determining  that the
SmartMist  system  offers medical and economic
benefits over existing asthma therapies. In
addition, the SmartMist system is  specifically
designed for the canisters currently used  by
some  of  the  leading manufacturers of MDIs. If,
among  other things, manufacturers decide to
change the dimensions of their canisters, the
Company could be adversely affected. Moreover,
MDIs use chlorofluorocarbons("CFCs") as a
propellant for the medication.   The Company  is
aware  of initiatives   and international
agreements to ban CFCs,  which  could  have  an
adverse effect on the Company.  In order to
commercialize  the SmartMist system, the company
is pursuing collaborations with pharmaceutical
firms, disease management companies and managed
care  organizations in order to develop the
market for  this product  and  to realize its
potential as part  of a  broader disease
management program.  There can be no assurance
that the  SmartMist system or the Company's
products in development will  prove competitive
or that the Company will be successful in  taking
products from their current state of development
to commercial introduction or success. Failure by
the Company  to successfully commercialize its
potential products in a timely manner would have
a material adverse effect on the Company.

<PAGE 14>

Dependence Upon Collaborative Partners and Need
for Additional Collaborative Partners

   The Company's commercialization strategy is
dependent, in part,  on the Company's ability to
enter into agreements with collaborative
partners. The Company's ability to successfully
develop and commercialize its first AERx system,
the AERx Pain Management  System,  is dependent
on the  Company's corporate partnership  with
SmithKline Beecham. SmithKline  Beecham  has
agreed to undertake certain collaborative
activities with  the Company, fund research and
development activities  with the Company, make
certain payments to the Company upon achievement
of  certain milestones and pay royalties to the
Company if and when  a product is commercialized.
If SmithKline Beecham fails to conduct these
collaborative activities in a timely manner or at
all,  the  preclinical  or  clinical development
or commercialization of the AERx Pain Management
System  will be delayed.  In  addition, the
agreement  may  be terminated  by SmithKline
Beecham  and  there  can  be no assurance  that
development  and  milestone payments will be
received. Should the  Company  fail  to receive
development  funds or achieve milestones  set
forth in the agreement, or should SmithKline
Beecham  breach  or  terminate the agreement, the
Company's business, financial condition and
results of operations  would be materially
adversely affected.

<PAGE 15>

     The Company will need to enter into
additional agreements with  corporate  partners
to  conduct the clinical  trials, manufacturing,
marketing and sales necessary to  commercialize
its  other potential products. In  addition,  the
Company's ability  to  apply the AERx system to
any proprietary  drugs, including new drugs,
biotechnology drugs or established  drugs in
proprietary formulations, will depend  on  the
Company's ability  to establish and maintain
corporate partnerships or other collaborative
arrangements  with   the   holders of proprietary
rights to such drugs. There can be  no assurance
that  the  Company will be able to establish such
additional corporate   partnerships  or
collaborative arrangements   on favorable terms
or at all, or that its existing or any  future
corporate partnerships or collaborative
arrangements  will  be successful.  In
addition,  there can  be  no  assurance  that
existing  or future corporate partners or
collaborators  will not pursue alternative
technologies or  develop  alternative products
either on their own or in collaboration with
others, including the Company's competitors.
There can be no assurance that  disputes will not
arise in the future with the Company's existing
or future corporate partners or collaborators,
and any  such  disagreements could lead to delays
in the research, development or commercialization
of any potential products  or result  in
litigation or arbitration  which  would  be  time
consuming and expensive.  Should any  corporate
partner  or collaborator fail to develop or
commercialize successfully any product to which
it has obtained rights from the Company,  the
Company's   business, financial  condition and
results of
operations may be materially adversely affected.


<PAGE 16>

Limited Manufacturing Experience

     The Company has only limited experience in
manufacturing. To date, the Company has scaled-up
its manufacturing capabilities  to support the
product launch of the SmartMist system.  In  the
event the SmartMist system achieves  market
acceptance,  the  Company will need to further
increase  its current manufacturing capacity. In
addition, the Company is in the  process  of
increasing the production of disposable  drug
packets  for the AERx system for later stage
clinical  trials. The  Company anticipates making
significant  expenditures  to attempt to provide
for the high volume manufacturing required for
multiple AERx products, if such products are
successfully developed. There  can be no
assurance that manufacturing and quality control
problems will  not  arise  as  the Company
attempts  to scale-up,  or  that any  such
scaleup  can be achieved  in  a timely manner or
at a commercially reasonable cost.  Any  failure
to surmount such problems could  delay  or
prevent  late stage clinical testing and
commercialization  of the Company's products. The
Company's manufacturing facilities and those  of
its contract manufacturers will be  subject  to
periodic  regulatory inspections by the FDA and
other federal and  state regulatory agencies and
such facilities must comply with good
manufacturing practice ("GMP") requirements of
the FDA.  There can be no assurance the Company
will satisfy such regulatory requirements and any
failure to  satisfy GMP  and other requirements
could have a material adverse effect on the
Company.

<PAGE 17>

     The  Company  uses contract manufacturers to
produce key components,  assemblies and
subassemblies  for  its SmartMist devices and
intends to use contract manufacturers in a
similar way  in  connection with clinical and
commercial manufacturing of  its  AERx devices.
There can be no assurance that  Aradigm will  be
able to enter into or maintain satisfactory
contract manufacturing  arrangements. Certain
components  of Aradigm's current  and  potential
products are  or will be  available initially
only  from single sources. While the  Company
has contingency  plans for alternate suppliers,
there  can  be  no assurance that the Company
could find alternate
suppliers  for such components. Even if new
suppliers are secured, there  can be no
assurance that this would not significantly
reduce  or eliminate the Company's ability to
supply product during any transition.  A  delay
of or interruption in  production could have  a
material  adverse effect on the  Company's
business, financial condition and results of
operations.

Future Capital Needs; Uncertainty of Additional
Funding

     The   Company's   operations  to   date
have consumed substantial and increasing amounts
of cash. The negative  cash flow   from
operations is  expected  to continue   in the
foreseeable future.  The  development of the
Company's technology and proposed products will
require a commitment of substantial  funds.  In
addition, costly  and  time consuming research
and preclinical and clinical testing activities
must be conducted  to  develop,  refine  and
commercialize  such technology and proposed
products. 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 scaleup  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.

<PAGE 18>

     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.   The  Company
anticipates  that  its existing resources,
anticipated payments from its existing  corporate
partners  and projected interest  income,  will
enable  the Company to maintain its current and
planned operations through 1998. 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.  If
additional funds are raised  by issuing  equity
securities, substantial dilution to shareholders
may  result. If  adequate  funds are not
available,  the Company  may  be required  to
delay, reduce the scope of, or eliminate  one  or
more  of its research or development programs or
obtain  funds through  arrangements with
collaborative  partners or others that  may
require the Company to relinquish rights to
certain of  its technologies, product candidates
or products that  the Company would not otherwise
relinquish.

<PAGE 19>

Dependence Upon Proprietary Technology;
Uncertainty of Patents and Proprietary Technology

The  field of aerosolized drug delivery is
crowded and a substantial number of patents have
been issued in this field. Competitors  and
institutions  may  have applied for  other
patents and  may  obtain additional patents  and
proprietary rights  relating  to  products or
processes competitive  with those of the Company.
Patents or other publications may hinder or
prevent the Company from obtaining patent
protection being sought  or draw into question
the validity of patents  already issued  to the
Company. In addition, patents issued to  others
might provide  competitors with the ability  to
prevent  the Company  from  making its products
or carrying  out processes necessary for use of
its products. The Company may not be able to
obtain a license under any such patent and may
thereby  be prevented from making products or
carrying out processes which are  important  or
essential to the business of  the  Company.
Although issued patents are presumed valid under
federal  law, none  of the  patents of the
Company has been  challenged in litigation. There
can be no assurance that any of such patents will
be found valid if challenged. There  also  can
be  no assurance that any of the applications
will issue or if issued will later be found valid
if challenged. Further, there can be no assurance
that  any issued patents or applications which
might  later issue as patents will provide the
Company with a degree  of  market exclusivity
sufficient for the  Company to profitably
compete against its competitors.  Pending United
States applications are maintained in secret
until  they are issued  as  patents  and as such
can not be searched by  the Company.  There may
be pending applications which will later issue as
patents which will create infringement issues for
the Company.  Further, patents already issued to
the Company  or applications  of  the Company
which are pending  may  become involved  in
interferences that could be resolved in favor  of
competitors  of the  Company and involve the
expenditure of substantial financial and human
resources of the Company.

<PAGE 20>

     Company  policy  is  to require its
officers, employees, consultants  and  advisors
to execute proprietary information and invention
assignment agreements upon commencement of their
relationships with the Company. There can  be  no
assurance, however, that these  agreements  will
provide meaningful protection  for  the Company's
inventions, trade secrets or other proprietary
information in the event of unauthorized use or
disclosure  of  such  information. Violations of
such agreements are difficult to police. See
"Business Intellectual Property and Other
Proprietary Rights."

Government   Regulation;  Uncertainty  with
Preclinical and Clinical Testing

    All   medical  devices  and  new  drugs,
including the Company's products under
development, are subject to extensive and
rigorous regulation by the federal government,
principally the  FDA, and by state and local
governments. Such regulations govern   the
development, testing, manufacture, labeling,
storage, premarket clearance or approval,
advertising, promotion, sale and distribution of
such products. If medical devices  or drug
products are marketed abroad, they also  are
subject to regulation by foreign governments.
    The   regulatory  process  for  obtaining
FDA premarket clearances or approvals for medical
devices and drug products is  generally  lengthy,
expensive and uncertain. Securing  FDA marketing
clearances  and  approvals often requires the
submission of extensive  clinical data and
supporting information  to the FDA. Product
clearances and approvals,  if granted, can be
withdrawn for failure to comply with regulatory
requirements or upon the occurrence of unforeseen
problems following initial marketing.

<PAGE 21>

   There  can be no assurance that the Company
will be able to  obtain necessary regulatory
clearances or approvals on  a timely  basis,  if
at  all, for any  of its products  under
development, and delays in receipt or failure to
receive  such clearances or approvals or failure
to comply with existing  or future  regulatory
requirements could have a material  adverse
effect  on the  Company. Moreover, regulatory
clearances  or approvals for products such as
medical devices and new drugs, even  if granted,
may include significant limitations  on  the uses
for which such products may be marketed. Certain
changes to  marketed medical  devices and new
drugs  are  subject  to additional FDA review and
clearance or approval. There can  be no assurance
that any  clearances or  approvals  that  are
required,  once obtained, will  not  be
withdrawn  or that compliance with other
regulatory  requirements can be maintained.
Further, failure to comply with applicable FDA
and other  regulatory requirements can result in
sanctions being imposed  on the Company or the
manufacturers of its products, including warning
letters, fines, product recalls or seizures,
injunctions,  refusals to permit products to be
imported  into or exported out of the United
States, refusals of FDA to grant premarket
clearance or premarket approval of medical
devices and  drugs  or  to allow the Company to
enter into government supply contracts,
withdrawals of previously approved marketing
applications and criminal prosecutions.
 The  Company received 510(k) clearance from the
FDA in 1996   for   the  SmartMist  system.  The
Company  has made modifications   to  the
SmartMist  system   since receiving clearance,
which  the Company believes  do  not require  the
submission of new 510(k) notifications to the
FDA. There  can be no assurance, however, that
the FDA would agree with any of the Company's
determinations not to submit a new 510(k) notice
for  any of these changes or would not require
the Company  to submit a new 510(k) notice for
any of the changes made to  the device. If the
FDA requires the Company to submit a new 510(k)
notice for  any modification to the  SmartMist
system, the Company  may be prohibited from
marketing the modified device until  the 510(k)
notice is cleared by the FDA, which  could have a
material adverse effect on the Company.
 The Company may also be subject to certain user
fees that the  FDA is authorized to collect under
the Prescription  Drug User Fees Act of 1992 for
certain drugs, including insulin and morphine.
This  act  expired on September 30, 1997, and
legislation to reauthorize it has been passed by
the House and Senate. It must be reconciled in a
House-Senate conference and signed by the
President to become law.

<PAGE 22>

     Before the Company can file for regulatory
approvals for the  commercial sale of the
Company's potential AERx products, the  FDA  will
require extensive  preclinical and  clinical
testing  to demonstrate  the  safety  and
efficacy  of  such potential products. To date,
the Company has tested an  early prototype
patient-operated version of the AERx Pain
Management System with morphine on a limited
number of healthy volunteers in  Phase  I
clinical trials in the United States. Failure  of
the Company to progress to more advanced clinical
trials would have a material adverse effect on
the Company. There can be no assurance  that  the
Company  will  be  able  to  manufacture
sufficient quantities of the disposable unit-dose
packets  to support any future clinical trials of
the AERx system, or that the design  requirements
of the AERx  system  will  make  it feasible for
development beyond the prototype currently being
used.
     The  timing of completion of clinical trials
is dependent upon, among other factors, the
enrollment of patients. Patient recruitment is a
function of many factors, including the  size of
the  patient  population, the proximity  of
patients  to clinical sites, the eligibility
criteria for the study and the existence  of
competitive clinical trials. Delays  in  planned
patient enrollment in the Company's current
trials or  future clinical trials may result in
increased costs, program delays or  both,  which
could have a material adverse effect  on  the
Company.

<PAGE 23>

The  Company also is developing applications of
its AERx system for the delivery of insulin and
other compounds. These applications  are  in  an
early stage of development and  the regulatory
requirements  associated with obtaining   the
necessary  marketing approvals from the FDA and
other regulatory  agencies are not known. There
can be no assurance that  these applications of
the AERx system will prove  to  be viable  or
that any necessary regulatory approvals  will  be
obtained  in a timely manner, if at all. Although
the  Company believes  the data regarding the
Company's potential  products is encouraging, the
results  of  initial  preclinical  and clinical
testing  of the products under  development  by
the Company are not necessarily predictive of
results that will be obtained  from  subsequent
or more extensive preclinical  and clinical
testing. Furthermore, there can be no assurance
that clinical trials of products under
development will demonstrate the  safety  and
efficacy of such products at all  or  to  the
extent necessary to obtain regulatory approvals.
Companies  in the medical  device, pharmaceutical
and biotechnology industries  have suffered
significant setbacks  in  advanced clinical
trials,  even after promising  results  in
earlier trials. The failure to demonstrate
adequately the safety and efficacy  of  a
therapeutic product under development could delay
or prevent regulatory approval of the product and
would have a material adverse effect on
the Company.

<PAGE 24>

 In  addition,  due  to  limited experience  with
chronic administration  of drugs delivered via
the lung for systemic effect, the FDA may require
clinical data to demonstrate  that such chronic
administration is safe. There can be no assurance
that the Company will be able to present such
data in a timely manner, or at all.

     The  FDA  and  other regulatory agency
requirements for manufacturing,   product
testing and  marketing can vary depending  upon
whether the product is a medical device or  a
drug. Manufacturers of medical devices  and drugs
also are required to comply with the applicable
GMP requirements, which relate to product testing
and quality assurance as well as the
corresponding maintenance of records and
documentation.  There can  be  no assurance that
the Company will be able to  comply with  the
applicable GMP and other FDA regulatory
requirements as it  scales  up its manufacturing
operations. Such  failure could have a material
adverse effect on the Company.
     In  addition,  in  order for the Company  to
market its products in Europe and in certain
other foreign jurisdictions, the  Company  and
its distributors and agents  must  obtain
required regulatory  approvals and clearances
and otherwise comply   with  extensive
regulations regarding  safety and quality.  These
regulations, including the  requirements for
approvals  or clearance to market and the time
required  for regulatory review, vary from
country to country. There can  be no assurance
that the Company will obtain regulatory approvals
in  such  countries or that it will not be
required  to  incur significant costs  in
obtaining or maintaining  its  foreign regulatory
approvals. Delays in receipt of approvals to
market the Company's products, failure to receive
these approvals, or future loss  of previously
received approvals  could  have a material
adverse effect on the Company's business,
financial condition and results of operations.

<PAGE 25>

     Because   the  Company's  AERx  Pain
Management System clinical  studies involve
morphine, the Company is registered with  the
Drug Enforcement Agency ("DEA") and its
facilities are subject to inspection and DEA
export, import, security and production quota
requirements. There can be no assurance  that the
Company will not be required to incur significant
costs to comply  with DEA regulations in  the
future  or  that  such regulations will not have
a material adverse effect  on  the Company.
Highly Competitive Markets; Risk of Alternative
Therapies
   The  medical  device,  pharmaceutical  and
biotechnology industries  are highly competitive
and rapidly evolving.  The Company's  success
will depend on its ability to  successfully
develop products and technologies for pulmonary
drug delivery. If a competing company were to
develop or acquire rights to a better pulmonary
delivery device, the Company  could be materially
and adversely affected.

   The   Company  is  in  competition  with
pharmaceutical, biotechnology  and drug delivery
companies and other  entities engaged  in  the
development  of alternative  drug  delivery
systems or  new drug research and testing, as
well  as with entities  producing  and developing
injectable  drugs.   The Company is aware of a
number of companies currently seeking to develop
new   products  and  non-invasive  alternatives
to injectable  drug  delivery,  including  oral,
intranasal and transdermal  delivery systems and
colonic absorption systems. The Company also is
aware of other companies currently engaged in
the development and commercialization of
pulmonary drug delivery   systems and  enhanced
injectable drug delivery systems.  Many  of  the
Company's competitors  have greater research and
development capabilities, experience,
manufacturing, marketing,  sales,  financial and
managerial resources than the Company and
represent significant competition  for the
Company. Acquisitions of  competing drug delivery
companies by  large  pharmaceutical companies or
partnering arrangements between such companies
could enhance competitors'  financial, marketing
and  other resources.  The Company's  competitors
may succeed in developing  competing
technologies, obtaining FDA approval for products
more rapidly than  the Company  and gaining
greater market  acceptance  of their  products
than the Company's products. There can  be  no
assurance that developments by others will not
render some  or all of the  Company's proposed
products  or  technologies uncompetitive or
obsolete, which would have a material adverse
effect on the Company.

<PAGE 26>

Dependence on Key Personnel

     The  Company  is dependent upon a limited
number  of key management  and technical
personnel. The loss of the services of  one  or
more of such
key employees could have a  material adverse
effect  on  the Company. In addition, the
Company's success  will  depend upon its ability
to attract  and  retain additional  highly
qualified sales, management,  manufacturing and
research and development personnel. The  Company
faces intense competition in its recruiting
activities,  and there can be  no assurance that
the Company will be able to attract or retain
qualified personnel.

Exposure to Product Liability

The   research,  development  and
commercialization of medical  devices and
therapeutic products entails significant product
liability risks.  If the Company succeeds in
commercializing  products using the SmartMist
system  or the AERx  system  and  if  it
succeeds in  developing additional devices and
new products, the use of such products in
clinical trials and the commercial sale of such
products may expose the Company  to  liability
claims. These  claims  might be  made directly by
consumers or by pharmaceutical companies or
others selling such products. Companies often
address the exposure of such  risk by obtaining
product liability insurance. Although the Company
currently  maintains limited product liability
insurance, there can be no assurance that the
Company will be able  to  obtain additional or
maintain existing insurance  on acceptable
terms, or  at all, or in  amounts sufficient  to
protect the  Company. A successful claim brought
against the Company  in excess of the Company's
insurance coverage  would have a material adverse
effect on the Company's business.

<PAGE 27>

Uncertainty Related to Third-Party Reimbursement

   In  both  domestic  and  foreign markets,
sales of the Company's current and potential
products, if any, will depend in  part on the
availability of reimbursement from third-party
payors  such  as government health administration
authorities, private  health insurers and other
organizations. Third-party payors  are
increasingly challenging the  price  and  cost
effectiveness  of  medical products and services.
Significant uncertainty exists as to the
reimbursement status  of  newly approved health
care products. There can be no assurance  that
any  of  the Company's current and potential
products will  be reimbursable by thirdparty
payors. In addition, there can be no assurance
that the Company's current and potential products
will be considered cost-effective or that
adequate third-party reimbursement will be
available to enable Aradigm to maintain price
levels sufficient to realize a profit.
Legislation and regulations  affecting  the
pricing  of pharmaceuticals  may change before
the Company's current and potential products are
approved  for marketing and any such  changes
could  further limit reimbursement.

<PAGE 28>

Hazardous Materials

      The  Company's operations involve the
controlled  use of hazardous   materials,
chemicals  and   various radioactive compounds.
Although  the  Company believes that  its  safety
procedures for handling and disposing of such
materials comply with   the standards  prescribed
by   state   and   federal regulations,  the risk
of accidental contamination  or injury from
these materials cannot be completely eliminated.
In  the event  of  such an accident, the Company
could be
held  liable for  any  damages that result and
such liability could  exceed the resources of the
Company.

Possible Volatility of Stock Price

The  market  prices  for securities  of  many
companies, including  the Company, engaged in
pharmaceutical development activities
historically have been highly volatile  and  the
market from time to time has experienced
significant price and volume  fluctuations that
are unrelated  to  the operating performance of
particular companies. Prices for the  Company's
Common Stock  may  be influenced by many
factors,  including investor perception of  the
Company,  fluctuations  in the Company's
operating results and market conditions relating
to the pharmaceutical  industry. In addition,
announcements  of technological innovations or
new commercial products  by the Company  or  its
competitors, delays in  the development  or
approval of the Company's product candidates,
developments  or disputes  concerning patent or
proprietary  rights,  publicity regarding actual
or potential  developments  relating to products
under development by the Company or its
competitors, regulatory developments in both the
United States and  foreign countries, public
concern  as  to  the safety of drug technologies
and economic and other external factors, as well
as period-to-period  fluctuations in financial
results,  may have  a  significant impact on the
market price of the  Common Stock.  Finally,
future sales of substantial amounts of Common
Stock by existing shareholders could also
adversely affect the prevailing  price of the
Common Stock. In the past,  following periods  of
volatility in the market price  of  a  company's
securities, class action securities litigation
has often  been instituted   against  such  a
company.  Any  such litigation instigated
against  the Company could result  in substantial
costs and a diversion of management's attention
and resources, which  could have a material
adverse effect on the  Company's business,
financial condition and operating results.

<PAGE 29>

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA


REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
                        
The Board of Directors and Shareholders
Aradigm Corporation

     We have audited the accompanying balance
sheets of Aradigm Corporation  as of December 31,
1997 and 1996, and the  related statements  of
operations, shareholders' equity, and cash  flows
for  each  of  the three years in the period
ended
December  31, 1997.  These financial statements
are the responsibility of  the Company's
management. Our responsibility  is  to  express
an opinion on these financial statements based on
our audits.

We  conducted  our  audits in accordance  with
generally accepted  auditing standards.  Those
standards require  that  we plan  and perform the
audit to obtain reasonable assurance about
whether the financial statements are free of
material misstatement.        An audit includes
examining, on  a
test basis, evidence supporting the amounts and
disclosures in the financial statements.   An
audit also includes assessing the accounting
principles used and significant estimates made by
management, as well as evaluating the overall
financial statement presentation. We  believe
that our audits provide a reasonable basis  for
our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material
respects, the financial position of  Aradigm
Corporation at December 31, 1997 and 1996, and
the results  of its operations and its cash flows
for each  of  the three years in the period ended
December 31, 1997, in conformity with generally
accepted accounting principles.


ERNST & YOUNG LLP
Palo Alto, California
February 6, 1998

<PAGE 30>




              Aradigm Corporation
                Balance Sheets
       (In thousands, except share data)
                       
                              December 31,
                              1997        1996
  Assets
  Current assets:
   Cash and cash equivalents   $15,517  $17,454
   Short-term investments        8,788    8,078
   Receivables                     261        -
   Inventories                     520        -
   Other current assets            409      451
    Total current assets        25,495   25,983
 Investments                         -    3,002
 Property and equipment, net     4,417    1,453
 Notes receivable from officers    303      220
 Other assets                       79       75
    Total assets               $30,294   30,733
 Liabilities and shareholders'
 equity
 Current liabilities:
  Accounts payable             $ 1,505  $   601
  Accrued clinical and other         -      899
  studies
  Accrued compensation             728      280
  Deferred revenue               6,339      169
  Other accrued liabilities        342      279
  Current portion of
  capital lease
  obligations                      582      269
  and equipment loans
   Total current liabilities    9,496    2,497
                        
 Noncurrent portion of capital
  lease obligations              2,139      350
  and equipment loans

 Commitments and contingencies

 Shareholders' equity:
 Preferred stock, no par value;
5,000,000 shares authorized; no     -         -
 shares issued or outstanding
 Common stock, no par value,
 40,000,000 shares authorized;
issued and outstanding shares:  54,976    49,821
1997 - 10,632,133; 1996 -
  10,214,054
  Shareholder notes receivable    (386)      (483)
  Deferred compensation           (104)      (308)
  Accumulated deficit           (35,827)     (21,144)
 Total shareholders' equity   18,659          27,886
    Total liabilities and       $30,294      $30,733
   shareholders' equity


<PAGE 31>

                      Aradigm Corporation
                   Statements of Operations
 (In thousands, except share and per share data)
                        
                        
                        
                     Years ended December 31,
                    1997     1996       1995
                    
                    
Contract and license  $  3,685    $   730     $155
  revenues

Expenses:
  Research and       12,732       7,981      3,440
  development
  General and        6,732        2,958      2,334
  administrative
    Total expenses   19,464       10,939     5,774

Loss from operations (15,779)     (10,209)  (5,619)

 Interest income      1,329        1,179       206
 Interest expense     (234)        (52)        (20)
   Net loss           $(14,684)   $(9,082)  (5,433)

Basic and diluted     $(1.43)   $(1.49)     $(5.41)
   net loss per
   share
 Shares used in
  computing basic   10,280,091  6,098,038  1,004,133
   and diluted net
  loss per share

<PAGE 32>

              Aradigm Corporation Statement of Shareholders' Equity
             (In thousands, except share data)
                Preferred Stock   Common Stock
                   Shares    Amount   Shares Amount
Balances at      3,503,458  $12,566  936,679 $  114
December 31,
1994
Issuance of               -       -  397,375    156
common stock
Repurchase of    -              -    (7,029)     (3)
common stock
Repayment of     -              -         -       -
notes
receivable
Issuance of
Series E        2,108,452  11,553        -        -
convertible
preferred
stock
Net loss         -              -         -       -

Balances at      5,611,910  24,119   1,327,025    267
December 31,
1995
Issuance of      -              -    662,629      350
common stock
Repurchase of    -              -    (2,766)      (1)
common stock
Issuance of
common stock
upon         (5,611,910) (24,119) 5,727,166    24,119
conversion of
preferred
stock and
warrants,  net
Issuance of      -              -  2,500,000    24,591
common stock
Deferred         -              -         -        495
compensation
Amortization of  -              -         -       -
deferred
compensation
Net change in    -              -         -       -
unrealized
gain (loss) on
available-for-
sale
investments
Net loss         -              -         -       -
Balances at      -              -   10,214,054 49,821
December 31,
1996
Issuance of      -              -    432,513    5,164
common stock
Repurchase of    -              -    (14,434)      (9)
common stock
Repayment of     -              -         -       -
shareholder
notes
Amortization of  -              -         -       -
deferred
compensation
Net change in    -               -        -        -
unrealized
gain (loss) on
available-for-
sale
investments
Net loss         -              -         -         -
Balances at      -    $       -      10,632,133   $54,976
December 31,
1997



               Aradigm Corporation Statement of Shareholders' Equity
                        (continued)
               (In thousands, except share data)

               Share-    Total
               holder    Deferred   Accumu- Share-
               Notes     Compen-    lated    holders
               Receiv-   sation    Deficit   Equity
               able

Balances at      $(84)  $   -   $(6,636)  $ 5,960
December 31,
1994
Issuance of      (143)      -         -        13
common stock
Repurchase of       3       -         -         -
common stock
Repayment of       28       -         -        28
notes
receivable
Issuance of
Series E             -       -         -   11,553
convertible
preferred
stock
Net loss           -       -     (5,433)   (5,433)

Balances at      (196)      -   (12,069)   12,121
December 31,
1995
Issuance of      (288)      -         -        62
common stock
Repurchase of       1       -         -         -
common stock
Issuance of
common stock
upon               -       -         -         -
conversion of
preferred
stock and
warrants,
net
Issuance of         -       -         -    24,591
common stock
Deferred            -   (495)         -         -
compensation
Amortization        -     187         -       187
of deferred
compensation
Net change in       -       -         7         7
unrealized
gain (loss)
on available-
for-sale
investments
Net loss            -       -   (9,082)    (9,082)
Balances at      (483)  (308)   (21,144)    27,886
December 31,
1996
Issuance of         -       -         -      5,164
common stock
Repurchase of       9       -         -          -
common stock
Repayment of       88       -         -         88
shareholder
notes
Amortization        -     204         -        204
of deferred
compensation
Net change in       -       -         1          1
unrealized
gain (loss)
on available-
for-sale
investments
Net loss            -       -     (14,684)   (14,684)


Balances at      $(386) $(104) $(35,827) $18,659
 December 31,
1997

<PAGE 33>


                     Aradigm Corporation
                   Statements of Cash Flows
                        (In thousands)


                        Years ended December 31,
                        1997          1996          1995
                        
Cash flows from
operating activities
Net loss              $(14,684)     $(9,082)     $(5,433)

Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Depreciation and          691          389            193
amortization
Amortization of           204           187             -
deferred
compensation
Loss on disposal of         -           -          18
property and
equipment
Loss on sale-               -           -          95
leaseback
transaction
Changes in operating
assets and
liabilities:
Receivables              (261)          260     (260)
Inventories and          (478)         (376)     (39)
other current assets
Other assets               (4)          (8)      (59)

Accounts payable         904            426      (40)
Accrued liabilities    (388)          1,172      118
Deferred revenue      6,170             (61)     230
Cash used in         (7,846)          (7,093)  (5,177)
 operating activities


Cash flows from
investing activities
Capital expenditures  (2,756)           (811)  (535)

Purchases of        (27,278)        (191,767)      -
 available-
for-sale
investments
Proceeds from         29,571         180,694        -
maturities of
available-for-sale
investments
Cash used in         (463)          (11,884)     (535)
 investing activities

Cash flows from
financing activities
Proceeds from         -                 -       11,553
issuance of
preferred stock
Proceeds from        5,164           24,653        13
issuance of common
stock, net
Proceeds from           88               -         28
repayments of
shareholder notes
Proceeds from sale
of equipment in sale-     -             -          390
leaseback
transaction
Notes receivable       (83)             (69)      (151)
from officers
Proceeds from        1,437                 -          -
equipment loans
Payments on lease    (234)              (270)       (91)
obligations and
equipment loans
Cash provided by      6,372            24,314      11,742
 financing activities


Net (decrease)       (1,937)            5,337       6,030
increase in cash and
cash equivalents
Cash and cash         17,454            12,117      6,087
equivalents at
beginning of year
Cash and cash       $ 15,517          $17,454      $12,117
 equivalents at end
of year

Supplemental
investing and
financing activities
Common stock issued   $     -    $   288      $      143
 in exchange for
notes receivable
Common stock
repurchased upon      $     9    $     1      $   3
cancellation of
shareholder notes
Acquisition of        $   899    $   395      $ 585
equipment under
capital leases

<PAGE 34>

Aradigm Corporation Notes to Financial Statements
December 31, 1997

1. Organization and Summary of Significant
Accounting Policies

Organization and Basis of Presentation
Aradigm  Corporation  (the  "Company")  was  incorporated
in California.  Through June 1997, prior to the  signing
of the Company's collaborative agreement with SmithKline
Beecham (see Note   7),  the  Company was in the
development stage.   Since inception,  Aradigm  has been
engaged in the development  and commercialization  of
noninvasive 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.

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.

<PAGE 35>

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

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

<PAGE 36>

Net Loss Per Share
Effective December 31, 1997, the Company adopted Statement
of Financial  Accounting Standards No. 128, "Earnings Per
Share" ("SFAS  128").   SFAS 128 requires the presentation
of  basic earnings  (loss)  per  share and diluted
earnings (loss)  per share,  if  more  dilutive,  for all
periods presented.   In accordance  with SFAS 128, basic
net loss per share  has  been computed using the weighted
average number of shares of common stock outstanding
during the period.
Net  loss  per share for 1996 and 1995 have been
retroactively restated   to  apply  the  requirements  of
Staff  Accounting Bulletin  No.  98,  issued by the SEC in
February  1998  ("SAB 98").   Under  SAB  98,  certain
shares of  common  stock  and options  to purchase shares
of common stock issued  at  prices substantially below the
per share price of shares sold in  the Company's initial
public offering previously included  in  the computation
of shares outstanding pursuant to Staff Accounting
Bulletin  Nos.  55, 64  and  83 are  now  excluded  from
the computation.
The  following  pro  forma per share  data,  as  adjusted,
is provided  to  show the calculation on a consistent
basis for 1997, 1996 and 1995.  It has been computed as
described above, but  includes the retroactive effect from
the date of issuance of  the  conversion of convertible
preferred stock to  common shares  upon  the  closing  of
the  Company's initial  public offering in June 1996.
A   reconciliation  of  shares  used  in  the  calculation
of historical  and pro forma, as adjusted, basic and
diluted net loss per share follows:

<PAGE 37>

                                   Year ended December 31,
                                 1997       1996         1995
Net loss                        $(14,684)   $(9,082)  $(5,433)


Basic and Diluted
Weighted average common shares
outstanding used in computing
basic and diluted net loss    10,280,091  6,098,038   1,004,133
per share
Basic and diluted net loss per  $  (1.43)  $(1.49)    $(5.41)
share

Pro  Forma  Basic and Diluted,
as adjusted
Shares used in computing basic
and diluted net loss per      10,280,091  6,098,038  1,004,133
share
Adjusted to reflect the effect        -    2,529,456  3,503,468
of the assumed conversion of
preferred stock
Shares used in computing pro
forma basic and diluted net   10,280,091   8,627,494  4,507,601
loss per share, as adjusted
Pro forma basic and diluted
net loss per share, as         $  (1.43)  $(1.05)       $(1.21)
 adjusted

Had  the  Company  been  in  a net  income  position,
diluted earnings per share would have included the shares
used in  the computation of pro forma basic net loss per
share as  well  as an  additional  222,031 shares related
to outstanding  options and  warrants  not  included
above (as determined  using  the treasury stock method).

<PAGE 38>

Employee Benefit Plans
The  Company has a 401(k) Plan which stipulates that all
full time  employees  with at least three months of
employment  can elect  to  contribute to the 401(k) Plan,
subject  to  certain limitations,  up  to  20% of salary
on a pretax  basis.  The
Company  has the option to provide matching contributions
but has not done so to date.

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.  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 130 and SFAS 131
on  its future financial statement disclosures, but  does
not  believe the additional disclosure will be material
to the financial statements.

Reclassifications
Certain reclassifications of prior year amounts have been
made to conform with current year presentation.

2. Financial Instruments

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  shortterm investments  consist          of
corporate  notes and market auction preferred securities
with maturities  ranging  from  3 to 12 months.  Other
investments consist  of  corporate notes with maturities
greater  than  12 months.

<PAGE 39>

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. The following  summarizes the Company's cash
equivalents and investments:
                                         Estimated
                                           Fair Value
                                           at December 31,
                                      1997       1996
Cash and cash equivalents:
  Money market fund                   $   6,000    $17,000
  Commercial paper                   14,331,000  16,939,000

                                   $ 14,337,000  $16,956,000

Short-term investments:
  Commercial paper                 $  3,272,000    $       -
  Corporate notes                     3,216,000    6,978,000
  Market auction preferred
  securities                          2,300,000    1,100,000
                                   $  8,788,000   $8,078,000
 Investments:
  Corporate notes                  $  -           $3,002,000

As  of December 31, 1997 and 1996, the difference between
the estimated  fair value and the amortized cost of
available-for sale securities was immaterial.  As of
December 31, 1997,  the average  portfolio duration was
approximately two months,  and the  contractual  maturity
of any single  investment  did  not exceed six months from
the balance sheet date.

<PAGE 40>

3. Inventories
Inventories  are stated at the lower of cost (first-in
first out basis) or market.  Inventories consist of the
following:
                                             December 31,
                                            1997      1996
Raw materials                              $479,000   $  -
Finished goods                              41,000       -
                                           $520,000   $  -

4. Property and Equipment

Property and equipment consist of the following:
                                          December 31,
                                        1997         1996
                                        
Machinery and equipment               $3,294,000  $601,000
Furniture and fixtures                   434,000   273,000
Lab equipment                          1,048,000   594,000
Computer equipment and software          755,000   496,000
Leasehold improvements                   288,000   201,000
                                       5,819,000 2,164,000
Less accumulated depreciation and     (1,402,000) (711,000)
amortization
                                      $4,417,000 $1,453,000

Property  and  equipment at December 31, 1997 includes
assets under capitalized leases of approximately
$3,322,000 ($980,000 in  1996).  Accumulated amortization
related to leased  assets was  approximately $392,000 at
December 31, 1997 ($344,000  in 1996).

<PAGE 41>

5. Leases and Commitments
In  August  1997,  the  Company obtained  an  additional
$5.0 million  equipment lease line of credit of which
approximately $2.9  million  remains  available at
December 31,  1997  for purchases through September 1998.
Amounts borrowed under  the Company's  equipment lines of
credit bear interest  at  rates from  10%  to  15%     and
are collateralized by  the  equipment purchased.   Under
the  terms of the  lease  agreements, the Company has the
option to purchase the leased equipment at  a negotiated
price at the end of each lease term.  The Company leases
its  office  and laboratory facilities  under several
operating leases expiring through the year 2014. Future
minimum  lease payments under noncancelable operating and
capital leases at December 31, 1997 are as follows:

                                      Operating
                                      Capital
                                      Leases        Leases
Years ending December 31:
1998                                 $843,000      $954,000
1999                                1,066,000       842,000
2000                                1,298,000       723,000
2001                                1,620,000       684,000
2002 and thereafter                33,539,000       462,000

Total minimum lease payments       $38,366,000    3,665,000

Less amount representing interest                (944,000)
Present value of future lease                   2,721,000
payments
Current  portion of  capital  lease              (582,000)
obligations
Noncurrent portion of capital lease             $2,139,000
obligations

Rent expense under these operating leases totaled
$420,000, $197,000, and $76,000  for  the  years ended
December 31, 1997, 1996,  and  1995, respectively.

<PAGE 42>

6. Shareholders' Equity

Capital Stock
In  June  1996,  the  Company  completed  the  initial
public offering  of  its common stock.  The Company issued
2,500,000 shares  for  net  proceeds of $24.6  million.
Prior  to  the closing of the initial public offering, the
Company effected a three-for-two   split   of  its
outstanding   common   stock.  Concurrent  with  the
closing of the initial public offering, previously
outstanding shares of Series A,  B, C,  D  and  E
preferred stock were converted into 5,611,911 shares of
common stock.   All  share  and per share data  in the
accompanying financial statements has been adjusted
retroactively  to  give effect to the stock split.

Stock Warrants
In  September 1997, in connection with a consulting
agreement, the  Company  issued  a warrant that entitles
the  holder  to purchase  170,000 shares of common stock
at an exercise  price of $8.96 per share. This warrant is
exercisable through August 2003.   In  June  1995,  in
connection  with  a  master  lease agreement,  the Company
issued a warrant  that  entitles  the holder  to
purchase 37,500 shares  of  common  stock  at  an exercise
price of $4.23 per share. This warrant is exercisable
through June 20, 1998.  At December 31, 1997, the Company
has reserved 207,500 shares of its common stock for
issuance  upon exercise of these common stock warrants. No
amounts have been recorded  for the above warrant
issuances as the amounts  were determined to be immaterial
at the time of issuance.

<PAGE 43>

1996 Equity Incentive Plan
In  April  1996, the Company's Board of Directors adopted
and the  Company's shareholders approved the 1996 Equity
Incentive Plan  (the "Plan"), which amended and restated
the 1992  Stock Option  Plan.   Options granted under the
Plan may  be  either incentive  or  nonstatutory stock
options. At  December  31, 1997,  the  Company had
authorized 1,980,000 shares of  common stock for issuance
under the Plan.  Options granted under  the Plan  expire
no later than ten years from the date  of  grant. For
incentive and nonstatutory stock option grants, the option
price  shall be at least 100% and 85%, respectively,  of
the fair value on the date of grant, as determined by the
Board of Directors.   If at any time the Company grants an
option, and the  optionee directly or by attribution owns
stock possessing more  than  10%  of  the total combined
voting power  of  all classes of stock of the Company, the
option price shall be  at least 110% of the fair value and
shall not be exercisable more than five years after the
date of grant.

Options  granted  under  the 1996 Equity  Incentive  Plan
are immediately  exercisable and generally vest over a
period of four  years from the date of grant.  Under the
Plan, employees may  exercise  options in exchange for a
note payable  to  the Company.   As of December 31, 1997
and
1996, notes  receivable from shareholders of $386,000 and
$483,000, respectively, were outstanding.  These notes
generally bear interest  at  6%  and are  due and payable
in regular installments over a five  year period.   Any
unvested stock issued is subject to  repurchase agreements
whereby the Company has the option  to  repurchase
unvested shares upon termination of employment at the
original issue price. The common stock has voting rights
but does  not have resale rights prior to vesting. During
1997, the Company granted  options  to purchase 550,600
shares of  common stock none  of which were exercised.
The Company has repurchased  a total  of  24,229 shares in
accordance with these  agreements. As of  December  31,
1997, 219,410 shares of  the  Company's common stock
remained subject to repurchase and 985,099 shares were
reserved for issuance upon exercise of options.

<PAGE 44>

The following is a summary of activity under the Plan:

                                   Options Outstanding
                     Shares
                     Available                         Weighted
                     for Grant   Number of  Price Per  Average
                        of        Shares      Share    Exercise
                      Options                           Price
Balance at           270,825     539,175    $0.10-       $0.29
December 31, 1994                            $0.37
   Shares            150,000     -          $     -     $    -
   authorized
   Shares granted    (290,550)   290,550     $0.33-       $0.43
                                             $0.43
   Shares            -           (335,876)   $0.33-       $0.38
   exercised                                 $0.43
   Shares            41,607      (41,607)    $0.33-       $0.39
   cancelled                                 $0.43
Balance at           171,882     452,242     $0.10-       $0.30
December 31, 1995                            $0.43
   Shares           1,005,000     -             $-         $-
   authorized
   Shares granted    (523,520)   523,520     $0.57-       $3.66
                                             $9.88
   Shares            -           (662,629)   $0.10-       $0.53
   exercised                                 $5.33
Balance at           653,362     313,133     $0.10-        $5.45
December 31, 1996                            $9.88
   Shares granted    (550,600)   550,600     $6.88-        $8.75
                                             $12.88
   Shares           -           (5,625)      $5.33         $5.33
   exercised
   Shares            24,229      -           $0.37-        $0.49
   repurchased                               $0.57
   Shares            26,825      (26,825)    $5.33-        $6.03
   cancelled                                 $9.88
Balance at           153,816     831,283     $0.10-        $7.62
December 31, 1997                            $12.88


                        Options Outstanding and Exercisable
                                                Weighted
                                  Weighted       Average
                                   Average      Remaining
Exercise Price Range    Number    Exercise     Contractual
                                    Price         Life
                                               (in years)
$0.10-$2.00              69,033      $0.46          6.6
$4.00-$6.88             188,900      $5.70          8.7
$7.00-$9.88             473,200      $8.42          9.2
$11.13-$12.88           100,150     $12.35          9.8
$0.10-$12.88            831,283      $7.62          9.0

The  Company has elected to follow Accounting Principles
Board Opinion  No.  25, "Accounting for Stock Issued  to
Employees" ("APB 25"), and the related Interpretations in
accounting  for its  employee and non-employee director
stock options because, as discussed  below,  the alternative
fair value accounting provided for under Statement of
Financial Accounting Standards No. 123,  "Accounting  for
Stock-Based Compensation" ("SFAS 123"), requires use of
option pricing valuation models that were not developed for
use  in valuing employee stock options. Under APB 25, the
Company has generally recognized no compensation expense
with respect  to such awards.

<PAGE 45>

The  Company  recorded deferred compensation of
approximately $495,000  for the difference between the grant
price  and  the deemed  fair  value of certain of the
Company's  common  stock options granted in    1996.  This
amount is being amortized  over
the  vesting period of the individual options, generally a
48 month period.  Deferred compensation expense recognized
in the years  ended  December  31, 1997 and  1996  was
approximately $204,000 and $187,000, respectively. The
weighted average fair value  of  options granted during
1996 with an exercise  price below  the deemed fair value
of the Company's common stock  on the  date  of grant was
$2.15. There were no such  grants  in 1997.  The  weighted
average fair value  of  options  granted during 1997 and
1996 with an exercise price equal to the  fair value  of
the Company's common stock on the date of grant was $3.35
and $5.60,
respectively.

Pro forma information regarding net loss and basic and
diluted net  loss  per  share  is required by  SFAS  123,
which  also requires that the information be determined as
if
the  Company had   accounted   for  its  employee and non-
employee director stock  options   granted subsequent  to
December 31, 1994 under the fair  value  method prescribed by
this statement.  The fair value of options  was estimated at
the date of grant using the Black-Scholes  option pricing
model  with  the following assumptions:  a  risk-free interest
rate ranging from 5.7%-6.4%,  5.1%-5.8% and 5.5%-7.9% for  the
years  ending  December
31,  1997,  1996  and  1995, respectively; a dividend yield of
0.0%; a volatility factor of the  expected  market price of
the Company's common  stock  of 0.7;  and  a  weighted average
expected option  life  of  four years.   Options granted prior
to the Company's initial public offering in June 1996 have a
volatility factor of 0.0.

<PAGE 46>

For purposes of pro forma disclosure, the estimated fair
value of the options is amortized to expense over the vesting
period of  the  options  using the straight-line method. Pro
forma information on the above basis is as follows:

                                  Year ended December 31,
                         1997          1996          1995
Pro forma net loss       $(14,960,000) $(9,117,000) $(5,437,000)
Net loss - as reported   $(14,684,000) $(9,082,000) $(5,433,000)

Pro forma basic and      $ (1.46)       $ (1.50)        $(5.41)
diluted net loss per
share
Basic and diluted net    $ (1.43)       $ (1.49)       $(5.41)
loss per share - as
reported

The effects of applying SFAS 123 for pro forma disclosures
are not likely to be representative of the effects on
reported net loss  for future years.  Pro forma net loss for
the year ended December  31,  1997  reflects compensation
expense  for  three years'  vesting, while the year ending
December 31, 1998  will reflect  compensation  expense  for
four  years'  vesting  of outstanding stock options.

Employee Stock Purchase Plan
Under  the Employee Stock Purchase Plan (the "Purchase
Plan"), 150,000  shares  of  common  stock have  been
authorized  for issuance.  Shares may be purchased under the
Purchase Plan at 85% of the lesser of the fair market value
of the common stock on  the grant date or purchase date.
As of December 31, 1997, 21,824 shares have been issued
under the Purchase Plan.

1996 Non-Employee Directors' Stock Option Plan
The  1996  Non-Employee  Directors'  Stock  Option  Plan
(the "Directors' Plan") authorizes the grant of 225,000
options for the  Company's common stock. As of December 31,
1997,  52,500 options have been granted under the Directors'
Plan.

<PAGE 47>

7. Collaborative Agreements

In  September  1997, the Company executed  a  development
and commercialization agreement with SmithKline  Beecham
covering use  of  the  AERx Pain Management System for the
delivery  of narcotic analgesics.  The Company and
SmithKline Beecham will collaborate  on  the development of
the products within  this field.  Under the terms of the
agreement, SmithKline  Beecham has  been  granted  exclusive
worldwide  sales  and marketing rights  to  the AERx Pain
Management System for use with  such analgesics, and Aradigm
retains all manufacturing rights. If
this  system receives regulatory approval, Aradigm expects to
sell  devices  and drug packets to SmithKline Beecham  and to
receive royalties on sales by SmithKline Beecham.
Pursuant  to  the SmithKline Beecham agreement, Aradigm could
receive  up  to  approximately $30 million  in milestone  and
product  development  payments,  and  $10
million  in  equity investments   if   and  when  the  first
product from the collaboration is commercialized. In October
1997, the Company received  $14 million from SmithKline
Beecham under the agreement, of which $5 million resulted
from the sale of shares  of  Aradigm  Common Stock.
Additional  milestone and product  development  payments will
be  paid  if Aradigm and SmithKline  Beecham decide to
jointly develop additional AERx products which incorporate
other opiates or opioids. Through December  31, 1997, the
Company has
recognized total  contract revenue of $2.7 million.

<PAGE 48>

In  December  1996,  the Company entered  into  a
feasibility agreement  with  a  pharmaceutical company  to
determine  the feasibility  of  using the Company's AERx(TM)
Pulmonary  Drug Delivery  System  for  the delivery of a
specified  drug.  The agreement  provides  for a $169,500
research  and  development payment  and  a  $237,500 payment
upon  acceptance  by the pharmaceutical company of certain
specified deliverables. All revenue under this agreement was
recognized in 1997.

In  December  1995,  the Company entered  into  a
feasibility agreement  with  a  pharmaceutical company  to
determine  the feasibility  of  using  the  Company's  AERx
Pulmonary  Drug Delivery  System  for  the delivery of a
specified  drug.  The agreement  provided  for a $260,000
research  and development payment.      Under  this
agreement,  revenues  of  $30,000 and
$230,000  were recognized in 1995 and 1996, respectively.
In November  1996,  the  Company  entered into  a  second
such agreement with the pharmaceutical company that provided
for  a $140,000  research and development payment.  Costs
associated with research and development activities
attributable to these agreements are    expected   to
approximate   the   revenues
recognized.   The agreement also provided for a
nonrefundable license fee of $500,000 upon execution of the
agreement, which was recognized as revenue in 1996.
8. Related Party Transactions

<PAGE 49>

At  December 31,  1997,  the  Company  has  notes
receivable, including accrued interest, totaling $303,000
from officers of the Company. Included therein are $153,000
of promissory notes bearing interest at 6%-7% per annum,
generally due and payable three years from the date of the
notes, and collateralized  by certain  personal assets of
the officers and  a  $90,000  full recourse  promissory note
bearing no  interest  and  due  and payable in September
1998.

At  December 31, 1997, the fair value of these  notes  is
not materially  different  from their carrying  values.  The
fair values  were  estimated using discounted cash  flow
analyses, using  interest rates currently offered for loans
with similar terms and to borrowers of similar credit
quality.

9. Income Taxes

The  Company uses the liability method to account  for
income taxes   as  required  by  Statement  of  Financial
Accounting Standards  No. 109, "Accounting for Income
taxes". Under  this method,  deferred  tax assets and
liabilities  are  determined based on differences between
financial reporting and tax bases
of  assets and liabilities and are measured using enacted  tax
rules  and  laws  that are expected to be in effect  when  the
differences are expected to reverse.
Significant  components of the Company's deferred  tax assets
are as follows:
                                        December 31,
                                     1997           1996
Net operating loss carryforward   $13,735,000    $7,336,000
Research and development credit   1,769,000         851,000
carryforward
Other                               36,000         611,000

Gross deferred tax assets         15,540,000      8,798,000
Valuation allowance              (15,540,000)    (8,798,000)
Net deferred tax assets           $      -        $     -



   The valuation allowance increased by $6,742,000 and
$3,751,000
in 1997 and 1996, respectively.

<PAGE 50>

   At  December 31,  1997,  the Company had  net  operating
loss carryforwards of approximately $35,000,000 for federal
income tax  purposes expiring in the years 2006 through 2012
and  net operating  losses for state income tax purposes of
$33,000,000 expiring in the years 1998 through 2002. At
December 31, 1997, the  Company had research and development
credit carryforwards for  federal  income tax purposes of
approximately $1,380,000, which expire in the years 2006
through 2012.

   Because  of  the "change in ownership" provisions of  the
Tax Reform  Act  of  1986, utilization of the  Company's tax
net operating loss carryforwards and tax credit carryforwards
may be  subject  to an annual limitation in future periods.  As
a result of  the  annual  limitation,  a  portion   of   these
carryforwards may expire before ultimately becoming available
to reduce future income tax liabilities.


<PAGE 51>


                            PART IV
                               
                               
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1)Financial Statements.

  Included in Part II of this Report:      Page in Form 10-K
        Report of Ernst & Young LLP, Independent Auditors 33
        Balance Sheets --- December 31, 1997 and 1996     34
        Statements of Operations ---
        Years ended December 31, 1997, 1996, and 1995     35
        Statements of Shareholders' Equity ---
        Years ended December 31, 1997, 1996 and 1995      36

        Statements of Cash Flows ---
        Years ended December 31, 1997, 1996 and 1995      37

        Notes to Financial Statements                     38

  (2) Financial Statement Schedules.

      None.

  (3) Exhibits.

      23.1    (5)Consent of Ernst & Young L.L.P., Independent
               Auditors.
      27.1      Financial Data Schedule for the year ended December
               31, 1997.
      27.2      Restated Financial Data Schedule for the year ended
               December 31, 1996.

      (1)Incorporated by reference to the indicated exhibit in the
        Company's Registration Statement on Form S-1 (No. 333-4236),
        as amended.
      (2)  Represents a management contract or compensatory plan or
        arrangement.
      (3)  Incorporated by reference to the Company's Form 8-K filed
        on November 11, 1997.
      (4)    Confidential treatment requested.
(b)       Reports on Form 8-K.
         A Form 8-K dated September 30, 1997, was filed on November
      11, 1997.  On September 30, 1997, the Company entered into a
      Product Development and Commercialization Agreement (the
      "Agreement") with SmithKline Beecham PLC ("SB") for the purpose
      of developing and commercializing
       a pulmonary drug delivery system for providing immediate
      pain relief using narcotic analgesics.  In connection
      with the Agreement, the Company sold and issued to SB
      pursuant to a  Stock Purchase Agreement 405,064 shares of
      the Company's common stock at an aggregate purchase price
      of $5,000,008.75.

(c)       Index to Exhibits.

      See Exhibits listed under Item 14 (a) (3).

(d)       Financial Statement Schedules.

      None.






<PAGE 52>




                           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,  in  the  City
of Hayward, State of California, on the 19th day of June, 1998.

                              ARADIGM CORPORATION


                              By:/s/Richard P. Thompson
                              Richard P. Thompson
                              President and Chief
                              Executive Officer



   Pursuant to the requirements of the Securities and
Exchange Act  of  1934,  this  Report  has been  signed
below  by  the following  persons  on  behalf of the
Registrant  and  in  the capacities and on the dates
indicated.


Signature                 Title                Date
/s/Richard P. Thompson   President, Chief     June 19,1998
Richard P. Thompson      Executive Officer
                         and Director
                         (Principal Executive
                         Officer)
                            
                            
/s/Mark A. Olbert*      Vice President,      June 19,1998
Mark A. Olbert          Finance and
                        Administration
                        and Chief Financial
                        Officer (Principal
                         Financial and
                         Accounting Officer)


/s/Reid M. Rubsamen*     Vice President, June 19, 1998
Reid M. Rubsamen, M.D.   Medical Affairs,
                         Secretary
                         and Director


/s/Burton J. McMurtry*  Director          June 19, 1998
Burton J. McMurtry, Ph.D.

/s/Gordon W. Russell*        Director     June 19, 1998
Gordon W. Russell


/s/Fred E. Silverstein*       Director    June 19, 1998
Fred E. Silverstein, M.D.

/s/Virgil D. Thompson*        Director     June 19,1998
Virgil D. Thompson


*By:/S/Richard P. Thompson

    Richard P. Thompson
    Attorney-in-Fact

<PAGE 53>

INDEX TO EXHIBITS

EXHIBIT NO.   DESCRIPTION OF DOCUMENT
23.1          Consent of Ernst & Young LLP, Independent Auditors.
27.1          Financial Data Schedule for the year ended December 31, 1997.
27.2          Restated Financial Data Schedule for the year ended
              December 31, 1996.


EXHIBIT 23.1


CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the
Registration Statement on Form S-8 No. 333-15947 pertaining
to the 1996 Equity Incentive Plan of Aradigm Corporation,
the Employee Stock Purchase Plan of Aradigm Corporation,
and the Non-Employee Directors' Stock Option Plan of
Aradigm Corporation of our report dated February 6, 1998,
with respect to the financial statements of Aradigm
Corporation included in the Annual Report (Form 10-K/A) for
the year ended December 31, 1997.


                              ERNST & YOUNG LLP


Palo Alto, California
June 19, 1998