United States
                    Securities and Exchange Commission
                           Washington D.C. 20549
                                     
                                 FORM 10-K 
                                Amendment 1
                                 
[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, 1996

                                    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 31, 1997, there were 10,214,057 shares of common stock
outstanding.  The aggregate market value of voting stock held by non-
affiliates of the Registrant was approximately $53,631,000 based upon the
closing price of the common stock on January 31, 1997 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.

                    DOCUMENTS INCORPORATED BY REFERENCE
                                     

   Portions of the Proxy Statement of Registrant for the 1997 Annual
Meeting of Shareholders to be filed with the Securities and Exchange
Commission not later than 120 days after the close of the Registrant's
fiscal year are incorporated into Part III of this Form 10-K.

                                  PART I
                                     
Item 1.   BUSINESS

       This  Report  on  Form  10-K  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.  Potential
risks  and  uncertainties include, without limitation, those  mentioned  in
this  report  and in particular, the factors described below  in  Part  II,
under heading "Risk Factors".

Overview

      Aradigm  Corporation (the "Company" or "Aradigm") is engaged  in  the
development of novel, hand-held pulmonary drug delivery systems designed to
enhance  the  delivery  and  effectiveness of  a  number  of  existing  and
development  stage drugs and reduce the need for injectable  drug  therapy.
Subject to applicable regulatory clearances and approvals, Aradigm plans to
commercialize  its proprietary technologies on two product  platforms:  (i)
the  SmartMist  system, which is designed to improve the  effectiveness  of
metered  dose  inhalers, such as those used to deliver asthma  medications,
and  (ii)  the  AERx  system,  which  creates  aerosols  from  liquid  drug
formulations for delivery locally to the lung or into the blood stream  via
the  lung. The Company believes that its systems, if successfully developed
and  approved  or  cleared for marketing, can be used to  deliver  existing
drugs for a variety of applications, including the treatment of respiratory
diseases,  pain management and diabetes management, as well as  to  deliver
imaging  agents  for  certain  lung diagnostic applications.  In  addition,
Aradigm's  potential products may offer a promising means of  delivery  for
new drugs under development by pharmaceutical and biotechnology companies.

      Aradigm's  lead SmartMist product under development is the  SmartMist
Asthma  Management  System.  In  May  1996,  the  Company  obtained  510(k)
clearance  from  the  FDA of the initial version of  its  SmartMist  Asthma
Management  System  and  expects  to  complete  development  and   commence
marketing  of  the  commercial version of the SmartMist  Asthma  Management
System during 1997. There can be no assurance that the Company will be able
to  develop and market successfully the commercial version of the SmartMist
Asthma Management System or that changes made during such development  will
not  necessitate  the submission of a second 510(k) notice.  The  Company's
lead  AERx  product  under development is the AERx Pain  Management  System
which  is designed to deliver morphine systemically by inhalation  for  the
treatment  of  pain. The Company filed an Investigational New Drug  ("IND")
application  for  acute pain management with the FDA in February  1996  and
completed  Phase  I of the clinical process in December 1996.  The  Company
also  has  commenced  early clinical studies of its  AERx  system  for  the
delivery  of insulin and a pulmonary diagnostic imaging agent. The  Company
believes that its products under development may improve the management  of
certain  diseases  by  reducing  the cost  of  therapy,  enhancing  patient
management  and  compliance and providing an improved means  to  administer
drugs outside of the hospital setting.

     The Company's plans and intentions with respect to the development and
commercialization of its technologies are subject to a number of risks  and
uncertainties.  There  can  be no assurance that  the  Company  can  obtain
required  regulatory clearances and approvals or that the Company  will  be
able  to  develop  and  commercialize successfully  any  of  its  potential
products.

Background

Pulmonary Drug Delivery

      Pulmonary drug delivery is widely used to treat respiratory  diseases
by  delivering pharmaceuticals locally to the lung and may have utility  in
the  delivery of drugs for systemic application by using the lung's natural
ability to transfer molecules into the blood stream. Pulmonary delivery  of
drugs  for  the  treatment  of respiratory diseases  has  proven  desirable
because  topical  application to affected lung  tissues  promotes  a  rapid
therapeutic  effect  and minimizes the side effects  of  several  important
pulmonary  drugs. The potential for pulmonary delivery to the blood  stream
for systemic effect offers a non-invasive alternative to injection that may
achieve  a more rapid speed of onset and superior bioavailability than  has
been  shown  with  other  approaches, such as oral,  transdermal  or  nasal
delivery. Speed of onset is an important therapeutic element for drugs such
as morphine for pain management and insulin for diabetes.

      The  respiratory system starts with the branching of the trachea into
two  mainstream  bronchi, which are further branched into large  conducting
airways.   The   airways  continue  to  branch  through  approximately   23
generations  until they end in the deep lung with air sacs,  known  as  the
alveoli, which are the site of gas exchange. The internal surface  area  of
the lung is approximately 1,000 square feet, most of which is available for
the  free  exchange  of oxygen, carbon dioxide and other molecules  between
ambient  air  and the blood stream. Because of its physiology  and  natural
function,  the  lung represents an attractive pathway for the  non-invasive
delivery of drugs.

      To  deliver  pharmaceuticals to or through the lungs, drugs  must  be
transformed into a low velocity aerosol (a suspension of drug particles  in
air)  which  can be inhaled by the patient. Large particles (i.e.,  greater
than  four  microns  in  diameter) typically get  deposited  in  the  large
airways, where they may be useful in treating diseases of the lung. Smaller
particles  (i.e.,  less than four microns in diameter), however,  are  more
likely  to pass through the lung's airways and be dispersed in the alveoli,
where  they  may  be absorbed by the alveolar membrane to enter  the  blood
stream for systemic effect.

     To date, the pulmonary drug delivery market has consisted primarily of
drugs  for  the  treatment of local diseases of the lung, such  as  asthma,
cystic  fibrosis,  emphysema  and  chronic  obstructive  pulmonary  disease
("COPD").  Sales  in the United States of drugs used in pulmonary  delivery
products for the treatment of lung diseases exceeded $1.7 billion in  1995.
In  recent  years, pharmaceutical and drug delivery companies,  recognizing
the   potential   benefits  of  utilizing  the  lung  for   systemic   drug
administration, have increased efforts to develop products and systems  for
pulmonary  drug  delivery.  Industry sources estimate  that  the  potential
worldwide market for pulmonary drug delivery products may exceed $9 billion
annually by the year 2000.

Existing Pulmonary Drug Delivery Technology

      Three  aerosol generating technologies currently are being  used  for
pulmonary  drug delivery: nebulizers, metered dose inhalers  ("MDIs"),  and
dry  powder  inhalers  ("DPIs").  Each  of  these  systems  was  originally
developed to treat lung diseases and produces a local therapeutic effect by
depositing  aerosolized medication on the large conducting airways  of  the
lung.  The  effectiveness of these devices depends upon  proper  inhalation
technique  to  produce a consistent, reproducible dose.  In  addition,  the
ability  of these technologies to improve the management of major pulmonary
diseases  has  been limited by their inability to compensate  automatically
for  poor  patient  technique  or provide physicians  with  information  on
patient inhalation and dosing patterns.

      Nebulizers.   Nebulizers  are primarily used  in  hospitals  for  the
treatment  of respiratory diseases, such as asthma. Liquid drug  is  loaded
into  the  nebulizer prior to each use, and the patient breathes through  a
mouthpiece  or  mask as the continuous fog of drug particles  is  produced.
Because  nebulizers  require an external power  source  or  compressed  gas
supply,  they  are not easily portable. Although drugs in liquid  form  are
easily  converted  to  an aerosol, nebulizers are inefficient  and  require
several  minutes  to  administer  a  single  dose  of  medication.  Because
nebulizers  produce a wide range of particle sizes, the majority  of  which
are  too  large  to  reach the alveoli, these devices are  impractical  for
systemic delivery.

      MDIs.   Metered  dose  inhalers, the  most  widely  used  system  for
pulmonary drug delivery, have been in existence for over 40 years  and  are
used  to  deliver asthma drugs. The drug is packaged in a portable canister
as   a   suspension  or  solution  in  a  volatile  propellant,   typically
chlorofluorocarbons ("CFCs"). To self-administer a drug, the  patient  must
depress  the  canister, releasing a high-velocity jet of aerosolized  drug,
while  inhaling slowly and evenly. Although widely used, there are  certain
inherent  problems with the use of MDIs. A patient must properly coordinate
inhalation  and activation of the aerosol jet to optimize the effectiveness
of  treatment.  Several  clinical studies have demonstrated  that  patients
routinely  use MDIs improperly, resulting in ineffective therapy.  Much  of
the  drug is deposited at the back of the throat and swallowed, rather than
reaching the desired location in the lung. Many leading asthma specialists,
however,  believe that MDIs, when used properly, can effectively  manage  a
significant  percentage of asthmatics. Although spacer  devices  have  been
developed  to address the problem of press-and-breathe coordination,  these
devices  do  not  fully  address  problems with  inhalation  technique  and
compliance  monitoring.  Moreover, because MDIs produce  a  wide  range  of
particle  sizes, only a small portion of which reach the alveoli, they  are
not optimal for the delivery of systemic therapies.

      DPIs.   Dry  powder inhalers, which are also used  to  deliver  drugs
locally  to  the  lung, have been and are being developed by pharmaceutical
companies  to  replace CFC-based MDI systems. DPI drugs are  formulated  in
solid  form  and  packaged in portable containers. Patients self-administer
the  drug  by  inhaling small, dry particles. Dry powder drug  formulations
present a considerable challenge for pharmaceutical chemists because  drugs
must be prepared as solids, must tolerate storage in a solid phase and must
facilitate  rapid and complete dispersion as an aerosol  at  the  point  of
delivery.  Although  DPIs have been used for the delivery  of  some  asthma
drugs,  several  companies are exploring the development of  DPIs  for  the
systemic delivery of other compounds, including proteins and peptides.

Aradigm Technology

     Existing systems for pulmonary drug delivery generally fail to achieve
precise, reproducible delivery of the desired drug dose, either locally  or
systemically.  Aradigm  believes  that  its  two  product  platforms,   the
SmartMist  system  and  the AERx system, may be  capable  of  improving  or
enabling a wide range of pulmonary drug delivery applications. Aradigm  has
combined  core competencies in physics, electrical engineering,  mechanical
engineering  and  pharmaceutical sciences to overcome  the  limitations  of
conventional  pulmonary  drug  delivery systems.  Through  this  integrated
approach, the Company has developed technologies which address each of  the
four  key  elements which it believes are required for the  development  of
effective pulmonary drug delivery products:

          *      Ease  of  Drug  Formulation:   The  Aradigm  systems  take
          advantage  of existing drug formulations, including standard  MDI
          formats   and   liquid  drug  formulations,  thereby  potentially
          reducing  formulation risks compared to other pulmonary  delivery
          technologies.  In  addition, liquid formulations  facilitate  the
          generation  of  small particle aerosols necessary  for  efficient
          delivery to the alveoli.

          *      Efficient  Precision  Aerosol  Generation:   Aradigm   has
          developed  a  proprietary aerosolization  technology  capable  of
          producing low velocity, small particle aerosols at the  point  of
          delivery for efficient deposition of drug in the alveoli. Through
          this technology, the Company believes it is able to overcome  the
          limitations  of conventional pulmonary drug delivery  systems  in
          which particle size and velocity cannot be optimized for systemic
          delivery.

          *      Automated   Breath-Controlled  Delivery:    Since   proper
          inhalation  technique  is needed to achieve  effective  pulmonary
          drug  delivery,  Aradigm's  systems are  designed  to  guide  the
          patient  to inhale slowly and evenly and to automatically deliver
          a drug aerosol early in the breathing cycle.

          *    Patient Compliance Monitoring:  Because patient adherence to
          prescribed  dosing  regimens  is  an  important  determinant   of
          therapeutic benefit, Aradigm's systems are also being designed to
          record   drug  administration,  inhalation  patterns  and   other
          relevant  physiological  information for  use  by  physicians  to
          analyze  and  optimize  patient treatment  regimens  and  improve
          patient outcomes.

Aradigm  is seeking to exploit various combinations of these four  elements
to  develop  pulmonary drug delivery systems which overcome the limitations
of  existing  systems  or  enable pulmonary delivery  of  drugs  which  are
currently not deliverable systemically via the lung.

SmartMist System

      The  SmartMist system incorporates the Company's breath  control  and
compliance  monitoring  technologies for use with  standard  MDIs  for  the
treatment  of asthma and other respiratory diseases. The initial  SmartMist
product,  which has been approved by the FDA and is expected to be launched
in  the second half of 1997, is a hand-held, battery-operated aerosol  drug
delivery  system.  The patient inserts a standard MDI  into  the  SmartMist
device and inhales normally through the mouthpiece. Indicator lights on the
device  switch from red to green to guide the patient to inhale slowly  and
evenly  within a predetermined range suitable for drug delivery.  When  the
desired flow rate is established early in the inspiratory cycle, the MDI is
automatically  actuated  by  the SmartMist  system.  The  delivery  of  the
medication   is   breath  controlled,  rather  than   manually   activated,
eliminating  the need for the patient to coordinate pressing and  breathing
while using an MDI.

      The microprocessor-controlled SmartMist system contains an electronic
air  flow  transducer and automatically calculates flow  rate  and  volume.
Additionally,  the  SmartMist system incorporates an electronic  peak  flow
meter, which quantitatively measures the effect of therapy when the patient
exhales though a separate mouthpiece attached to the device. The peak  flow
rate is displayed to the patient and recorded in the internal memory of the
product.  Each  system  can  store approximately  90  days  worth  of  drug
administrations, inhalation patterns and pulmonary function data  that  can
be downloaded into a computer for review by the patient and the health care
professional to enhance patient management and compliance.

AERx System

      The  AERx  system  is  a novel drug delivery  system  that  is  being
developed  to  enable  pulmonary  delivery  of  a  wide  range  of   liquid
pharmaceuticals for local or systemic effect. The AERx system is based on a
proprietary   aerosol  generation  technology  capable  of  producing   low
velocity,  small  particles suitable for delivery to the alveoli.  By  also
incorporating  the  Company's  proprietary breath  control  and  compliance
monitoring  technologies,  the AERx system  is  designed  to  optimize  the
delivery of aerosolized medications to the lung. The AERx system, which  is
currently  being tested in a clinical bench prototype form, will aerosolize
liquid  drug  formulations that are pre-packaged in proprietary  unit  dose
packages for inhalation. Each unit dose package is comprised of (i) a small
blister  package  which  stores  a liquid  drug  formulation  and  (ii)  an
aerosolization  nozzle  consisting of a porous  membrane  incorporating  an
array of micromachined holes.

     The AERx system creates a respirable aerosol by releasing a mechanical
piston  that  is activated automatically when the patient's  inhalation  is
optimal  for  drug  delivery. The piston compresses  the  blister  package,
thereby  forcing  open  the sealed channel and extruding  the  liquid  drug
through  the aerosolization nozzle. The aerosolized drug produced  by  this
process  is  then  inhaled through the mouthpiece of the AERx  device.  The
extrusion   of  the  liquid  drug  through  the  disposable  nozzle   takes
approximately one second and produces a low velocity, fine particle aerosol
for  optimized deposition within the lung. The force applied to  drive  the
liquid  through  the nozzle and the diameter of the nozzle holes  influence
the  size  of the droplets or particles that form the emitted aerosol.  The
size  of  the  micromachined holes within the  single  use  nozzle  can  be
adjusted for each specific clinical application, including the creation  of
larger  particles for delivery of drug to the large conducting  airways  of
the  lung for local effect or smaller particles for delivery of drug to the
deep lung for systemic effect.

      Formulations developed for use in the AERx system are in liquid form,
typically  using an aqueous-based solvent, similar to those  employed  with
nebulizers.  No  propellants, such as the CFCs used in MDIs,  are  required
since  mechanical pressure is used to generate the aerosol. Moreover, since
the  drug is stored in unit dose packages, preservatives may not be  needed
for some applications, further simplifying the formulation process.

      The  AERx  system employs the same patented technology  used  in  the
SmartMist system to measure precisely the airflow through the device  while
the  patient  is  inhaling.  Breath control ensures  that  the  patient  is
breathing  the same way each time a dose of aerosolized drug is  delivered.
As a result, essentially the same dose of medication is delivered each time
the product is used.

     Compliance monitoring technology similar to that used in the SmartMist
system  has been designed for the AERx system. Information about each  drug
administration,  including dosage, breathing technique and  other  relevant
physiological parameters are recorded automatically for later review by the
patient and health care professional. The Company expects to customize  the
software  embedded  in  the  AERx  device for  the  particular  therapeutic
application  in  order to collect and present the data  most  relevant  for
managing each patient type. The Company believes that the combined features
of  the  AERx  product  will  make the AERx  system  an  effective  disease
management tool.

Strategy

      Aradigm's  goal  is  to  become  a  leader  in  the  development  and
commercialization  of  pulmonary  drug  delivery  products.  The  Company's
strategy incorporates the following principal elements:

     Focus on Near-Term Product Opportunities:  The Company is focusing its
initial commercial development efforts on product opportunities which  have
the  potential  to  reach  the market quickly.  The  Company  designed  the
SmartMist  Asthma Management System specifically to take advantage  of  the
shorter  regulatory cycle for 510(k) approvable products. In addition,  the
Company is developing a diagnostic application of its AERx technology which
may   have   a   shorter  regulatory  approval  process  than   therapeutic
applications of the AERx system. Many of the Company's initial  therapeutic
development programs will target previously approved and widely used drugs.
For  example, the first AERx therapeutic product for which an IND was filed
was  the  AERx Pain Management System for the delivery of morphine. Because
morphine  is a well characterized drug with a demonstrated safety  profile,
the   Company  believes  the  AERx  Pain  Management  System  carries  less
development  risk than new drug development projects and may  require  less
time  for regulatory approval. Nevertheless, there can be no assurance that
the  Company  can secure regulatory approval for its potential products  or
that the Company can successfully develop or market any such products.

      Establish  Broad Applicability:  The Company believes that  its  AERx
technology  can  effectively  deliver  many  pharmaceutical  products.  The
Company  is  conducting  feasibility studies on a number  of  compounds  to
demonstrate  the  applicability of the AERx system  to  a  broad  range  of
molecule sizes and types, including proteins, peptides and small molecules.
The  Company  plans  to  publish results from these and  other  studies  to
promote  the  acceptance  of the AERx system as  a  viable  pulmonary  drug
delivery  technology for a wide variety of compounds. The Company  believes
this  strategy will maximize the number of commercial product opportunities
for Aradigm and will increase the interest of potential partners to develop
drugs for the AERx system, thereby reducing the Company's dependence on any
single product.

      Establish  Collaborative Relationships:   In  order  to  enhance  its
commercial  opportunities  and  effectively leverage  its  core  scientific
resources,   Aradigm   intends   to  enter  into   multiple   collaborative
relationships for the development of new products and for the marketing and
sale  of  products utilizing its technologies. Through product  development
collaborations,  Aradigm  will  seek access to  proprietary  pharmaceutical
compounds  as well as to the resources and expertise necessary  to  conduct
late  stage  clinical trials and obtain regulatory approvals. In  addition,
the  Company  will  pursue  relationships with  pharmaceutical  and  device
companies  with established sales forces and distribution channels  in  the
Company's target markets. By establishing such collaborative relationships,
Aradigm intends to introduce multiple new products while avoiding the  need
to  establish  drug discovery research and sales and marketing capabilities
for  each target market. Nevertheless, the Company has not established  any
corporate development collaborations and there can be no assurance that  it
will be able to do so on reasonable terms, or at all.

       Build  Strong  Proprietary  Position:   The  Company  believes  that
establishing a strong proprietary position in pulmonary drug delivery could
provide  an  important  competitive advantage in its  target  markets.  The
Company has aggressively pursued patent protection of its technology and as
of  March 1, 1997 has 19 issued United States patents and has more than  20
United  States patent applications pending. When appropriate,  the  Company
also seeks international patent protection. While there can be no assurance
that  any  of  the Company's patents will provide a significant  commercial
advantage,  these patents are intended to provide protection for  important
aspects  of the Company's technology, including aerosol generation,  breath
control, compliance monitoring and unit dose formulation. In addition,  the
Company  is developing in-house manufacturing capability for the production
of  certain components of its products, including the disposable unit  dose
package for the AERx system, to further protect its core technologies.

Aradigm Product Applications

The SmartMist System

      The  Company is initially developing the SmartMist technology  to  be
applied  to asthma management with the SmartMist Asthma Management  System.
In  the  future, the SmartMist platform may be utilized to develop products
for other lung diseases, such as cystic fibrosis, emphysema and COPD.

SmartMist Asthma Management System

      The  Company has developed the SmartMist Asthma Management System  to
ensure  proper  breath control and compliance by MDI-using  asthmatics.  By
improving the self-administration of MDIs, the Company believes that  these
patients  will be better managed, have fewer symptoms and will  make  fewer
visits  to  the  emergency  room, resulting in improved  patient  care  and
reduced health care expenses.

      Asthma is an inflammatory disease process characterized by abnormally
high responsiveness of the tracheobronchial tree to a multitude of stimuli,
such  as dust, pollen and stress. The hallmark of the disease is reversible
airway  obstruction,  and the characteristic wheezing  sounds  are  due  to
narrowing of the airways.

      Of  the  estimated  12  million  asthmatics  in  the  United  States,
approximately  one  million severe asthmatics consume  a  majority  of  the
nearly $4.5 billion which is spent annually in the United States for direct
health  care costs related to the treatment of asthma. Over half  of  those
dollars   is  spent  on  hospital  care,  including  approximately  450,000
hospitalizations  and 1.5 million emergency room visits occurring  annually
in  the  United  States for acute asthma incidents.  Asthma  is  a  chronic
disease which, if properly treated, should not progress to crisis stage. It
is  believed  that most hospitalizations for treatment of asthma  represent
patient management and compliance failures. The Company believes that there
is  a  significant  market opportunity to improve  patient  management  and
compliance, thereby minimizing patient utilization of costly acute care and
overall reducing the cost of asthma management.

      Studies  have  shown  that  up to 70%  of  patients  use  their  MDIs
incorrectly  and that nearly 50% of patients revert to incorrect  technique
following   retraining.  Even  patients  who  have   good   technique   are
inconsistent  in  applying it, especially during an  acute  asthma  attack.
Proper  technique  is  particularly important for  patients  using  topical
steroids, drugs which treat the underlying inflammation that causes asthma,
but do not act immediately or provide palliative benefits. Inhaled steroids
can  take  six  to  eight  weeks to effect improvement  noticeable  to  the
patient.  With  no immediate relief of symptoms providing feedback  to  the
patient,  there  is no way for patients to know if they have  received  the
intended drug dose.

      The  management of asthma can also be improved by monitoring  patient
compliance  with  the prescribed therapy and recording the  effect  of  the
therapy. Peak flow, defined as peak velocity achieved during maximum forced
exhalation, is a direct indicator of airway obstruction. Routine peak  flow
measurement  has  been generally recommended by pulmonary specialists,  but
many patients do not diligently take and record these measurements.

      The  Company  believes  that  its  SmartMist  system  is  capable  of
addressing  MDI limitations, such as improper inhalation, improperly  timed
release of the aerosol, and the lack of information regarding patient usage
and patient lung function following usage. Without modifying the MDI or the
drug itself, the SmartMist device is designed to assist the patient in self-
administering the drug while inhaling in an optimal manner, guided  by  the
breath  indicator  lights on the device. The built-in peak  flow  meter  is
designed  to  allow  patients to track their  own  lung  function  so  that
patients  can  anticipate  asthma exacerbations in  time  to  modify  their
therapy.  In  addition,  the device is designed to  compile  data  on  drug
delivery events and lung function readings so that a complete record can be
reviewed by health care professionals.

       Aradigm  has  completed  a  radiolabeled  asthma  drug  study   that
demonstrates the benefits of the breath control technology incorporated  in
the  SmartMist system. In addition, the Company has completed two  clinical
studies  to  support  market  adoption of the SmartMist  Asthma  Management
System.   The  first  study, which involved 40 patients  with  asthma,  was
conducted at the University of California at San Francisco and the National
Jewish Hospital in Denver and compared the technique of patients using  the
SmartMist  system with the technique of other patients using MDIs  equipped
with  the  Technique Assessor, a research device developed  by  Aradigm  to
measure  how patients actuate and inhale through conventional  MDIs.   This
study  showed  that patients in the SmartMist group had significantly  more
MDI  inhalations rated as "correct" (91% versus 46%).  The second study was
conducted  at  Northwest  Asthma and Allergy in  Seattle  and  involved  13
steroid-dependent adolescent patients with asthma.  The SmartMist was given
to  all  13  patients  and  used  to evaluate  patient  compliance  with  a
medication  regimen  and to accurately assess how reliably  and  accurately
patients recorded this information in peak flow diaries.  Although  patient
diaries  indicated  that  all patients were at least  80%  compliant,  data
recorded  by  the  SmartMist revealed that only five  of  the  13  patients
studied were 80% compliant with the prescribed medication regimen.

      A  prototype  of  the  SmartMist Asthma Management  System  has  been
developed  for  use in clinical testing and received 510(k) clearance  from
the  FDA  in  May  1996. While the Company has established its  Respiratory
Products  Business Unit to market the SmartMist product, there  can  be  no
assurance  that the Company can successfully market the product.  Moreover,
there  can  be  no assurance that the Company will be able  to  develop  or
manufacture  a  version of the SmartMist Asthma Management System  suitable
for  commercialization  that can be marketed without additional  regulatory
filings or approvals.

      Depending  on  manufacturing costs and  other  factors,  the  Company
believes  that  the  price to consumers of the Company's  SmartMist  Asthma
Management System will be approximately $500 per unit.

The AERx System

      The  Company is developing the AERx platform based on a comprehensive
approach to pulmonary drug delivery that includes drug formulation, aerosol
generation,  patient breath control and compliance monitoring technologies.
The  Company  believes that the AERx system will be broadly  applicable  to
drugs  that are intended for systemic delivery, for local delivery  to  the
lung or for pulmonary diagnostics. The Company currently is developing AERx
products   for   pain   management,  diabetes  management   and   pulmonary
diagnostics.  In  addition, the Company is planning  to  develop  the  AERx
system  for  the  non-invasive delivery of certain other  drugs,  including
proteins and biotechnology drugs.

AERx Pain Management System

      The  Company is developing the AERx Pain Management System as a  non-
invasive,  patient-controlled pulmonary drug delivery product for treatment
of  chronic  and  acute pain. In March 1996, the Company's IND  application
covering  the use of AERx to deliver morphine for the management  of  acute
pain  cleared  the  FDA  review period and the Company  completed  Phase  I
clinical  testing  in  December 1996.  Preliminary  results  from  Phase  I
testing  of  a  prototype AERx Pain Management System for the  delivery  of
morphine  via the lung demonstrated that delivery of morphine to the  blood
supply  was as rapid as with intravenous administration.  In addition,  the
reproducibility of morphine delivery using the AERx system  was  comparable
to morphine delivered intravenously.

      The  pain  management  market includes patients  with  cancer,  post-
operative and chronic persistent pain. Pharmaceutical care is the  mainstay
of  pain  treatment  and dominates the pain management market.  The  United
States market for drugs and devices used in pain management is estimated to
be  more  than $15 billion annually. The Company believes that non-invasive
rapid treatment of breakthrough pain is a major unmet medical need.

      Aradigm has targeted cancer pain as one of the first indications  for
the  AERx  Pain  Management  System. As of  the  end  of  1995  there  were
approximately  3,000,000 patients with active cancer in the United  States.
Based on published reports, the Company believes that approximately 45%  of
such  patients report suffering from pain, with nearly half of those cancer
patients  reporting  that  their pain was  not  alleviated  by  their  pain
management therapy.

      Conventional drug delivery methods for pain management include  oral,
transdermal  patch,  intravenous  ("IV"),  intramuscular  and  subcutaneous
delivery.  Patient controlled analgesia ("PCA") products allow patients  to
self-administer pain medication on demand from a microprocessor  controlled
intravenous  infusion pump. PCA systems have proven to be a  cost-effective
means  of intravenous delivery in the hospital setting. Widespread adoption
of  PCA  outside  of  the  hospital,  however,  has  been  limited  by  the
requirement  for  an  intravenous delivery site that requires  regular  and
expensive  maintenance. Home PCA can cost as much as $4,000 per month,  due
partially to the home nursing required to maintain the needle site.

      The  Company  believes that a patient controlled,  non-invasive  drug
delivery  system  that  provides  for  rapid  uptake  of  medication  could
significantly expand the outpatient market for pain management. Features of
the  Company's  AERx Pain Management System are expected to be  similar  to
those  of  PCA  products,  but  will not be limited  by  the  necessity  of
intravenous  or subcutaneous access. The AERx product is being designed  to
be programmed to allow for patient-activated delivery in accordance with  a
physician-directed dosing program. Lock-out mechanisms being  designed  for
the  product  should  eliminate the risk of  inappropriate  dosing,  and  a
patented   electronic   patient  identification  feature   should   prevent
unauthorized  use of the device. An automatically maintained  dosing  event
diary  to  be  embedded  within the AERx device is designed  to  allow  the
physician  to closely monitor patient use. The Company believes that  these
features of the AERx platform combined with the inherent speed of onset  of
pulmonary delivery should provide a significant advance in ambulatory  pain
management.

      The  Company has completed a phase I clinical trial of the AERx  Pain
Management  System  for the delivery of morphine via  the  lung.   The  two
center study was conducted at Harris Laboratories in Lincoln, Nebraska  and
at  Massachusetts General Hospital in Boston.  The studies, which  involved
30  healthy  volunteers,  demonstrated that  morphine  delivered  via  AERx
reaches peak levels in the blood at approximately the same time as morphine
delivered via the intravenous route to the same subjects.  In addition, the
variability  in  measured  morphine blood  levels  observed  following  the
delivery  of  morphine via AERx was shown to be the same as the variability
following IV administration to the same volunteers. The Company is pursuing
corporate partners to collaborate on further development and testing of the
AERx Pain Management System.

AERx Diabetes Management System

      The  Company  is  developing the AERx Diabetes Management  System  to
permit  diabetes  patients to non-invasively self-administer  insulin.  The
Company   believes   that  when  provided  with  a  non-invasive   delivery
alternative  to  injection,  patients are more  likely  to  self-administer
insulin  as  often as needed to keep tight control of their  blood  glucose
levels.   The  Company  has  completed  two  clinical  feasibility  studies
delivering  insulin with the AERx Diabetes Management System.  The  studies
demonstrated  that insulin delivered via a prototype of the  AERx  Diabetes
Management  System  achieved maximum blood glucose  reductions  in  healthy
fasting  volunteers  in  half the time required  for  subcutaneous  insulin
injections.  The reductions in blood glucose levels were also at  least  as
reproducible   in  both  magnitude  and  time  to  maximum   reduction   as
subcutaneous injections.  Clinical testing will continue in 1997.

     In healthy individuals, the pancreas secretes insulin, which helps the
body to regulate blood glucose levels. Patients with Type I diabetes do not
have  the ability to produce their own insulin and must self-inject insulin
regularly  to  control their disease. Patients with Type  II  diabetes  are
unable to use efficiently the insulin that their body produces. While  they
may have some impairment in their ability to produce insulin as well, it is
the  defect in their ability to use insulin efficiently that leads  to  the
addition  of  insulin  to  their  treatment  program.  By  increasing   the
circulating  insulin  concentration,  the  inefficiency  can  be  partially
overcome.  The  Diabetes  Control and Complications  Trial  ("DCCT")  study
sponsored by National Institutes of Health from 1983 to 1993 indicated that
insulin  should  be  given  throughout the day in  response  to  frequently
measured  blood  glucose levels. The DCCT study showed that  keeping  blood
glucose  levels  as  close  to  normal as  possible  slows  the  onset  and
progression of eye, kidney and nerve diseases often caused by diabetes.  In
fact,  the  DCCT  study demonstrated that any sustained lowering  of  blood
glucose  levels  is beneficial, even if the person has a  history  of  poor
blood glucose control.

      The Company believes that approximately 700,000 Americans suffer from
Type  I  diabetes.  Virtually all of them are on  daily  insulin  injection
therapy,  and most are currently monitoring their own blood glucose  level.
It  is  believed that more than 13 million Americans suffer  from  Type  II
diabetes,  of which approximately 50% are not yet diagnosed. Although  most
of  this Type II population does not currently use insulin as part of their
therapy,  in  aggregate they consume the majority of insulin  used  in  the
United  States,  due  to their larger numbers. The insulin  market  in  the
United States was expected to exceed $850 million in 1996. The direct costs
associated  with  diabetes  are estimated to be greater  than  $45  billion
annually.

      Patients  with  diabetes often avoid or limit the amount  of  insulin
therapy because of the pain and inconvenience of administering the drug  by
injection.  The  Company believes that its AERx Diabetes Management  System
can  provide  a non-invasive method for delivery of insulin that  would  be
efficacious  and  reproducible. Such a system should support  diabetics  in
complying with their insulin therapy, thereby lessening the risk  of  long-
term complications.

AERx Diagnostic System

     The Company believes that the same technologies that may make the AERx
system  a precision pulmonary drug delivery system can be applied  to  more
safely  deliver  radiolabeled  imaging  agents  to  diagnose  certain  lung
conditions  than  currently available methods. In an early clinical  study,
the  Company demonstrated that the AERx Diagnostic System was effective  in
delivering technetium DTPA ("(99m)Tc-DTPA"), a commonly used agent for lung
imaging.

      Radiolabeled imaging agents ("radiopharmaceuticals") are widely  used
for  the  diagnosis  of a variety of cardiopulmonary  conditions,  such  as
pulmonary embolism. The radiopharmaceutical is imaged by a gamma camera  in
a  process called ventilation lung scanning. Ventilation lung scans require
that  patients  inhale  either  radioactive  gas  or  radiolabeled  aqueous
solution  of  aerosol  delivered to the lung via  conventional  nebulizers.
Because nebulizers are inefficient and result in inconsistent deposition of
particles  in  the lung, they often require a relatively higher  amount  of
radiopharmaceutical  to  produce  an  adequate  scan.   Additionally,   the
nebulization process can take several minutes, which increases the risk  of
undesirable radiation exposure for the patient and attending staff.

      The  Company  estimates that approximately 800,000  ventilation  lung
scans are performed in the United States each year at a cost of about  $200
million.  The radioactive materials used in ventilation lung scans  in  the
United  States  are  prepared  at radiopharmacies  located  throughout  the
country which supply these materials to hospitals and clinics.

     The Company believes that its AERx technology can provide an effective
and  safe alternative to nebulizers for supplying radiopharmaceuticals  for
ventilation  lung  scans.  The Company intends  to  supply  its  unit  dose
packaging equipment to radiopharmacies to allow the pharmacies to fill  and
seal  single-use doses of (99m)Tc-DTPA to be used with the AERx  Diagnostic
System  for  ventilation  lung scans. The Company believes  that  the  AERx
Diagnostic  System  will  use less radioactive material  and  will  provide
better    image    quality   for   diagnosis.   Moreover,    because    the
radiopharmaceutical is self-contained and does not need  to  be  nebulized,
the  amount  of  ambient  radiation can be substantially  reduced,  thereby
minimizing staff exposure to radiation.

      The  AERx  Pulmonary  Diagnostic System has been  shown  in  multiple
clinical  feasibility studies to deliver efficiently and  reproducibly  the
same radiolabeled aqueous solution to the lungs of healthy volunteers as is
currently used with nebulizers for ventilation lung imaging, and the images
produced  were  of the same high quality as those generated  using  krypton
gas,  the "gold standard" for nuclear imaging. One study demonstrated  that
the  quality of lung images produced with the AERx system in patients known
to  have  COPD  was  also equivalent to existing methods.  The  Company  is
currently  investigating  the regulatory path  for  approval  of  the  AERx
Diagnostic System for sale in the United States and abroad and is exploring
development   partnerships   with   contract   research   and   development
organizations.

Additional Potential AERx Applications

      The Company is evaluating the use of the AERx system to deliver other
pharmaceutical compounds including three compounds which are proprietary to
the  Company's two corporate partners.  Two of these compounds are entering
clinical  evaluation  with  the AERx system. The Company  has  successfully
evaluated  a  number  of  compounds in in vitro  and  in  vivo  feasibility
studies.  The  Company has approved protocols with the  Royal  North  Shore
Hospital  in  Sydney, Australia for the clinical evaluation  of  additional
drugs  often  used  for  pain management. Aradigm  is  considering  further
feasibility  studies  with  anti-infectives, peptides,  proteins  and  gene
vectors for the treatment of asthma, other severe chronic diseases  of  the
respiratory tract, and systemic diseases.

     The Company believes that the AERx system may have applicability for a
range  of  compounds developed by biotechnology companies  that  cannot  be
delivered  orally.  Due to their large size and poor oral  bioavailability,
macromolecules  developed  by  the  biotechnology  industry  are  typically
developed  in  liquid formulation and delivered by injection.  The  Company
believes  that  the  AERx  platform can potentially  provide  for  improved
delivery   and  broader  applications  of  these  therapies  or   potential
therapies.  The  Company is currently conducting two  clinical  feasibility
studies,  under  the sponsorship of two pharmaceutical companies,  for  two
proteins  currently marketed for systemic delivery.  The  Company  is  also
conducting a clinical feasibility study, under the sponsorship of a  second
pharmaceutical company, for a small molecule for systemic delivery.

     The Company believes that its technology can be applied to many new or
approved  pharmaceutical and biological compounds in addition  to  morphine
and insulin. A partial list of compounds that have been evaluated or may be
evaluated appears below (asterisks indicate compounds which the Company has
successfully aerosolized in preliminary in vitro tests).

    Pharmaceutical                  Biologicals

    Albuterol*      Midazolam*      Alpha Interferon   Gamma Interferon
    Beclomethasone* NSAIDs          Calcitonin         Growth Hormone
    Cromolyn*       Pentamidine     DNAse*             IGF-1
    Fentanyl*       Sumatriptan     Erythropoietin*    
    Levorphanol     Triamcinolone                      

The  Company has not acquired rights to develop applications for any of  the
proprietary  compounds listed above and may not pursue or be  successful  in
acquiring such rights.

Manufacturing

      The Company plans to build manufacturing facilities for the production
of  certain components of its drug delivery systems that it considers to  be
key  to  its  core  technologies. These may include the  production  of  the
disposable  aerosol generating nozzles, the assembly of the disposable  unit
dose  packages and the sterile filling of drug into the unit dose  packages.
The  Company also may complete the final calibration, assembly and packaging
of the AERx and SmartMist systems to control both quality and cost.

      The  Company  may  seek  to have many key components,  assemblies  and
subassemblies  completed by contract manufacturers. These  may  include  the
assembly  of printed circuit boards, the production of application  specific
integrated  circuits ("ASICs"), the production of mechanical assemblies  and
the  production  of specific plastics and laminates for the disposable  unit
dose  packages. In some cases, the Company may choose to license  commercial
partners  to  produce  some  of the disposable unit  dose  packages  in  the
partner's own facilities.

      The  Company  is  in the process of scaling up the production  of  the
SmartMist   Asthma  Management  System  with  the  assistance  of   contract
manufacturers.  Significant  additional work  must  be  completed  prior  to
commercialization.  In  addition, the Company is  in  the  early  stages  of
producing  clinical supplies of disposable unit dose packages  for  clinical
trials  of the AERx system. The Company is building a sterile pharmaceutical
packaging  production line sufficient to meet the capacity requirements  for
clinical  trials and initial product sales, if any. The Company  anticipates
making significant expenditures to provide for the high volume manufacturing
required  for  multiple  AERx products, if such  products  are  successfully
developed. Although the Company is working with contract manufacturers  that
are  experienced in medical device manufacturing, there can be no  assurance
that  the Company will be able to complete the scale-up process in a  timely
manner or that significant problems will not be discovered during the scale-
up process.

      Although  the  majority  of the materials  to  be  used  in  Aradigm's
potential  products  are  readily available from multiple  sources,  certain
materials,  including  the  ASICs,  microprocessors,  plastics  and  plastic
laminates,  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 manufacturers for such
components.  Even if new suppliers are secured, there can  be  no  assurance
that  this  would not significantly reduce the Company's ability  to  supply
product during any transition.

Competition

     The Company faces intense competition. Several companies are developing
and  marketing nebulizer, MDI and DPI devices as well as other drug delivery
approaches.   Aradigm  is  aware  that  a  number  of   pharmaceutical   and
biotechnology  companies  and  research  institutions  are  working  on  the
pulmonary  delivery  of peptide and protein dry powders.  There  can  be  no
assurance   that  competitors  will  not  introduce  products  or  processes
competitive  with, or superior to, those under development by  the  Company.
The  Company faces intense competition to develop a solution to non-invasive
delivery  from  a  number  of  drug delivery and  pharmaceutical  companies,
including: Astra AB, Boehringer Ingelheim, Dura Pharmaceuticals, Inc., Fluid
Propulsion  Technologies, Inc., Forest Labs, Glaxo  Wellcome,  Inc.,  Inhale
Therapeutic Systems, Ivax (Norton), Medeva Ltd., Rhone-Poulenc Rorer (Fisons
Limited),  Schering Plough and 3M. Many of these companies are  much  larger
and  have  far greater resources than Aradigm. This list includes  companies
working  on  developing systems for other non-invasive routes  of  delivery,
such  as  oral,  transdermal  and  intranasal  administration,  as  well  as
companies  working  on  pulmonary delivery systems.  New  drugs  or  further
developments  in  alternative  drug delivery  methods  may  provide  greater
therapeutic  benefits  for  a  specific drug  or  indication  or  may  offer
comparable  performance  at lower cost, than the  Company's  pulmonary  drug
delivery systems under development.

Intellectual Property and Other Proprietary Rights

      The Company's business and competitive position is dependent upon  its
ability  to  protect  its proprietary technology and  avoid  infringing  the
proprietary rights of others.

     The Company relies on patents, patent applications and trade secret law
to  protect its proprietary technology. As of March 1, 1997 the Company  has
19 United States patents and presently has more than 20 United States patent
applications  pending. There can be no assurance that any of  the  Company's
patent  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  compete
profitably  against  its competitors. Patents can not  prevent  others  from
developing  alternative  technologies which are used  for  aerosolized  drug
delivery and patent applications do not provide any exclusivity until and if
they  are  issued as a patent. Because the general idea of aerosolized  drug
delivery  is  well  established,  no entity  may  obtain  patent  protection
covering all forms of aerosolized delivery of all types of drugs. There  can
be  no  assurance that others have not independently developed or  will  not
develop  devices, components and methods of aerosolized drug  delivery,  and
obtained  or  will obtain patents on such, which patents could  be  used  to
prevent the Company from making, using or selling its patented technology.

      The  Company's  success will depend on its ability to obtain  patents,
maintain  trade secrets and operate without infringing upon the  proprietary
rights  of  others.  A  substantial number of patents have  been  issued  to
competitors  in  the  field of aerosolized drug delivery.  These  and  other
competitors  and  institutions may have applied for other  patents  and  may
obtain  additional patents and proprietary rights relating  to  products  or
processes  similar to those of the Company. The Company may not be  able  to
obtain a license under any such patent and therefore could be prevented from
making  products  or  carrying out processes that may be  important  to  the
business of the Company.

      The  Company  has carried out and continues to carry out  searches  of
publications,  including  patents  and scientific  papers  relating  to  the
business of the Company. These searches are supplemented by searches done by
examiners  in  the  United  States Patent Office and  other  patent  offices
reviewing  patent applications of the Company. Many entities  are  obtaining
patents and publishing papers in the field of aerosolized delivery and there
can  be no assurance that the searches carried out by the Company have found
the  most relevant publications. Thus, patents may exist which would provide
competitors with the ability to prevent the Company from making  or  selling
its products. Further, existing and future patents or other publications may
hinder  or prevent the Company from obtaining patents or draw into  question
the validity of patents already issued to the Company.

      The Company's current policy is to file patent applications on what it
deems  to  be  important technological developments which  might  relate  to
products  of  the  Company or methods of using such products.  To  date  all
inventions  have originated in the United States and all patent applications
were  originally  filed  in the United States. The  Company  also  seeks  to
protect  these  inventions  through  foreign  counterpart  applications   in
selected   other  countries.  The  Company  currently  has  National   Phase
applications  pending  in  patent offices  outside  of  the  United  States.
Statutory  differences in patentable subject matter may limit the protection
the  Company  can  obtain on some of its inventions outside  of  the  United
States.  For example, methods of treating humans are not patentable in  many
countries  outside of the United States. These and other issues may  prevent
the  Company from obtaining patent protection outside of the United  States.
Further,  competitors  may  have  obtained  or  could  later  obtain  patent
protection outside of the United States which would prevent the Company from
making,  using or selling products or processes of its business in countries
other than the United States.

      The  Company  pursues  a  policy of having  its  officers,  employees,
consultants  and  advisors  execute proprietary  information  and  invention
agreements upon commencement of their relationships with the Company.  These
agreements provide that all confidential information developed or made known
to  the  individual  during  the course of the relationship  shall  be  kept
confidential  except  in  specified  circumstances.  These  agreements  also
provide  that  all inventions developed by the individual on behalf  of  the
Company  shall  be  assigned to the Company and  that  the  individual  will
cooperate with the Company in connection with securing patent protection  on
the invention if the Company wishes to pursue such protection. 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.

Government Regulation

      All  medical devices and 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.  If
these  products  are  marketed  abroad, they  also  are  subject  to  export
requirements  and  to  regulation  by foreign  governments.  The  regulatory
clearance process is generally lengthy, expensive and uncertain. The Federal
Food, Drug, and Cosmetic Act (the "FDC Act"), and other federal statutes and
regulations,  govern  or  influence the development,  testing,  manufacture,
labeling,  storage, approval, advertising, promotion, sale and  distribution
of such products. 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 the  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  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. Sales of the Company's products outside of  the
United  States are subject to foreign regulatory requirements that may  vary
from  country  to  country. The time required to  obtain  clearance  from  a
foreign country may be longer or shorter than that required by the FDA,  and
clearance or approval or other product requirements may differ. 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,  the loss of previously  received  clearances  or
approvals,   or  failure  to  comply  with  existing  or  future  regulatory
requirements could have a material adverse effect on the Company.

Regulation of Medical Devices

      The  Company  is  required to file a premarket  notification  ("510(k)
notification")  submission  or  premarket approval  ("PMA")  application  or
supplement with the FDA before it begins marketing a new medical  device  or
changes  or modifies an existing device in a manner that could significantly
affect the device's safety or effectiveness or changes the device's intended
use.

      The  FDA  categorizes  medical devices into one  of  three  regulatory
classifications -- Class I, II or III -- on the basis of controls deemed  by
the FDA to be necessary reasonably to assure their safety and effectiveness.
Generally, Class I devices are subject to general controls (e.g.,  labeling,
premarket  notification,  and adherence to the  current  good  manufacturing
practice  ("cGMP") regulations for medical devices). Class  II  devices  are
subject to general and special controls (e.g., performance standards,  post-
market  surveillance,  patient registries and  FDA  guidelines).  Class  III
devices,   which  typically  are  life-sustaining  or  life-supporting   and
implantable  devices,  or  new  devices that  have  been  found  not  to  be
substantially equivalent to a legally marketed predicate device, are subject
to  general controls and also require clinical testing to assure safety  and
effectiveness  before  FDA  approval is  obtained.  The  FDA  also  has  the
authority to require clinical testing of Class I and II devices.

      If  a  company  can  establish  that a new  device  is  "substantially
equivalent"  to  a legally marketed Class I or II medical device,  or  to  a
preamendment  Class  III  medical  device  (i.e.,  a  Class  III  device  in
commercial  distribution prior to enactment of the Medical Device Amendments
of  1976) for which the FDA has not called for PMA applications, the company
may seek clearance to market the device by filing a 510(k) notification. The
510(k)  may  need  to  be supported by appropriate data, including  clinical
study  data, establishing substantial equivalence to the FDA's satisfaction.
The  FDA  recently  has  been  requiring a more  rigorous  demonstration  of
substantial equivalence.

     The Company may not place the device into commercial distribution until
an  order  of  substantial equivalence is issued  by  the  FDA.  No  law  or
regulation  specifies the time by which the FDA must  respond  to  a  510(k)
notification.  At  this  time,  the  FDA  typically  responds  to  a  510(k)
notification  within  90  to  180  days,  although  some  submissions   take
considerably  longer.  An  FDA  order  may  declare  that  the   device   is
substantially equivalent and allow the proposed device to be marketed in the
United  States. The FDA may determine, however, that the proposed device  is
not  substantially  equivalent or may require further information,  such  as
additional test data, before it can make a final determination.

      If  a company cannot establish that a proposed device is substantially
equivalent  to  a legally marketed predicate device, the company  must  seek
premarket approval from the FDA through the submission of a PMA application.
A PMA application must be supported by extensive data, including preclinical
and  clinical trial data, to demonstrate the safety and effectiveness of the
device.  If  human  clinical trials are required and the device  presents  a
"significant  risk,"  the  company  must  file  an  investigational   device
exemption ("IDE") application prior to commencing clinical trials.  The  IDE
application  must be supported by data, typically including the  results  of
animal and mechanical testing. If the IDE application is not disapproved  by
the  FDA,  human  clinical trials may begin at the specified investigational
sites  and  with  the  specified number of patients 30 days  after  the  FDA
receives the application. Sponsors of clinical trials are permitted to  sell
study   devices,  provided  compensation  does  not  exceed  the   cost   of
manufacture, research, development and handling. The clinical trials must be
conducted  under the auspices of an independent institutional  review  board
("IRB")  established  pursuant to FDA regulations. If the  device  does  not
present  a  significant risk, the study may be conducted under IRB authority
as a nonsignificant risk study.

      Following  receipt of the PMA application, if the FDA determines  that
the application is sufficiently complete to permit a substantive review, the
agency  will "file" the application. Once the submission is filed,  the  FDA
begins a review of the PMA application. The FDA has 180 days to review a PMA
application,   although  reviews  more  often  occur  over  a  significantly
protracted time period, and the FDA generally takes two years or  more  from
the date of filing to complete its review.

      The  PMA process can be expensive, uncertain and lengthy. A number  of
devices for which premarket approval has been sought by other companies have
never been approved. Review time is often significantly extended by the FDA,
which  may require more information or clarification of information provided
in  the  submission. During the review period, an advisory committee  likely
will  be  convened  to  review  and evaluate  the  application  and  provide
recommendations to the FDA as to whether the device should be  approved.  In
addition,  the  FDA  will  inspect  the  manufacturing  facility  to  ensure
compliance  with the cGMP regulations for medical devices prior to  approval
of  the  PMA  application. If granted, the premarket  approval  may  include
significant limitations on the indicated uses for which the product  may  be
marketed, and the agency may require post-marketing studies of the device.

      There  can be no assurance that any required FDA or other governmental
clearance  or  approval  will  be granted,  or,  if  granted,  will  not  be
withdrawn.  Governmental regulation may prevent or substantially  delay  the
marketing  of  the  Company's proposed products and  cause  the  Company  to
undertake costly procedures. In addition, the extent of potentially  adverse
government   regulation   that  might  arise  from   future   administrative
regulations  or policy or from legislation cannot be predicted. Any  failure
to  obtain  or  delay  in  obtaining  such  clearances  or  approvals  could
materially and adversely affect the Company's ability to market its proposed
products.

      The  FDA's Medical Device Reporting regulation requires medical device
manufacturers,  distributors, and user facilities to provide information  to
the  agency on deaths or serious injuries or illnesses alleged to have  been
associated with the use of its devices, as well as product malfunctions that
would likely cause or contribute to death, serious injury or serious illness
if  the  malfunction were to recur. In addition, the FDA prohibits a company
from  promoting a cleared or approved device for an indication for  use  not
approved by the FDA.

     In May 1996, the Company obtained 510(k) clearance from the FDA for the
initial  version of its SmartMist Asthma Management System to guide  patient
self-administration of asthma medications and compile data on drug  delivery
events  and  lung function, and the Company expects to complete  development
and  commence  marketing of the commercial version of the  SmartMist  Asthma
Management  System during 1997. There can be no assurance that  the  Company
will be able to fully develop and market successfully the commercial version
of  the  SmartMist  Asthma  Management System, or  whether  changes  to  the
commercial   version  of  the  SmartMist  Asthma  Management   System   will
necessitate the submission of a second 510(k) notice. If the submission of a
second  510(k) notice is required, there can be no assurance that  clearance
can  be  obtained in a timely manner or at all. Delays in receipt of  market
clearance  or  restrictions  on the types of asthma  drugs  with  which  the
SmartMist  Asthma Management System can be used or failure  to  comply  with
existing  or  future regulatory requirements could have a  material  adverse
effect on the Company.

Regulation of Drugs

      Different  types  of FDA regulations apply to various  drug  products,
depending  upon whether they are marketed only upon the order of a physician
(i.e.,  they  are  prescription drugs) or over-the-counter, are  biological,
insulin  or  antibiotic drugs or are controlled drugs,  such  as  narcotics.
Product  development and approval within this regulatory framework  takes  a
number  of years, involves the expenditure of substantial resources  and  is
uncertain.  Many  drug products ultimately do not reach the  market  because
they  are  not found to be safe or effective or cannot meet the FDA's  other
regulatory  requirements. In addition, there can be no  assurance  that  the
current  regulatory framework will not change or that additional  regulation
will  not  arise at any stage of the Company's product development that  may
affect approval, delay the submission or review of an application or require
additional expenditures by the Company.

      The  activities required before a new drug product may be marketed  in
the  United  States includes pre-clinical and clinical testing.  Preclinical
tests   include  laboratory  evaluation  of  product  chemistry  and   other
characteristics  and  animal  studies to assess  the  potential  safety  and
efficacy  of  the  product  as  formulated.  Many  preclinical  studies  are
regulated  by the FDA under a series of regulations called the current  Good
Laboratory  Practice  regulations. Violations of these regulations  can,  in
some  cases, lead to invalidation of the studies, requiring such studies  to
be replicated.

      The preclinical work necessary to administer investigational drugs  to
human  subjects  is  summarized  in  an IND  application  to  the  FDA.  FDA
regulations  provide that human clinical trials may begin 30 days  following
submission  of  an  IND  application, unless the FDA  advises  otherwise  or
requests  additional information. There is no assurance that the  submission
of  an IND will eventually allow a company to commence clinical trials. Once
trials  have  commenced,  the FDA may stop the trials  by  placing  them  on
"clinical  hold" because of concerns about, for example, the safety  of  the
product being tested.

      Clinical  testing involves the administration of the drug  to  healthy
human  volunteers  or  to  patients under the  supervision  of  a  qualified
principal  investigator, usually a physician, pursuant to  an  FDA  reviewed
protocol. Each clinical study is conducted under the auspices of an  IRB  at
each  of the institutions at which the study will be conducted. An IRB  will
consider, among other things, ethical factors, the safety of human subjects,
informed consent requirements and the possible liability of the institution.
Human  clinical  trials typically are conducted in three sequential  phases,
but the phases may overlap. Phase I trials consist of testing the product in
a  small  number of patients or normal volunteers, primarily for safety,  at
one  or  more  dosage  levels,  as  well as  characterization  of  a  drug's
pharmacokinetic and/or pharmacodynamic profile. In Phase II clinical trials,
in addition to safety, the efficacy of the product is usually evaluated in a
patient  population. Phase III trials typically involve  additional  testing
for safety and clinical efficacy in an expanded population at geographically
disperse  sites. All of the phases of clinical studies must be conducted  in
conformance with FDA's bioresearch monitoring regulations.

      A company seeking FDA approval to market a new drug, including insulin
and controlled substances, must file a new drug application ("NDA") with the
FDA  pursuant to the FDC Act. In addition to reports of the preclinical  and
clinical  trials  conducted  under an effective  IND  application,  the  NDA
includes  information pertaining to the preparation of the  drug  substance,
analytical methods, drug product formulation, details on the manufacture  of
finished products and proposed product packaging and labeling. Submission of
a  NDA  does  not assure FDA approval for marketing. The application  review
process  generally  takes  several years to complete,  although  reviews  of
treatments for cancer and other life-threatening diseases may be accelerated
or  expedited. However, the process may take substantially longer if,  among
other things, the FDA has questions or concerns about the safety or efficacy
of  a  product.  In  general, FDA requires at least two properly  conducted,
adequate  and  well-controlled clinical studies demonstrating efficacy  with
sufficient levels of statistical assurance.

      Notwithstanding the submission of safety and efficacy  data,  the  FDA
ultimately  may  decide that the application does not  satisfy  all  of  its
regulatory  criteria  for  approval. The FDA  also  may  require  additional
clinical  tests (i.e., Phase IV clinical trials) following NDA  approval  to
confirm safety and efficacy.

      In addition, the FDA may in some circumstances impose restrictions  on
the  use  of  the  drug that may be difficult and expensive  to  administer.
Product   approvals   may  be  withdrawn  if  compliance   with   regulatory
requirements  are  not  maintained or if problems occur  after  the  product
reaches  the market. The FDA also requires reporting of certain  safety  and
other  information that becomes known to a manufacturer of an approved drug.
The  product  testing and approval process is likely to take  a  substantial
number of years and involves expenditure of substantial resources. There can
be  no assurance that any approval will be granted on a timely basis, or  at
all.  Upon  approval,  a  prescription drug may only  be  marketed  for  the
approved  indications  in  the approved dosage forms  and  at  the  approved
dosage.

      Among  the  other  requirements  for  drug  product  approval  is  the
requirement that the prospective manufacturer conform to the FDA's and  cGMP
regulations for drugs. In complying with the cGMP regulations, manufacturers
must continue to expend time, money and effort in production, record keeping
and   quality   control  to  assure  that  the  product   meets   applicable
specifications  and  other  requirements.  The  FDA  periodically   inspects
manufacturing  facilities  in the United States to  assure  compliance  with
applicable cGMP requirements. Failure of the Company to comply with the cGMP
regulations  or  other  FDA regulatory requirements could  have  a  material
adverse effect on the Company.

      The Company is developing applications of its AERx technology for  the
delivery  of  morphine, insulin and lung imaging agents via inhalation.  The
Company  believes  that  the  use of its AERx  technology  for  insulin  and
morphine  delivery  via inhalation will be subject to the drug  regulations,
including  conducting clinical studies pursuant to an IND and the submission
and  approval  of an NDA before marketing can occur. If the Company  obtains
FDA  approval to market the AERx Diabetes Management System for the delivery
of  insulin, each batch of unit-dose insulin-containing packages used in the
AERx Diabetes Management System will be subject to the insulin certification
requirements.

      The  Company  has  not  yet been able to determine  whether  the  AERx
Diagnostic  Imaging  System will be regulated as a device  or  a  drug.   In
either  case,  the  FDA likely will require substantial  clinical  data  for
market  clearance  or approval under the medical device or  drug  regulatory
framework  or  both.  There can be no assurance that the  use  of  the  AERx
platform for insulin or lung imaging agent delivery will prove to be  viable
or  that any necessary regulatory clearance approvals will be obtained in  a
timely manner, if at all.

      The Company also will 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. User fees also pertain to the
establishments where the products are made and to the marketed  prescription
drug products. In addition to these FDA requirements, the Company is subject
to  foreign regulatory authorities governing clinical trials and drug sales.
Unapproved  new  drugs  can be exported from the United  States  to  certain
countries for commercialization only after FDA authorization is obtained.

      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.

Other Regulations

      Products  marketed outside the United States that are manufactured  in
the  United  States  are  subject to certain FDA  regulations,  as  well  as
regulation by the country in which the products are to be sold. The  Company
also  would be subject to foreign regulatory requirements governing clinical
trials  and  medical device and drug product sales if products are  marketed
abroad. Whether or not FDA approval has been obtained, approval of a product
by  the comparable regulatory authorities of foreign countries usually  must
be  obtained  prior  to commencement of marketing of the  product  in  those
countries. The approval process varies from country to country and the  time
required may be longer or shorter than that required for FDA approval.

      The  Company  is  subject to numerous federal, state  and  local  laws
relating  to  such  matters  as  controlled drug  substances,  safe  working
conditions,  manufacturing practices, environmental protection, fire  hazard
control  and disposal of hazardous or potentially hazardous substances.  For
example,  the  United  States  Drug  Enforcement  Agency  ("DEA")  regulates
controlled   drug   substances,  such  as  morphine  and  other   narcotics.
Establishments  handling controlled drug substances such as  morphine  must,
for  example, be registered and inspected by the DEA, and may be subject  to
export,  import,  security and production quota requirements.  In  addition,
advertising and promotional materials relating to medical devices and  drugs
are,  in  certain  instances, subject to regulation  by  the  Federal  Trade
Commission or the FDA. There can be no assurance that the Company  will  not
be  required  to  incur  significant costs to  comply  with  such  laws  and
regulations in the future or that such laws or regulations will not  have  a
material adverse effect upon the Company's business, financial condition  or
results of operations.

Scientific Advisory Board

   The  Company  has  assembled an International Scientific  Advisory  Board
comprised of scientific and development advisors that provide expertise,  on
a consulting basis, in the areas of pain management, allergy and immunology,
pharmaceutical development and drug delivery, but are employed elsewhere  on
a full time basis. As a result, they can only spend a limited amount of time
on  the  Company's  affairs.  The International  Scientific  Advisory  Board
assists  the  Company  on issues related to potential product  applications,
product   development  and  clinical  testing.  Its   members,   and   their
affiliations and areas of expertise, include:

Name                     Affiliation                     Area of Expertise
 
Peter Byron, Ph.D        Medical College of Virginia,    Aerosol Science/
                         Virginia Commonwealth           Pharmaceutics
                         University
            
Michael Cousins, M.D     University of Sydney, Australia Pain Management

Peter Creticos, M.D      The Johns Hopkins University    Allergy/
                         School of Medicine              Immunology/
                                                         Asthma
           
Stanley S. Davis, Ph.D.  Lord Trent Professor of         Drug Delivery
                         Pharmacy, University of
                         Nottingham
   
Jeffrey Drazen, M.D.     Harvard University Medical      Pulmonary
                         School                          Medicine
          
Lorne Eltherington,      Sequoia Hospital                Pain Management
 M.D., Ph.D.
       
Richard Kitz, M.D        Harvard University Medical      Anesthesiology
                         School, Massachusetts General
                                     Hospital
Lawrence M.              The Johns Hopkins University    Allergy/
 Lichtenstein,           School of Medicine              Immunology
 M.D., Ph.D.
            
Leigh Thompson, M.D.,    CEO, Profound Quality           Pharmaceutical
 Ph.D.                   Resources, former Chief         Product
                         Scientific Officer, Eli Lilly   Development
                         and Company

Employees

      As of December 31, 1996, the Company had 55 employees, of whom 45 were  in
product development and 10 were in administration. The Company believes that its
future   success   is  dependent  on  attracting  and  retaining  highly-skilled
scientific, sales and marketing and senior management personnel. Competition for
such skills is intense, and there is no assurance that the Company will continue
to be able to attract and retain high-caliber employees. The Company's employees
are  not  represented  by  any  collective  bargaining  agreement.  The  Company
considers its relations with its employees to be good.

Executive Officers of the Company

     The following table sets forth certain information with respect to the
executive officers of the Company as of December 31, 1996:

Name                           Age            Position

Richard P. Thompson            45             President, Chief Executive
                                              Officer and Director
            
Reid  M. Rubsamen, M.D.        40             Vice President, Medical
                                              Affairs, Secretary and
                                              Director

R. Ray Cummings                40             Vice President, Business
                                              Development

Max   D. Fiore                 41             Vice President, Engineering

Igor Gonda, Ph.D.              49             Vice President, Research &
                                              Development
            
Mark  A. Olbert                41             Vice President, Finance &
                                              Administration and
                                              Chief Financial Officer
      
     Richard  P. Thompson has been a director of the Company and has served  as
the  Company's  President  and  Chief Executive Officer  since  1994  and  Chief
Financial  Officer from April 1996 to December 1996. From 1991 to 1994,  he  was
President  of  LifeScan,  Inc., a Johnson & Johnson Company,  a  medical  device
manufacturing  and development company. Mr. Thompson was a founder  of  LifeScan
and  between  1981 and 1991 he held the positions of Vice President, Operations,
and later Vice President, Sales and Marketing, at LifeScan. Mr. Thompson holds a
B.S.  in biological sciences from the University of California at Irvine and  an
M.B.A. from California Lutheran College.

      Reid  M. Rubsamen, M.D., a founder of the Company, has been a director  of
the  Company  and has served as the Company's Vice President of Medical  Affairs
and  Secretary  since  1991. Dr. Rubsamen is a Board Certified  anesthesiologist
having  received his medical training at Pacific Medical Center,  San  Francisco
and Massachusetts General Hospital, where in 1989 he served as Chief Resident in
Anesthesia. He was also a doctoral candidate in the computer science  department
at  the  Massachusetts Institute of Technology, leaving in  1990  to  found  the
Company.  Dr.  Rubsamen holds an A.B. in biochemistry and computer science  from
the  University of California, Berkeley, and an M.S. in computer science and  an
M.D. from Stanford University.

      R.  Ray  Cummings has served as the Company's Vice President  of  Business
Development since 1995. From 1994 to 1995, he served as Vice President, Business
Development  of  Celtrix Pharmaceuticals. From 1992 to 1994,  Mr.  Cummings  was
employed  as  Director,  Corporate Licensing of G.  D.  Searle  and  Company,  a
pharmaceutical company. From 1990 to 1992, he was the Director of  New  Business
Development   and  Licensing  of  Immunex  Corporation,  another  pharmaceutical
company.  Mr.  Cummings  holds  a  B.S. in  biological  sciences  from  Stanford
University,  an  M.S.  in  biochemistry  and  molecular  biology  from   Harvard
University and an M.B.A. from University of California, Berkeley.

      Max  D.  Fiore  has served as the Company's Vice President of  Engineering
since  1994.  From 1991 to 1994, Mr. Fiore served as Director of Engineering  at
Lifescan,  Inc.  From  1990  to 1991, Mr. Fiore was the  IMX(TM)  Business  Unit
Research  &  Development Manager for Abbott Laboratories, a pharmaceuticals  and
medical  device  company. Mr. Fiore holds a B.S.E.E. and a B.S.  in  engineering
from Northwestern University and an M.S.E.E. in bio-medical/microprocessor-based
instrument design from University of Wisconsin.

      Igor  Gonda, Ph.D. has served as the Company's Vice President of  Research
and  Development since 1995. From 1992 to 1995, Dr. Gonda was a Senior Scientist
and  Group Leader at Genentech, Inc., a pharmaceutical company. Prior to joining
Genentech,  Inc., Dr. Gonda was a Senior Lecturer in the Department of  Pharmacy
at  University of Sydney, Australia. Dr. Gonda holds a B.Sc. in chemistry and  a
Ph.D. in physical chemistry from the University of Leeds, United Kingdom.

      Mark  A. Olbert joined the Company in late 1996 as Chief Financial Officer
and  Vice President of Finance and Administration. He was previously with  Amgen
Inc.,  where he spent six years in finance operations and was most recently  the
Director  of Mergers & Acquisitions.  Prior to Amgen, Mr. Olbert held  financial
management positions at Ashton-Tate and Atlantic Richfield.  Mr. Olbert holds  a
B.A.  in molecular biology from the State University of New York at Buffalo  and
an  M.B.A.  from  the Amos Tuck School of Business Administration  at  Dartmouth
College.

Item 2.   PROPERTIES

Aradigm  currently leases approximately 22,000 square feet of  office  space  in
three  buildings  in  an  office  park at 26219  Eden  Landing  Road,   Hayward,
California. The Company's lease for such office space expires in February  1999.
Minimum  annual  payments  under these leases will  be  approximately  $217,000,
$144,000 and $70,000 in 1997, 1998 and 1999, respectively. The Company uses this
space  for  general administrative, product development, clinical, manufacturing
and  research  and development purposes. The Company believes that its  existing
facilities  are  adequate to meet its requirements for the near  term  and  that
additional space will be available on commercially reasonable terms if needed.

Item 3.   LEGAL PROCEEDINGS

      The Company is not currently a party to any legal proceedings.

Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

       No  matters  were  submitted to a vote of the Company's security  holders
during the quarter ended December 31, 1996.

PART II
      
Item 5.    MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED   STOCKHOLDER
           MATTERS
      
MARKET INFORMATION

       The Company's common stock trades on The Nasdaq National Market under the
symbol  "ARDM".   The  high  and  low  sales prices  (excluding  retail  markup,
markdowns and commissions) for the six months in the period beginning  June  20,
1996, the date of the Company's initial public offering, and ending December 31,
1996 are as follows:

                                                  HIGH      LOW
YEAR ENDED DECEMBER 31, 1996
Second quarter (beginning June 20, 1996)       $ 11.250     $ 9.516
Third quarter                                  $ 10.250     $ 7.750
Fourth quarter                                 $ 11.500     $ 9.625

       As  of  December  31, 1996, there were approximately 189 stockholders  of
record and approximately 800 beneficial holders of the Company's common stock.

DIVIDEND POLICY

       The  Company has never paid cash dividends on its capital stock and  does
not  anticipate paying cash dividends in the foreseeable future, but intends  to
retain  its  capital  resources for reinvestment in its  business.   Any  future
determination to pay cash dividends will be at the discretion of  the  Board  of
Directors and will be dependent upon the Company's financial condition,  results
of  operations,  capital requirements and other such factors  as  the  Board  of
Directors deems relevant.

Item 6.                                 SELECTED FINANCIAL DATA

Years Ended December 31,                                    
(In thousands, except per                                   
share amounts)                    1996    1995     1994     1993  1992
                                                            
Statements of Operations                                    
Data:
                                                            
Contract and license             $ 730    $ 155   $  125   $ -    $  -
revenues
Operating expenses:                                         
 Research and development        7,981    3,440    2,198     926    435
 General and administrative      2,958    2,334    1,664     741    385
   Total operating expenses     10,939    5,774    3,862   1,667    820
Loss from operations           (10,209)  (5,619)  (3,737) (1,667)  (820)
Interest income                  1,179      206       38      13      8
Interest expense                   (52)     (20)     (34)     (1)   (19)
Net loss                        (9,082)  (5,433)  (3,733) (1,655)  (831)
Net loss per share (1)           (1.22)    (1.06)  (0.48)  (0.23) (1.47)
Shares used in computing    
net loss per share (1)           7,442    3,692    3,537   3,468  3,587
                                                            
Balance Sheet Data:                                         
                                                            
Cash, cash equivalents and     
investments                    $28,534  $12,114   $6,087  $1,932 $1,283
Working capital                 23,486   11,594    5,739   1,781  1,168
Total assets                    30,733   13,306    6,343   2,055  1,367
Deficit accumulated during  
development stage              (21,144) (12,069)  (6,636) (2,903)(1,248)
Total shareholders' equity      27,886   12,121    5,960   1,888  1,241
                                                            

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

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  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.   Potential  risks  and uncertainties include,  without  limitation,
those mentioned in this report and in particular, the factors described in  Part
II, under heading "Risk Factors".
      
Overview

      Since  its inception in 1991, Aradigm has been a development stage company
engaged  in  the advancement of pulmonary drug delivery systems. As of  December
31,  1996, the Company had an accumulated deficit of $21.1 million. The  Company
has  been  unprofitable each year and expects to incur further  significant  and
increasing  operating losses over the next several years primarily  due  to  the
expansion   of   research  efforts  and  the  establishment   of   manufacturing
capabilities  to  support  clinical trials and,  if  any  of  its  products  are
successfully   developed  and  receive  necessary  regulatory   approvals,   the
commercialization of such products. To date, Aradigm has not sold  any  products
and does not anticipate receiving significant revenue from products in 1997.

Results of Operations

Years Ended December 31, 1996, 1995 and 1994

Contract  Revenues.   The Company reported revenues from contracts  and  license
fees  of  $730,000  in 1996 compared to $155,000 in 1995 and $125,000  in  1994.
Included  in  1996  revenues was a $500,000 license fee from  a  human  clinical
feasibility testing agreement and $230,000 contract research revenues recognized
from  an  agreement  that provided for a payment of $260,000 upon  execution  in
December  1995.   1995  revenues were derived entirely  from  contract  research
agreements.  In 1994, the Company recorded its initial revenues of $125,000 from
a feasibility research contract.

Research  and  Development  Expenses.  Research and  development  expenses  have
increased  each  year since the Company's inception;  these expenses  were  $8.0
million  in  1996  compared to $3.4 million in 1995 and $2.2  million  in  1994.
Research  and development expenses in 1996, 1995 and 1994 represented  73%,  60%
and 57%, respectively, of total expenses.  Research and development expenses  in
1996  increased by 132% over 1995, attributable primarily to increased  staffing
and  costs associated with the expansion of research and development efforts  on
the  AERx  system,  the initiation of additional clinical testing  of  the  AERx
system  and  the  expansion  of  the  SmartMist  system  program.  Research  and
development expenses in 1995 increased by 57% over 1994, attributable  primarily
to  the  expansion of the research and development efforts on the  AERx  system,
which  began preliminary clinical testing during the year.  The Company  expects
research  and development spending to increase significantly over the  next  few
years as the Company expands its development efforts.

General  and Administrative Expenses.  General and administrative expenses  were
$3.0  million in 1996 compared to $2.3 million in 1995 and $1.7 million in 1994.
General  and administrative expenses increased by 27% in 1996 compared  to  1995
and  40%  in  1995  compared to 1994, primarily due to  increases  in  staffing,
administrative and facilities expenses related to general corporate  activities.
The  Company  expects general and administrative costs to continue  to  increase
over  the next several years as it expands its operations, increases its efforts
to  develop  collaborative relationships with corporate partners and  meets  its
obligations as a public company.

Interest  Income.  Interest income increased significantly in 1996  compared  to
1995 and 1994, primarily due to increased average cash balances in 1996 compared
to 1995 and 1994.  The increased average cash balances in 1996 resulted 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 $52,000 in 1996 compared to $20,000  in
1995  and  $33,000 in 1994. Interest expense increased primarily as a result  of
higher  outstanding capital lease balances in 1996 under the Company's equipment
line of credit.

Net  Operating Loss Tax Carryforwards.  As of December 31, 1996, the Company had
federal net operating loss tax carryforwards of approximately $18 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.

Liquidity and Capital Resources

      The  Company has financed its operations since inception primarily through
public and private placements of its capital stock, proceeds from financings  of
equipment acquisitions, contract revenue and interest earned on investments.  As
of  December 31, 1996, the Company had realized approximately $48.8  million  in
net  proceeds  from sales of its capital stock.  The Company also  has  a  $1.75
million  equipment  line  of  credit, of which $770,000  remains  available  for
purchases  through  June 1997.  As of December 31, 1996, the Company  had  cash,
cash equivalents and investments of approximately $28.5 million.

      Net cash used in operating activities in 1996 was $7.1 million compared to
$5.2 million in 1995.  The increase resulted primarily from the increase in  the
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  operating activities in 1995 increased by $1.8 million compared to 1994  due
to the increase in the net loss.

     Net cash used in investing activities in 1996 was $10.8 million compared to
$535,000  in  1995.   The  increase resulted primarily from  the  Company's  net
purchase  of available-for-sale investments and additional capital expenditures.
Net cash used in investing activities in 1995 and 1994 related solely to capital
expenditures by the Company.

      Net  cash  provided  by financing activities in 1996  was  $24.3  million,
primarily as a result of the Company's completion of its initial public offering
of  common  stock,  which resulted in net proceeds of $24.6  million.  Net  cash
provided  by  financing activities for 1995 was $11.7 million,  primarily  as  a
result of $11.6 million in net proceeds from the issuance of preferred stock.

      From inception through December 31, 1996, the Company's cash utilized  for
operating activities totaled approximately $18.4 million. The net cash  utilized
was approximately $7.1 million in 1996, $5.2 million in 1995 and $3.4 million in
1994 and differed from the Company's net loss in those periods principally as  a
result  of  depreciation expense and increases in accounts payable  and  accrued
liabilities. The Company expects that its cash requirements will increase due to
expected  increases in expenses related to research and development  activities,
the   scale  up  of  manufacturing  processes  and  increases  in  general   and
administrative costs. The Company's cash requirements will also be  affected  by
the  extent  and  duration  of  the  foreign and  domestic  regulatory  approval
processes  for  its potential products. Although there can be no assurance  that
the  Company  will receive regulatory approval for any of its products,  if  the
Company  does  so,  its cash requirements may increase due  to  the  significant
expenses  associated with initial commercial production and  marketing  efforts.
These  expenses  include,  but are not limited to, increases  in  personnel  and
related costs, capital expenditures, product prototype development expenses  and
the costs of facilities expansion.

The  Company  expects  that  its existing capital resources,  existing  contract
research  and  development  revenue, interest  income  and  equipment  financing
capability  will  enable the Company to maintain current and planned  operations
through  the  first half of 1998. 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  process development  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. The Company  has  not  yet
established  any  corporate  development collaborations  and  there  can  be  no
assurance that it will be able to do so on reasonable terms, or at all. Nor  can
there  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.
      
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.

Early Stage Of Development

      Aradigm, a development stage company incorporated in January 1991,  has  a
limited  history of operations and has generated only limited revenues to  date,
primarily  from two short-term research and feasibility agreements and  interest
income.  No  revenues  have  been generated by  sales  of  products  or  product
royalties.  The  Company has no products other than the initial version  of  its
SmartMist Asthma Management System approved for commercial sale, and all of  its
potential  products are in various stages of research or development. There  can
be  no  assurance  that the Company's research and development efforts  will  be
successful  or  that regulatory clearance for the sale of any of  its  potential
products will be obtained or that its potential products can be manufactured  at
an acceptable cost.

History of Losses; Anticipated Future Losses

      The  Company has not been profitable since inception and, through December
31,  1996, had incurred a cumulative deficit of approximately $21.1 million. The
Company  expects to continue to incur substantial and increasing losses over  at
least  the next several years as the Company's research and development efforts,
pre-clinical 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.

Uncertainty of Successful Product Development

      The  Company's SmartMist and AERx systems are still in the prototype stage
and will require further development and regulatory approvals before they can be
commercialized.  While  the Company is developing a commercial  version  of  the
SmartMist Asthma Management System that has received 510(k) clearance  from  the
United  States Food and Drug Administration ("FDA"), there can be  no  assurance
that  such  commercial  version of the device can be successfully  developed  or
marketed  without further design modifications. There also can be  no  assurance
that  any  such  modifications of the approved device will not  necessitate  the
submission  of  a  second 510(k) notice. The Company's AERx platform  is  at  an
earlier stage of development than the SmartMist device and is being tested using
a  clinical bench prototype. The AERx system will require substantial additional
development, preclinical and clinical testing and investment. To further develop
its  AERx  system, the Company must address many engineering and design  issues,
including  ensuring that the device has the ability to deliver a consistent  and
predictable  amount  of  drug  into the blood stream  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 system. 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 system  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 system from being a commercially  viable
product.  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 could have a material adverse  effect  on
the Company.

Uncertainty Of Successful Product Commercialization

      Even if the Company successfully develops and obtains necessary regulatory
approvals  for a product, the Company's success in commercializing such  product
will  be  dependent  upon  many factors, including  acceptance  by  health  care
professionals and patients. Acceptance of the Company's products by health  care
professionals  and  patients  will  largely depend  on  demonstrating  that  the
Company's products are competitive with alternate delivery systems with  respect
to  safety,  efficacy 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
Asthma  Management System, is specifically designed for the canisters  currently
used by some of the leading manufacturers of MDIs. If, among other things, these
manufacturers  exit  from this business or decide to change  the  dimensions  of
their  canisters,  the  Company  could  be materially  and  adversely  affected.
Moreover,  MDIs  use CFCs, as a propellant for the medication.  The  Company  is
aware of initiatives and international agreements to ban CFCs, which if extended
to  MDIs, could have a material adverse effect on the Company. No assurance  can
be  made  that the Company's products 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.

Dependence Upon Entering Into Collaborations

      The Company currently lacks the marketing and sales experience, personnel,
distribution   channels   and  other  infrastructure  needed   to   successfully
commercialize  the SmartMist Asthma Management System.  Through its  Respiratory
Products  Business Unit, the Company is currently establishing such  capability.
The  Company's ability to successfully develop and commercialize products  based
on  its  AERx  system  is  largely  dependent upon  the  Company  entering  into
collaborative arrangements with corporate partners willing to make available  to
the  Company  resources  to  assist  with such  areas  as  product  development,
preclinical  and  clinical trials, regulatory processes,  marketing,  sales  and
distribution. 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 upon the Company's ability to establish
and  maintain  partnering  or collaborative arrangements  with  the  holders  of
proprietary  rights  to  such  drugs.  The Company  also  has  no  collaborative
agreements with corporate partners for products based on its AERx system.  There
can  be  no  assurance  that  the Company will enter  into  such  partnering  or
collaborative arrangements or, even if entered into, that such arrangements will
be  successful.  The  failure  of the Company to  enter  into  collaborative  or
partnering arrangements would have a material adverse effect on the Company.

Limited Manufacturing Experience; Risk Of Scale-up Failure

      To  date,  the  Company has manufactured components of its  systems  under
development  only on the small scale needed for early stage trials.  To  achieve
the  levels of production necessary to support late stage human clinical  trials
and for commercialization of Aradigm's potential products, the Company will need
to  scale up its current manufacturing capabilities. Significant additional work
must  be completed prior to commercialization of the SmartMist Asthma Management
System.  There can be no assurance such work will be completed successfully.  In
addition,  the  Company is in the early stages of scaling-up the  production  of
clinical  trial  supplies of disposable drug packages for the AERx  system.  The
Company  anticipates making significant expenditures to attempt to  provide  for
the  high  volume manufacturing required for multiple AERx system  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 such scale up 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 will  be
subject  to cGMP requirements of the FDA. There can be no assurance the  Company
will  satisfy such regulatory requirements and any failure to satisfy  cGMP  and
other requirements could have a material adverse effect on the Company.

      The  Company has engaged certain contract manufacturers in connection with
production  of its prototype inhalation devices and the Company intends  to  use
one  or  more  contract manufacturers to produce key components, assemblies  and
subassemblies  for its clinical trials and commercialization. There  can  be  no
assurance  that  Aradigm  will be able to enter into  or  maintain  satisfactory
contract  manufacturing arrangements. Certain components of Aradigm's  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.

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
and  to  accelerate in the foreseeable future. The development of the  Company's
technology and proposed products will require a commitment of substantial  funds
to  conduct the costly and time-consuming research and preclinical and  clinical
testing  activities necessary to develop and refine such technology and proposed
products,  to  establish a late stage clinical and early  commercial  production
facility 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 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  timing  and cost of its late stage clinical and early commercial production
facility,  the cost involved in preparing, filing, prosecuting, maintaining  and
enforcing patent claims and the need to acquire licenses or other rights to  new
technology.

      The Company will need to raise substantial additional capital to fund  its
operations.  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.

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 and interferences could be resolved in favor of
competitors of the Company and involve the expenditure of substantial  financial
and human resources of the Company.

     The Company pursues a policy of having its officers, employees, consultants
and  advisors  execute  proprietary information and  invention  agreements  upon
commencement  of their relationships with the Company as officers, employees  or
consultants,   which  agreements  provide  that  all  confidential   information
developed  or made known to the individual during the course of the relationship
shall  be kept confidential, except in specified circumstances. These agreements
also  provide that all inventions developed by the individual on behalf  of  the
Company  shall be assigned to the Company and that the individual will cooperate
with  the Company in connection with securing patent protection on the invention
if  the  Company  wishes to pursue such protection. 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. Violation of  such
agreements are difficult to police.

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.

     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 material changes to medical devices
and  new  drugs also are subject to 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.

      There  can  be  no assurance that the Company will be able to  develop  or
manufacture  a  version of the SmartMist Asthma Management System  suitable  for
commercialization.  Any  changes made to the initial version  of  the  SmartMist
Asthma  Management  System that has been cleared by the  FDA  will  require  the
Company  to evaluate whether such changes could significantly affect the  safety
or  effectiveness  of  the device and, therefore, require the  submission  of  a
second  510(k) notice. The Company has yet to determine whether changes  it  may
make to the SmartMist Asthma Management System will require the submission of  a
second  510(k) notice. If the submission of a second 510(k) notice is  required,
there  can be no assurance that clearance can be obtained in a timely manner  or
at all.

      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 only tested  an  early  prototype
bench-mounted  version of the AERx Pain Management System  with  morphine  on  a
limited number of healthy volunteers in Australia and in Phase I clinical trials
in  the United States.  There can be no assurance that the Phase I study results
will  support  additional clinical trials of the AERx system, that  the  Company
will  be  able  to  manufacture sufficient quantities of the  disposable  nozzle
packages  to support any future clinical trials of the AERx system, or that  the
design  requirements  of  the AERx system will make it amenable  to  development
beyond  the  early design stage prototype currently being used. Failure  of  the
Company to progress to Phase II clinical studies or otherwise to advance  beyond
the  current  early  design  stage prototype of the AERx  system  would  have  a
material adverse effect on the Company.

      The timing of completion of clinical trials is dependent upon, among other
factors,  the  enrollment of patients. Patient accrual 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.

      The  Company  also is developing applications of its AERx system  for  the
delivery of insulin and imaging agents via inhalation. 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. Potentially, the FDA could regulate the  lung  imaging
product as a medical device, as a drug, or as a device/drug combination product.
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.

     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  FDA  and  cGMP  regulations,  which  include
requirements relating 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  cGMP
regulations  and  other  FDA  regulatory  requirements  as  it  scales  up   its
manufacturing operations. Such failure could have a material adverse  effect  on
the Company.

     Because the Company's AERx Pain Management System clinical studies involves
morphine, the Company is registered with the 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 and significant developments are  expected  to
continue  at a rapid pace. 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. Competitors in this field include: Astra AB,  Boehringer
Ingelheim,  Dura  Pharmaceuticals, Inc., Fluid  Propulsion  Technologies,  Inc.,
Forest  Labs,  Glaxo Wellcome, Inc., Inhale Therapeutic Systems, Ivax  (Norton),
Medeva Ltd., Rhone-Poulenc Rorer (Fisons Limited), Schering Plough and 3M.  Many
of   these   companies  and  entities  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
could have a material adverse effect on the Company.

Dependence On Key Personnel; Managing Growth

      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. Through at least the end of 1997, the Company  expects  to
experience  rapid  growth  in employee headcount and operations.  The  Company's
expected  growth and development and commercialization efforts will require  the
implementation of improved or new systems for financial control and  management.
The  failure to properly implement such systems and to effectively manage growth
could have a material adverse effect on the Company.

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  continue
to  obtain  such insurance on acceptable terms in amounts sufficient to  protect
the Company.

Uncertainty Related To Health Care Reform

      Political,  economic and regulatory influences are subjecting  the  health
care industry in the United States to fundamental change. Although Congress  has
failed to pass comprehensive health care reform legislation to date, the Company
anticipates  that  Congress,  state legislatures and  the  private  sector  will
continue  to  review  and assess alternative health care  delivery  and  payment
systems.  Market  forces are expected to demand reduced  costs.  Aradigm  cannot
predict  what  impact the adoption of any federal or state  health  care  reform
measures or future private sector reform may have on its business.

Uncertainty Related to Third-Party Reimbursement

      In  both  domestic  and foreign markets, sales of the Company's  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
potential products will be reimbursable by third parties. In addition, there can
be  no  assurance that the Company's proposed 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  proposed  products are approved for marketing and  any  such  changes
could further limit reimbursement for medical products and services.

Hazardous Materials

      The  Company's  research and development involves 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 any such liability could exceed  the
resources of the Company.

Control By Officers, Directors And Principal Shareholders

      Executive  officers and directors of the Company, together  with  entities
affiliated with them, own or control approximately 42% of the outstanding shares
of  Common  Stock  and are able to significantly influence the election  of  the
Company's  Board of Directors and other corporate actions requiring  stockholder
approval, as well as significantly influence the direction and policies  of  the
Company.

Possible Volatility of Stock Price

       The   market  prices  for  securities  of  many  companies   engaged   in
pharmaceutical  development activities historically have been  highly  volatile.
Prices  for  the  Company's  Common Stock may be  influenced  by  many  factors,
including  the depth of the market for the Common Stock, 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 stockholders could  also  adversely  affect  the
prevailing price of the Common Stock.

Potential Adverse Impact Of Shares Eligible For Future Sale

      Sales of shares of Common Stock (including shares issued upon the exercise
of  outstanding options) in the public market could adversely affect the  market
price of the Common Stock. Such sales also might make it more difficult for  the
Company to sell equity securities or equity-related securities in the future  at
a  time and price that the Company deems desirable. As of January 31, 1997,  the
Company had approximately 10,214,000 shares of Common Stock outstanding and  has
reserved approximately 1,379,000 shares of its Common Stock for the exercise  of
an  outstanding warrant and for issuances under its 1996 Stock Option Plan,  the
1996 Non-Employee Directors' Stock Option Plan and Employee Stock Purchase Plan
                                     
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 (a
development  stage company) as of December 31, 1996 and 1995,  and  the  related
statements  of  operations, shareholders' equity, and cash flows for  the  years
then ended and for the period from January 30, 1991 (inception) through December
31,  1996.   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.  The financial statements for  the  year  ended
December  31,  1993, were audited by other auditors whose report dated  February
22,  1994  expressed an unqualified opinion on those statements.  The  financial
statements for the period from January 30, 1991 (inception) through December 31,
1993  include  total revenues and net loss of $0 and $2.9 million, respectively.
Our  opinion  on  the statements of operations, shareholders' equity,  and  cash
flows  for  the  period from January 30, 1991 (inception) through  December  31,
1996,  insofar as it relates to amounts for periods ended through  December  31,
1993, is based solely on the report of other auditors.

       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 and the report of other auditors provide a reasonable
basis for our opinion.

       In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the  financial position of Aradigm Corporation (a development stage company)  at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for  each of the three years in the period ended December 31, 1996 and  for  the
period  from  January  30,  1991  (inception)  through  December  31,  1996,  in
conformity with generally accepted accounting principles.


                                                          ERNST & YOUNG LLP


Palo Alto, California
February 7, 1997
                                     
                                     
                                     
REPORT OF BREGANTE + COMPANY LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Aradigm Corporation

       We  have audited the accompanying statements of operations, shareholders'
equity,  and  cash  flows of Aradigm Corporation (a company in  the  development
stage)  for  the year ended December 31, 1993 and for the period from  inception
(January  30,  1991) through December 31, 1996.  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  audit 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 audit provides a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in  all  material respects, the results of operations and cash flows of  Aradigm
Corporation  for  the  year ended December 31, 1993  and  for  the  period  from
inception  (January  30,  1991) through December 31, 1993,  in  conformity  with
generally accepted accounting principles.


                                                     BREGANTE & COMPANY LLP


San Francisco, California
February 22, 1994







                            Aradigm Corporation
                       (A development stage company)
                                     
                              Balance Sheets

                                                  December 31,
                                               1996         1995
   Assets                                                           
      Current assets:        
        Cash and cash equivalents           $18,553,831  $12,117,355
        Short-term investments                6,977,331          -
        Contract receivable                        -         260,000
        Other current assets                    451,220       74,127
     Total current assets                    25,982,382   12,451,482
                                                         
   Investments                                3,002,445          -
   Property and equipment, net                1,452,968      636,351
   Notes receivable from officers               219,739      150,444
   Other assets                                  75,657       68,099
       Total assets                         $30,733,191  $13,306,376
                                                         
   Liabilities and shareholders' equity                  
   Current liabilities:                                  
        Accounts payable                       $601,230     $174,854
        Accrued clinical and other                       
         studies                                898,635          -
        Accrued compensation                    279,985      217,643
        Other accrued liabilities               278,985       68,448
        Deferred revenue                        169,500      230,000
        Current portion of capital lease                 
         obligations                            268,514      167,003
       Total current liabilities              2,496,849      857,948
                                           
                                                         
   Noncurrent portion of capital                         
     lease obligations                          350,171      327,407
                                                         
   Commitments and contingencies                         
                                                         
   Shareholders' equity:                                 
   Preferred stock, no par value;                        
      5,000,000 shares authorized                        
      (10,000,000 in 1995); issued and                   
      outstanding shares: 1996 - none;             -      24,119,060
      1995 - 5,611,910; aggregate
      liquidation preference of
      $25,284,342 at December 31, 1995
   Common stock, no par value,                           
      40,000,000 shares authorized                       
      (20,000,000 in 1995); issued and       49,821,157      267,158
      outstanding shares: 1996 -
      10,214,054; 1995 - 1,327,025
        Notes receivable from                  
          shareholders                         (482,805)    (196,664)
        Deferred compensation                  (308,239)         -
        Deficit accumulated during the      
         development stage                  (21,143,942) (12,068,533)
       Total shareholders' equity            27,886,171   12,121,021
       Total liabilities and                
       shareholders' equity                 $30,733,191  $13,306,376

                            Aradigm Corporation
                       (A development stage company)
                                     
                         Statements of Operations



                                                                  Period from
                                                                  January 30,
                                                               1991(inception)
                                                                    through
                                    Years ended December 31,      December 31,
                               1996         1995        1994          1996
                                                                                
  Contract and license                                           
   revenues                 $ 730,000     $155,000     $125,000    $1,010,000
                                                                 
  Expenses:                                                      
  Research and              
      development           7,981,419    3,440,181    2,197,708    15,283,945
  General and               
      administrative        2,957,467    2,333,372    1,664,596     8,189,140
     Total expenses        10,938,886    5,773,553    3,862,304    23,473,085
                                                                 
  Loss from operations    (10,208,886)  (5,618,553)  (3,737,304)  (22,463,085)
                                                                 
  Interest income           1,178,800      205,863       38,050     1,443,611
  Interest expense           (52,075)      (20,078)     (33,423)     (131,220)
  Net loss               $(9,082,161)  $(5,432,768) $(3,732,677) $(21,150,694)
                                                                 
  Net loss per share         $ (1.22)     $ (1.47)     $ (1.06)    
  Shares used in computing                                       
    net loss per share     7,442,016     3,692,088    3,536,510

<TABLE>
                                     
                               Aradigm Corporation
                          (A development stage company)
                                        
                        Statement of ShareholdersO Equity
       Period from January 30, 1991 (Inception) through December 31, 1996


<CAPTION>
                                                                                          
                                                                                            
                                                                Notes
                                                                Receiv-                Deficit       
                    Preferred                 Common            able From  Deferred    During the     Share-
                      Stock                    Stock            Share-     Compensa-   Development    holders'
                  Shares     Amount     Share       Amount      holders    tion        Stage          Equity
<S>               <C>        <C>        <C>         <c)         <C>        <C>        <C>             <C>
                                                                                                  
Balances at          -      $    -           -      $   -       $    -     $     -    $      -      $      -
January 30,1991  
(inception)

Issuance of                                                                             
common stock                                                                        
in exchange for      -           -        805,400      30,270        -           -           -           30,270
equipment and cash
at $0.03 and
$0.05 per share,
respectively

Issuance of Series                                                                           
A convertible     149,594      99,730        -           -           -           -           -           99,730
preferred stock
for cash at $0.67
per share

Net loss             -           -           -           -           -           -       (416,551)     (416,551)
                                                                                                
Balances at       149,594      99,730     805,400      30,270        -           -       (416,551)     (286,551)
December 31,
1991

Issuance of                                                                       
common stock and     -           -         97,500       5,625        -           -            -           5,625
for cash at $0.05
and $0.10
 per share

Issuance of                                                                           
Series A                                                                        
convertible         49,998      33,332         -           -         -           -            -          33,332
preferred stock 
for cash and in
exchange for 
debt at
$0.67 per share

Issuance of Series                                                                         
B convertible                                                                          
preferred stock for
cash and in
exchange for debt  803,441   2,320,862         -           -         -            -             -       2,320,862
at $2.90 per share,
net of issuance
costs of $9,129

Net loss              -            -           -           -         -            -          (831,928)   (831,928)
                                                                                               
Balances at      1,003,033    2,453,924     902,900      35,895      -            -        (1,248,479)  1,241,340
December 31,
1992

Issuance of                                                                            
Series C 
convertible
preferred                                                                          
stock for cash                                                                          
and in exchange     45,831    2,308,331         -           -        -           -              -      2,308,331
for debt at $3.60
per share, net
of issuance costs
of $16,673

Repurchase of                                                                           
common stock at       -            -        (197,221)     (6,574)     -           -             -          (6,574)
$0.03 per share

Net loss             -            -            -           -          -           -       (1,654,609)   (1,654,609)
                                                                                               
Balances at     1,648,864    4,762,255      705,679      29,321       -           -       (2,903,088)    1,888,488
December 31,
1993

Issuance of                                                                      
common stock         -            -         231,000      84,700    (84,700)       -             -             -
in exchange
for notes receivable
at $0.37 per
share

Repayment of         -            -            -           -           220        -             -              220
notes receivable

Issuance of                                                                           
Series D
convertible
preferred                                                                          
stock for cash                                                                         
and in          1,854,594    7,803,638         -           -          -           -             -        7,803,638
exchange for 
debt plus
accrued
interest  at
$4.23 per share,
net of issuance
costs of
$35,195

Net loss             -            -            -           -         -            -       (3,732,677)   (3,732,677)
                                                                                               
Balances at     3,503,458   12,565,893      936,679     114,021    (84,480)       -       (6,635,765)    5,959,669
December 31,
1994
                             
Issuance of                                                                                       
common stock 
in exchange          -            -         397,375     155,714   (142,544)       -             -           13,170
exchange for 
cash and a
note receiv-
able at 
prices from
$0.33 to $0.43
per share

Repurchase of                                                                                     
common stock at      -             -         (7,029)     (2,577)     2,577        -             -             - 
$0.37 per share

Repayments of        -            -            -           -       27,783        -             -           27,783
notes receivable

Issuance of                                                                                       
Series E                                                                                          
convertible     2,108,452    11,553,167         -           -         -           -             -       11,553,167
preferred
stock for 
cash at $5.50
per share,
net of issuance
costs of $43,347

Net loss             -             -            -           -         -           -        5,432,768)   (5,432,768)
                                                                                                  
Balances at     5,611,910    24,119,060    1,327,025     267,158  (196,664)       -      (12,068,533)   12,121,021
December 31,
1995      

Issuance of                                                                                       
common stock in                                                                                    
exchange for         -             -         662,629     349,647  (287,330)       -             -           62,317
cash and notes 
receivable at
prices from
$0.10 to $5.33
per share

Repurchase of       -             -           (2,766)     (1,189)    1,189        -             -             - 
common stock at
$0.43 per share

Issuance of                                                                                       
common stock   (5,611,910) (24,119,060)     5,727,166   24,119,060      -         -             -             -      
upon conversion   
of preferred
stock and
warrants, net

Issuance of                                                                                       
common stock in                                                                                   
exchange for        -             -         2,500,000   24,591,588      -         -             -       24,591,588
cash at $11.00                 
per share , net
of issuance
costs of
$983,412

Deferred            -             -             -          494,893      -       (494,893)        -             -
compensation           

Amortization
of deferred         -             -             -            -          -        186,654          -         186,654
deferred
compensation

Net change in       -             -            -             -          -            -           6,752        6,752
unrealized gain      
(loss) on
available-for
sale investments

Net loss            -             -            -             -          -            -      (9,082,161)   (9,082,161)

Balances at         -             -     $10,214,054   $49,821,157 $(482,802)    $(308,239) $(21,143,942)  $27,886,171
December 31, 1996                      
</TABLE>
<TABLE>
                                        

                               Aradigm Corporation
                          (A development stage company)
                                        
                            Statements of Cash Flows
                                                                                               
                                                                              Period from
<CAPTION>
                                                                              January 30,
                                                                                1991
                                           Years ended December 31,          (inception)
                                                                              through
                                                                              December 31
                                                                                              ,
                                         1996        1995         1994             1996
<S>                                <C>           <C>           <C>            <C>
                                                                                               
Cash flows used in                                                                             
operating activities

Net loss                           $(9,082,161)  $(5,432,768)  $(3,732,677)   $(21,150,694)

Adjustments to reconcile                                                                       
net loss to net cash used
in operating activities:

Depreciation and                       389,703       192,495        87,678         719,459
amortization

Amortization of deferred               186,654          -             -            186,654
compensation

Accrued interest on note                  -             -           32,622          32,622
exchanged for preferred
stock

Loss on disposal of                       -           18,467           -            37,666
property and equipment

Loss on sale-leaseback                    -           95,294           -            95,294
transaction

Changes in operating                                                                           
assets and liabilities:

Contract receivable                    260,000      (260,000)          -             -
Other current assets                  (377,093)      (38,334)       (20,237)     (451,220)
Other assets                            (7,558)      (59,779)        (5,520)      (75,657)
Accounts payable                       426,376       (41,145)        87,824       601,230
Accrued liabilities                  1,171,514       118,262        129,103     1,457,605
Deferred revenue                       (60,500)      230,000           -          169,500

Net cash used in                    (7,093,065)   (5,177,508)    (3,421,207)  (18,377,541)
operating activities
                                                                                               
Cash flows used in                                                                             
investing activities

Capital expenditures                  (811,583)     (535,230)      (195,077)   (1,695,744)

Purchases of available            (190,666,647)         -              -     (190,666,647)
for sale investments

Proceeds from maturities of        180,693,623          -              -      180,693,623
available for sale
investments

Net cash used in                   (10,784,607)     (535,230)      (195,077)  (11,668,768)
investing activities
                                                                                               
Cash flows provided by                                                                         
financing activities

Proceeds from issuance of                 -             -         1,500,000     2,111,395
notes payable to
shareholders

Repayment of notes payable                -             -              -         (298,972)
to shareholders

Proceeds from issuance of                 -       11,553,167      6,271,016    22,274,014
preferred stock

Proceeds from issuance of           24,653,905        40,953            220    24,710,973
common stock, net

Repurchase of common stock                -             -              -           (6,574)

Proceeds from sale of                                                                          
equipment in sale-                        -          389,621           -          389,621
leaseback transaction

Notes receivable from                  (69,295)     (150,444)          -         (219,739)
officers

Payments on lease                     (270,462)      (90,116)          -         (360,578)
obligations

Net cash provided by                24,314,148    11,743,181      7,771,236    48,600,140
financing activities
                                                                                               
Net increase in cash and             6,436,476     6,030,443      4,154,952    18,553,831
cash equivalents

Cash and cash equivalents           12,117,355     6,086,912      1,931,960          -  
at beginning of period

Cash and cash equivalents         $ 18,553,831   $12,117,355     $6,086,912   $18,553,831
at end of period

Supplemental investing                                                                         
and financing activities

Common stock issued in            $       -      $      -        $     -      $    20,000
exchange for equipment

Common stock issued in            $    286,141   $   142,544     $   84,700   $   513,385
exchange for notes
receivable

Preferred stock issued in         $       -      $      -        $1,500,000   $ 1,812,423
exchange for debt

Acquisition of equipment          $    394,737   $   584,526     $     -      $   979,263
under capital leases
</TABLE>
                                        
1. Organization and Summary of Significant Accounting Policies

Organization and Description of Business
Aradigm  Corporation (the OCompanyO) was incorporated  in  the  State  of
California  on  JanuaryE30, 1991. Since inception, the Company  has  been
engaged  in  the  development  of non-invasive  pulmonary  drug  delivery
products. The CompanyOs principal activities to date have been conducting
research  and  development, recruiting personnel,  focusing  on  business
development,  raising capital and acquiring assets.  Accordingly,  it  is
considered a development stage company.

Basis of Presentation
The  Company  expects increasing losses over the next  several  years  as
development efforts continue. Management plans to continue to finance the
Company  primarily through issuances of equity securities,  research  and
development contract revenue, capital lease financing, and in the  longer
term,   revenue  from  product  sales.  If  the  financing   arrangements
contemplated by management are not consummated, the Company may  have  to
seek other sources of capital or re-evaluate operating plans.

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.

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
remaining term of the lease.

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.  Non-refundable
signing  or  license  fee  payments that  are  not  dependent  on  future
performance under collaborative agreements are recognized as revenue when
received.

Net Loss Per Share
Except  as noted below, net loss per share is computed using the weighted
average  number of shares of common stock outstanding. Common  equivalent
shares  from stock options and warrants are excluded from the computation
as  their effect is antidilutive, except that, pursuant to the Securities
and  Exchange  Commission Staff Accounting Bulletins, common  and  common
equivalent  shares  issued at prices below the Company's  June  20,  1996
initial  public offering price during the 12-month period  prior  to  the
offering  have  been  included  in  the  calculation  as  if  they   were
outstanding  for  all  periods through the offering (using  the  treasury
stock method and the initial public offering price).

As  described above, the antidilutive effect of certain stock options  is
included  in  the  calculation of loss per share for all periods  through
June 20, 1996, but is excluded from the calculation after that date.  The
following pro forma per share data is provided to show the calculation on
a  consistent basis for 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.

Per share information calculated on the above basis is as follows:

                                 Years ended December 31,
                                    1996        1995
                                                      
Pro forma net loss pershare        $(1.02)     $(0.76)

Shares used in computing
pro forma net loss per share      8,917,246    7,195,556


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, corporate master notes, and market auction preferreds.
The  Company's  short-term investments consist of  corporate  notes  with
maturities  ranging  from 3 to 12 months. Other  investments  consist  of
corporate notes with maturities greater than 12 months.

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

The  following summarizes available-for-sale investment at  December  31,
1996:

                                             Estimated Fair Value
                                             December 31, 1996
Cash and cash equivalents:                   
  Money market fund                           $  17,036
  Commercial paper                           16,938,517
  Market auction preferreds                   1,100,000
                                            $18,055,553
                                             
Short-term investments:                      
  Corporate notes                            $6,977,331
                                             
Investments:                                 
  Corporate notes                            $3,002,445
                                             
As  of December 31, 1996, the difference between the estimated fair value
and  the  amortized cost of available-for-sale securities was immaterial,
the  average  portfolio duration was approximately four months,  and  the
contractual maturity of any single investment did not exceed 17 months.

3. Property and Equipment

Property and equipment is comprised of the following:
                                             December 31,
                                           1996        1995
                                                     
Machinery and equipment                 $600,668     $340,469
Furniture and fixtures                   272,384      153,992
Lab equipment                            594,168      222,845
Computer equipment and software          495,700      240,725
Leasehold improvements                   201,431         -
                                       2,164,351      958,031
Less accumulated depreciation and       (711,383)    (321,680)
amortization
                                      $1,452,968     $636,351

Property  and  equipment  at  December 31,  1996  includes  assets  under
capitalized  leases  of  approximately  $980,000  ($585,000   in   1995).
Accumulated  amortization  related to  leased  assets  was  approximately
$344,000 at December 31, 1996 ($99,000 in 1995).

4. Leases and Commitments

In  June  1995,  as  part  of a sale-leaseback transaction,  the  Company
entered  into a $1,750,000 capital lease line of credit for financing  of
equipment.   At  December  31, 1996 and 1995 approximately  $770,000  and
$1,165,000,  respectively, was available under the lease line  of  credit
arrangement.  The drawdown period under the lease line of credit  expires
in June 1997.  Amounts borrowed under the line of credit bear interest at
10.4% and are collateralized by the equipment purchased.  Under the terms
of  the lease agreement, the Company will have the option to purchase the
leased  equipment at a negotiated price at the end of the 42-month  lease
term.

Future  minimum  lease  payments under operating and  capital  leases  at
December 31, 1996 are as follows:
                                           Operating   Capital
                                           Leases      Leases
Years ending December 31:                            
1997                                       $217,278    $319,052
1998                                        143,652     324,552
1999                                         70,485     114,866
2000                                           -          4,614
Total minimum lease payments               $431,415     763,084
Less amount representing interest                      (144,399)
Present value of future lease payments                  618,685
Current portion of capital lease                     
obligations                                            (268,514)
Noncurrent portion of capital lease                  
 obligations                                          $ 350,171

The  Company  occupies  three facilities under  operating  leases.   Rent
expense  under  these  operating  leases totaled  $197,341,  $76,320  and
$61,357   for  the  years  ended  December  31,  1996,  1995  and   1994,
respectively,  and  $417,127 for the period from inception  (January  30,
1991) through December 31, 1996.

5. Shareholders Equity

Capital Stock
On  June  20, 1996, the Company completed the initial public offering  of
its  common stock.  The Company issued 2,500,000 shares for net  proceeds
of $24,591,588.  Prior to the closing of the initial public offering, the
Company effected a three-for-two split of its outstanding capital  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  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.

In  June  1996,  in connection with the closing of the Company's  initial
public  offering, warrants to purchase convertible preferred  stock  were
automatically converted and exercised for 115,256 shares of common stock.

At  December  31,  1996, the Company has reserved 37,500  shares  of  its
common  stock  for issuance upon exercise of 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.

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
this  Plan  may  be either incentive or nonstatutory stock  options.   At
December  31, 1996 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 exerciseable 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, 1996 and 1995,  notes
receivable from shareholders of $482,805 and $196,664, 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 1996, the Company granted
options to purchase 523,520 shares of common stock of which 183,809, with
a weighted average fair value of $1.28, were exercised and are subject to
repurchase.   In 1996 and 1995, the Company repurchased 2,766  and  7,029
shares,  respectively,  in  accordance  with  these  agreements.   As  of
December  31, 1996, 411,156 shares of the Company's common stock remained
subject to repurchase and 966,495 shares were reserved for issuance  upon
exercise of options.

The following is a summary of activity under the Plan:

                                       Options Outstanding
                      Shares                                 Weighted 
                      Available                              Average
                      for Grant    Number of    Price Per    Exercise
                      of Options    Shares      Share        Price
                      
Balance at December                                           
 31, 1993              300,000      285,000    $0.10-$0.33   $0.24
   Shares authorized   225,000         -       $    -        $ -
   Shares granted     (254,175)     254,175    $0.10-$0.37   $0.36
Balance at December                                           
 31, 1994              270,825      539,175    $0.10-$0.37   $0.29
   Shares authorized   150,000         -       $    -        $ -
   Shares granted     (290,550)     290,550    $0.33-$0.43   $0.43
   Shares exercised      -         (335,876)   $0.33-$0.43   $0.38
   Shares forfeited     41,607      (41,607)   $0.33-$0.43   $0.39
Balance at December                                           
 31, 1995              171,882      452,242    $0.10-$0.43   $0.30
   Shares authorized 1,005,000         -       $    -        $ -
   Shares granted     (523,520)     523,520    $0.57-$9.88   $3.66
   Shares exercised       -        (662,629)   $0.10-$5.33   $0.53
Balance at December                                           
 31, 1996              653,362      313,133    $0.10-$9.88   $5.45


                          Options Outstanding and Exercisable
                                 Weighted     
                                 Average      Weighted Average
                                 Exercise     Remaining Contractual
Exercise Price        Number     Price        Life(in years)
Range
$0.10-$2.00           69,033               $0.46                  7.62
$4.00-$5.67          156,600               $5.23                  9.40
$9.75-$9.88           87,500               $9.79                  9.83
$0.10-$9.88          313,133               $5.45                  9.12

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  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  generally
recognizes no compensation expense with respect to such awards.

Pro  forma information regarding net loss and 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  stock  options  granted
subsequent to December 31, 1994 under the fair value method prescribed by
this  statement.  The fair value for these 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  5.1%-6.6%
and   5.5%-7.9%  for  the  years  ending  December  31,  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.

The  Company has 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  period  ended December 31,  1996  was  approximately
$187,000.  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.  The weighted average  fair
value of options granted during 1996 with an exercise price equal to  the
fair value of the Company's common stock on the date of grant was $5.60.

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,
                                      1996             1995
Pro forma net loss                 $(9,117,000)     $(5,437,000)
Net loss - as reported             $(9,082,000)     $(5,433,000)
                                                   
Pro forma net loss per share       $ (1.23)        $ (1.47)
Net loss per share - as reported   $ (1.22)        $ (1.47)

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, 1996 reflects
compensation  expense  for  two years' vesting,  while  the  year  ending
December  31,  1997 will reflect compensation expense  for  three  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 or purchase date.  No shares  have
been issued under the Purchase Plan as of December 31, 1996.

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.  No  options  have been granted under the Directors'  Plan  as  of
December 31, 1996.

6. Collaborative Agreements

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.   Under  this
agreement, no revenues were recognized as no work was performed in 1996.

In December 1995, 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 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  non-
refundable license fee of $500,000 upon execution of the agreement, which
was recognized as revenue in 1996.

In  January  1994,  the Company entered into a collaborative  development
agreement with a pharmaceutical company to develop a modified version  of
the  SmartMist  system  and to conduct certain performance  studies.  The
agreement provided for a $125,000 research and development payment and  a
payment  of  $125,000  upon acceptance by the pharmaceutical  company  of
certain  specified  deliverables.  Costs  associated  with  research  and
development  activities attributable to this agreement  approximated  the
revenues  recognized.  Under this agreement, revenues  of  $125,000  were
recognized in both 1994 and 1995.

7. Related Party Transactions

At  DecemberE31,  1996,  the  Company  holds  notes  receivable  totaling
$219,739  from  officers of the Company. Included therein  is  a  $53,254
promissory  note  bearing interest at 6% per annum, due  and  payable  on
FebruaryE7,  2001, and collateralized by certain personal assets  of  the
officer  and a $90,000 full recourse promissory note bearing no  interest
and due and payable on SeptemberE18, 1998.

At  DecemberE31,  1996, 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.

8. Income Taxes

The  Company  uses the liability method to account for  income  taxes  as
required   by  Statement  of  Financial  Accounting  Standards   No.E109,
OAccounting for Income Taxes.O 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  CompanyOs  deferred  tax   assets   (in
thousands) are as follows:

                              December 31,

                            1996       1995

                                    

Net operating loss carry    $7,336    $4,520
 forward                            

Research and development            
credit carryforward            851       476


Other                          611        51

Gross deferred tax           8,798     5,047
assets

Valuation allowance         (8,798)   (5,047)

Net deferred tax assets     $   -     $  -

The  valuation allowance increased by $3,751,000 and $2,203,000  in  1996
and 1995, respectively.

At December 31, 1996, the Company had net operating loss carryforwards of
approximately $18,000,000 for federal income tax purposes expiring in the
years  2006  through 2011 and net operating losses for state  income  tax
purposes  of  $17,000,000 expiring in the years  1997  through  2001.  At
December 31,  1996,  the  Company  had research  and  development  credit
carryforwards for federal income tax purposes of approximately  $600,000,
which expire in the years 2006 through 2011.

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.

Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
       FINANCIAL DISCLOSURE

      At  a meeting held on March 14, 1995, the Board of Directors of the
Company  approved the engagement of Ernst & Young LLP as its  independent
auditors  for  the fiscal year ending December 31, 1994.   Prior  to  the
engagement  of  Ernst  &  Young LLP, Bregante +  Company  LLP  served  as
independent auditors of the Company.  The Audit Committee of the Board of
Directors approved the change in auditors on that date.

      The  report  of  Bregante + Company LLP on the company's  financial
statements  for  the  year ended December 31, 1993  did  not  contain  an
adverse  opinion  or  a disclaimer of opinion and was  not  qualified  or
modified as to uncertainty, audit scope, or accounting principles.

      In  connection with the audit of the Company's financial statements
for  the fiscal year ended December 31, 1993, there were no disagreements
with  Bregante  + Company LLP on any matters of accounting principles  or
practices,  financial  statement  disclosure,  or  auditing   scope   and
procedures  which,  if  not resolved to the satisfaction  of  Bregante  +
Company  LLP, would have caused Bregante + Company LLP to make  reference
to the matter in their report.

                               
                           PART III.
                               

Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Identification of Directors

       The  information  required by this Item concerning  the  Company's
directors  is  incorporated  by reference  from  the  sections  captioned
"Proposal   1:   Election  of  Directors"  contained  in  the   Company's
Definitive  Proxy Statement related to the Annual Meeting of Shareholders
to  be  held May 20, 1997, to be filed by the Company with the Securities
and Exchange Commission (the "Proxy Statement").

Identification of Executive Officers

       The  information  required by this Item concerning  the  Company's
executive offices is set forth in Part I of this Report.


Item 11. EXECUTIVE COMPENSATION

       The information required by this Item is incorporated by reference
from  the  section  captioned "Executive Compensation" contained  in  the
Proxy Statement.


Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       The information required by this Item is incorporated by reference
from  the  section  captioned "Security Ownership of  Certain  Beneficial
Owners and Management" contained in the Proxy Statement.

Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       The information required by this Item is incorporated by reference
from   the   section  captioned  "Certain  Transactions"  and  "Executive
Compensation" contained in the Proxy Statement.


                               
                               
                            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          35
     
     Report of Bregante + Company LLP, Independent Auditors     36
     
     Balance Sheets December 31, 1996 and 1995                  37
     
     Statements of Operations Years ended December 31, 1996,
     1995, and 1994                                             38
     
     Statements of Shareholders' Equity Years ended
     December 31, 1996, 1995 and 1994                           39
     
     Statements of Cash Flows Years ended December 31, 1996,
     1995 and 1994                                              41
     
     Notes to Financial Statements                              42

  (2) Financial Statement Schedules.
      None.

  (3) Exhibits.
      3.1 (1) Amended and Restated Articles of Incorporation of the
               Company.
      3.2 (1) Bylaws of the Company
      4.1     Reference is made to Exhibits 3.1 and 3.2
      4.2 (1) Specimen stock certificate
      4.3 (1) Amended and Restated Investor Rights Agreement, dated
               December 22, 1995, among the Company and certain of its
               shareholders
      10.1 (1) (2) Form of Indemnity Agreement between the Registrant
               and each of its directors and officers
      10.2 (1) (2) The Company's Equity Incentive Plan, as amended (the
               "Equity Incentive Plan")
      10.3 (1) (2) Form of the Company's Incentive Stock Option
               Agreement under the Equity Incentive Plan
      10.4 (1) (2) Form of the Company's Nonstatutory Stock Option
               Agreement under the Equity Incentive Plan
      10.5 (1) (2) Form of the Company's Non-Employee Directors' Stock
               Option Plan
      10.6 (1) (2) Form of the Company's Nonstatutory Stock Option
               Agreement under the Non-Employee Directors' Stock Option
               Plan
      10.7 (1) (2) Form of the Company's Employee Stock Purchase Plan
      10.8 (1) (2) Form of the Company's Employee Stock Purchase Plan
               Offering Document
      10.9 (1)Lease Agreement for the property located at 26219 Eden
               Landing Road, Hayward, California, dated November 1992 and
               amended November 29, 1994, between the Company and Hayward
               Point Eden I Limited Partnership
      10.10 (1)    Lease Agreement for the property located at 26224
               Executive Place, Hayward, California, dated November 29,
               1994 and amended January 30, 1995, between the Company and
               Hayward Point Eden I Limited Partnership
      10.11 (1)    Lease Agreement for the property located at 3930
               Point Eden Way, Hayward, California, dated February 21,
               1996, between the Company and Hayward Point Eden I Limited
               Partnership
      10.12 (1) (2)Stock Purchase Agreement and related agreements,
               including Promissory Note, dated May 19, 1994, between the
               Company and Richard P. Thompson
      10.13 (1) (2)Stock Purchase Agreement and related agreements,
               including Promissory Note, dated May 23, 1995, between the
               Company and R. Ray Cummings
      10.14 (1) (2)Note Agreement and Promissory Note Secured by Deed of
               Trust, dated May 1, 1995, between the Company and R. Ray
               Cummings
      10.15 (1) (2)Promissory Note, dated October 26, 1995, between the
               Company and Igor Gonda
      10.16 (1) (2)Promissory Note, dated December 27, 1995, between the
               Company and Igor Gonda
      10.17 (1)    Master Lease Agreement and Warrant, between the
               Company and Comdisco, Inc., dated June 9, 1995
      11.1    Statement regarding computation of pro forma per share
               loss. Reference is made to page 56.
      23.1    Consent of Ernst & Young L.L.P., Independent Auditors.
               Reference is made to page 57.
      23.2    Consent of Bregante + Company L.L.P., Independent
               Auditors.  Reference is made to page 58.
      24.1    Power of Attorney.  Reference is made to page 54.

(b)       Reports on Form 8-K.
          None filed.

(c)       Index to Exhibits.
          See Exhibits listed under Item 14 (a) (3)

(d)       Financial Statement Schedules.
          None.


(1)   Incorporated by reference to the indicated exhibit in the Company's
  Registration Statement (No. 333-4236), as amended.
(2)  Represents a management contract or compensatory plan or
  arrangement.


                          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 8th  day
of May, 1997.


                              ARADIGM CORPORATION

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


                       POWER OF ATTORNEY

   KNOW  ALL  PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Richard P.
Thompson  and Reid M. Rubsamen, M.D., and each one of them, attorneys-in-
fact  for the undersigned, each with the power of substitution,  for  the
undersigned in any and all capacities, to sign any and all amendments  to
this Report on Form 10-K, and to file the same, with exhibits thereto and
other  documents in connection therewith, with the Securities an Exchange
Commission,  hereby  ratifying  and confirming  all  that  each  of  said
attorneys-in-fact,  or his substitutes, may do or cause  to  be  done  by
virtue hereof.

   IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his/her name.

   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/                   President, Chief Executive Officer    March 27,1997
Richard P. Thompson   and Director (Principal Executive
                      Officer)


/s/                   Vice President, Finance and           March 27,1997
Mark A. Olbert        Administration and Chief
                      Financial Officer (Principal
                      Financial and Accounting Officer)


/s/                   Vice President, Medical               March 27,1997
Reid M. Rubsamen, M.D Affairs, Secretary and
                      Director



/s/                   Chairman of the Board of              March 27,1997
Lester John Lloyd     Directors


/s/                   Director                              March 27,1997
Jared A. Anderson, Ph.D.


/s/                   Director                              March 27,1997
Ross A. Jaffe, M.D.


/s/                   Director                              March 27,1997
Burton J. McMurtry, Ph.D.


/s/                   Director                              March 27,1997
Gordon W. Russell


/s/                   Director                              March 27,1997
Fred E. Silverstein, M.D.


/s/                   Director                              March 27,1997
Virgil D. Thompson
                                                                         
                                                                         


                                                             EXHIBIT 11.1
                                                                         
                                                                         
                               
                      ARADIGM CORPORATION
     STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE



                                   Twelve Months Ended December 31,
                                1996         1995         1994
                                                          
Net loss                        $(9,082,161) $(5,432,768) $(3,732,677)
                                                          
                                                          
Shares used in calculation of                             
net loss per share:
                                                          
  Weighted average Common       6,098,038    1,004,133         848,555
shares outstanding
  Shares related to SAB         1,343,978    2,687,955       2,687,955
Nos. 55, 64, and 83                                       
  Shares used in computing      7,442,016    3,692,088       3,536,510
net loss per share                                        
                                                          
Net loss per share             $   (1.22)   $   (1.47)        $  (1.06)
                                                          
                                                          
                                                          
Shares used in calculation of                             
supplemental net loss per share:                                     
                                                          
Shares used in computing      7,442,016                    3,692,088
 net loss per share
Adjusted to reflect effect                              
 of assumed conversion
 of preferred stock from      1,475,230                    3,503,468
 date of issuance
Shares used in computing                                
 supplemental net
 loss per share               8,917,246                    7,195,556
                                                          
Supplemental net loss per    $   (1.02)                   $     (.76)
share

















                                                             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 7, 1997, with respect
to the financial statements of Aradigm Corporation included in the Annual
Report (Form 10-K) for the year ended December 31, 1996.


                                                  ERNST & YOUNG

Palo Alto, California
March 27, 1997
                               
                               
                                                             EXHIBIT 23.2
                                                                         
                                                                         
      CONSENT OF BREGANTE + COMPANY, 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 22, 1994, with
respect to the financial statements of Aradigm Corporation included in
the Annual Report (Form 10-K) for the year ended December 31, 1996.


                                           BREGANTE + COMPANY LLP

San Francisco, California
March 27, 1997