<PAGE>


                                 UNITED STATES 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON,  DC  20549

                                    FORM 10-Q

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

For the quarterly period ended March 31, 1997

                                         or,

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

For the transition period from ____________________ to ____________________

                         COMMISSION FILE NUMBER: 0-23556

                           INHALE THERAPEUTIC SYSTEMS
             (Exact name of registrant as specified in its charter)

     CALIFORNIA                                   94-3134940          
- -------------------------------        ---------------------------------
(State of other jurisdiction of        (IRS Employer Identification No.)
incorporation or organization)     

                             1060 EAST MEADOW CIRCLE
                          PALO ALTO,  CALIFORNIA  94303
                    (Address of principal executive offices)

                                  415-846-2600
              (Registrant's telephone number, including area code)

                                 Not applicable
- ---------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)


Indicate by check mark whether the registrant (1) has filed all reports required
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.
[X] Yes        [ ]  No



                       APPLICABLE ONLY TO CORPORATE ISSUERS

The number of outstanding shares of the registrant's Common Stock, no par value,
was 13,642,004 as of May 1, 1997.



<PAGE>


                           INHALE THERAPEUTIC SYSTEMS
                                     INDEX




PART I: FINANCIAL INFORMATION 
                                                                          PAGE


Item 1.   Condensed Financial Statements - unaudited.....................   3

          Condensed Balance Sheets - March 31, 1997  
             and December 31, 1996.......................................   3

          Condensed Statements of Operations for the three months
             ended March 31, 1997 and 1996...............................   4
     
          Condensed Statements of Cash Flows for the three months ended
             March 31, 1997 and 1996.....................................   5
     
          Notes to Condensed Financial Statements........................   6
     

Item 2.   Management's Discussion and Analysis of Financial Condition and 
             Results of Operations.......................................   7
     
     
     

PART II:  OTHER INFORMATION


Item 1.   Legal Proceedings..............................................  13


Item 2.   Changes in Securities..........................................  13


Item 3.   Defaults Upon Senior Securities................................  13


Item 4.   Submission of Matters to a Vote of Security Holders............  13


Item 5.   Other Information..............................................  13


Item 6.   Exhibits and Reports on Form 8-K...............................  14

          Signatures.....................................................  15



                                                                Page 2 of 15


<PAGE>


Item 1.

                            INHALE THERAPEUTIC SYSTEMS

                             Condensed Balance Sheets
                                  (in thousands)


<TABLE>
<CAPTION>
                                                 March 31, 1997  December 31, 1996
                                                 --------------  -----------------
                                                   (unaudited)       (Note) 
<S>                                              <C>             <C>
                                     ASSETS
Current assets:
     Cash and cash equivalents                      $   36,662     $  18,568
     Short-term investments                             31,123        17,741
     Other current assets                                  887         1,239
                                                    ----------     ---------
            Total current assets                        68,672        37,548

Property and equipment, net                              4,210         3,770
Deposits and other assets                                  135           174
                                                    ----------     ---------
                                                     $  73,017     $  41,492
                                                    ----------     ---------
                                                    ----------     ---------

                        LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable and accrued liabilities       $    2,987     $   3,042
     Accrued compensation                                1,037           479
     Deferred revenue - current portion                  5,191         2,723
                                                    ----------     ---------
            Total current liabilities                    9,215         6,244

Equipment financing obligations                            175           187

Shareholders' equity:
     Common stock, no par value: 30,000
         shares authorized, 13,642 shares and
         11,835 shares issued and outstanding at 
         March 31, 1997 and December 31, 1996, 
         respectively.                                  93,415        62,840
     Deferred compensation                                 (47)          (88)
     Accumulated deficit                               (29,741)      (27,691)
                                                    ----------     ---------
           Total shareholders' equity                   63,627        35,061
                                                    ----------     ---------
                                                     $  73,017     $  41,492
                                                    ----------     ---------
                                                    ----------     ---------
</TABLE>


Note:     The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required  by generally accepted accounting principles
for complete financial statements.


SEE ACCOMPANYING NOTES.


                                                                Page 3 of 15


<PAGE>


                             INHALE THERAPEUTIC SYSTEMS

                        Condensed Statements of Operations
                   (in thousands, except per share information) 
                                   (unaudited) 



                                       THREE MONTHS ENDED MARCH 31,
                                       -----------------------------
                                            1997           1996
                                       -----------------------------
Contract research revenue                 $  3,177      $  1,482 

Operating costs and expenses:
    Research and development                 4,569         2,916 
    General and administrative               1,382           702 

                                          --------      --------
Total operating costs and expenses           5,951         3,618 
                                          --------      --------

Loss from operations                        (2,774)       (2,136)


Interest income, net                           730           235 

                                          --------      --------

Net loss
                                         $  (2,044)     $ (1,901)
                                          --------      --------
                                          --------      --------

Net loss per share                       $   (0.16)     $  (0.19)
                                          --------      --------
                                          --------      --------

Shares used in computing net loss 
  per share                                 12,878        10,151
                                          --------      --------
                                          --------      --------


SEE ACCOMPANYING NOTES.


                                                                Page 4 of 15


<PAGE>


                           INHALE THERAPEUTIC SYSTEMS

                       Condensed Statements of Cash Flows
                Increase/(Decrease) in Cash and Cash Equivalents
                                 (in thousands)
                                   (unaudited)


<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED
                                                              MARCH 31,
                                                       -------------------------
                                                          1997          1996
                                                       ----------    -----------
<S>                                                    <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Cash provided by (used in) operations                 $  1,868     $  (3,039)


CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of available for sale securities,
      net of sales and maturities                         (13,388)        1,462
   Purchases of property and equipment, net                  (898)         (344)
                                                         --------     ---------
Net cash provided by (used in) investing activities       (14,286)        1,118

CASH FLOWS FROM FINANCING ACTIVITIES:
   Payments of equipment financing obligations                (63)          (62)
   Issuance of common stock, net of issuance costs         30,575            11
                                                         --------     ---------
   Net cash provided by financing activities               30,512        12,083
                                                         --------     ---------
Net increase (decrease) in cash and cash equivalents       18,094        (1,972)

Cash and cash equivalents at beginning of period           18,568         3,834
                                                         --------     ---------

Cash and cash equivalents at end of period               $ 36,662     $   1,862
                                                         --------     ---------
                                                         --------     ---------

</TABLE>


SEE ACCOMPANYING NOTES.


                                                                Page 5 of 15


<PAGE>

                           INHALE THERAPEUTIC SYSTEMS


                   NOTES TO CONDENSED FINANCIAL STATEMENTS
                                 March 31,1997
                                  (unaudited)

1.   BASIS OF PRESENTATION

     The accompanying unaudited condensed financial statements of Inhale
Therapeutic Systems ("Inhale" or the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions for Form 10-Q and Article 10 of Regulation S-X.  The
balance sheet as of March 31, 1997 and the related statements of operations and
cash flows for the three month periods ended  March 31, 1997 and 1996, are
unaudited but include all adjustments (consisting of normal recurring
adjustments) which the Company considers necessary for a fair presentation of
the financial position at such dates and the operating results and cash flows
for those periods.  Although the Company believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information normally included in financial statements and
related footnotes prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission (the "Commission").  The accompanying
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 filed with the Commission.

     Results for any interim period are not necessarily indicative of results
for any other interim period or for the entire year.

2.   REVENUE RECOGNITION

     Contract revenue from collaborative research agreements is recorded when
earned and as the related costs are incurred.  Payments received which are
related to future performance are deferred and recognized as revenue when earned
over future performance periods.  In accordance with contract terms, up-front
and milestone payments from collaborative research agreements are considered
reimbursements for costs incurred under the agreements, and accordingly, are
generally recognized based on actual efforts expended over the terms of the
agreements.  The Company's research revenue is derived primarily from partners
in the pharmaceutical and biotechnology industries.  All of the Company's
research and development agreements are generally cancelable by the partner
without significant penalty to the partner. Contract research revenue from 
two partners represented 75% of the Company's revenue in the three month 
period ended March 31, 1997.  Contract revenue from two partners accounted 
for 85% of the Company's revenue in the comparable period in 1996.  Costs 
of contract research revenue approximate such revenue and are included 
in research and development expenses.

3.   NET LOSS PER SHARE

     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.

     In February 1997, the Financial Accounting Standard Board issued Statement
No. 128, EARNINGS PER SHARE, which is required to be adopted on December 31,
1997.  At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods.  Under the
new requirements for calculating basic, formerly primary, earnings per share,
the dilutive effect of stock options will be excluded.  The statement is
expected to have no impact on the Company's primary or fully diluted earnings
per share for the first quarter ended March 31, 1997 and March 31, 1996. 

4.   EQUITY

     In February 1997 the Company received  $30.4 million in net proceeds from 
a private placement of 1,800,000 shares its Common Stock  to a group of
institutional investors at a price of $18 per share. 


                                                                Page 6 of 15


<PAGE>


I
tem 2.


       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                            RESULTS OF OPERATIONS

     This Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three months ended March 31, 1997 and 1996 should
be read in conjunction with the Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. The following
discussion contains forward-looking statements that involve risk and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed herein as well as those
discussed under the heading "Risk Factors" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.  
     
     Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof.  The
Company undertakes no obligation to publicly release the results of any revision
to these forward-looking statements which may be made to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
     
OVERVIEW

     Since its inception in July 1990, Inhale has been engaged in the 
development of a pulmonary system for the delivery of macromolecules and 
other drugs for systemic and local lung applications.  The Company has been 
unprofitable since inception and expects to incur significant and increasing 
additional operating losses over the next several years primarily due to 
increasing research and development expenditures and expansion of late stage 
clinical and early stage commercial manufacturing facilities.  To date, 
Inhale has not sold any products and does not anticipate receiving revenue 
from product sales or royalties in the near future.  For the period from 
inception through March 31, 1997, the Company incurred a cumulative net loss 
of approximately $29.7 million.  Inhale's sources of working capital have 
been equity financing, financing of equipment acquisitions, interest  earned 
on investments of cash, and revenues from short-term research and feasibility 
agreements and development contracts.

     Inhale typically has been compensated for research and development expenses
during initial feasibility work performed under collaborative arrangements.
Inhale's strategy is to enter into development contracts with pharmaceutical and
biotechnology corporate partners after feasibility is demonstrated. Partners
that enter into collaborative agreements will pay for research and development
expenses and may make payments to Inhale as it achieves certain key milestones. 
Inhale expects to receive royalties from its partners based on revenues received
from product sales, and to receive revenue from the manufacturing of powders and
the supply of devices.  In certain cases, the Company may enter into
collaborative agreements under which the Company's partners would manufacture or
package powders or supply inhalation devices, thereby potentially limiting one
or more sources of revenue for the Company.  To achieve and sustain profitable
operations, the Company, alone or with others, must successfully develop, obtain
regulatory approval for, manufacture, introduce, market and sell products
utilizing its pulmonary drug delivery system.  There can be no assurance that
the Company can generate sufficient product or contract research revenue to
become profitable or to sustain profitability.

RESULTS OF OPERATIONS

     Revenue in the first quarter of 1997 was $3,177,000, as compared to
$1,482,000 in the first quarter of 1996, an increase of 114%.  The increase in
revenue was primarily due to the signing of additional corporate partners in
1997.  In January 1997 the Company entered into a development agreement with Eli
Lilly and Company ("Lilly") to develop pulmonary-delivery for a selected
osteoporosis product.  Under the terms of the agreement, Inhale will receive up
to an estimated $20 million in initial fees, funding for research and milestone
payments.   In return, Lilly will receive global commercialization rights for
the pulmonary delivery of the products with Inhale receiving royalties on any
marketed products.  In addition, in January 1997 the Company entered into an
agreement with Centeon L.L.C. to develop a 


                                                                Page 7 of 15


<PAGE>

pulmonary formulation of alpha-1 proteinase inhibitor.  Under this agreement 
the Company will receive up to an estimated $15 million in funding for 
research and milestone payments and royalties on future product sales.  In 
return, Centeon will receive commercialization rights worldwide outside of 
Japan.  Revenue for the first quarter of 1997 and 1996 was comprised of 
reimbursed research and development expenses and the amortization of the 
pro-rata portion of the up-front signing and milestone payments based on 
actual efforts expended.  Costs of contract research revenue approximate such 
revenue and are included in research and development expense.

     Research and development expenses increased to approximately $4,569,000 
in the first quarter of 1997 from $2,916,000 in the first quarter of 1996, an 
increase of 57%.  The increase is primarily attributed to continued expansion 
of research activities resulting from an increase in the number of projects, 
additional hiring of scientific personnel, and increased costs of laboratory 
supplies and consulting services.  The Company expects research, development 
and process development spending to increase significantly over the next few 
years as the Company continues to expand its research and development and 
prepares for its initial commercial manufacturing.

     General and administrative expenses increased to $1,382,000 in the first
quarter of 1997 from $702,000 in the first quarter of 1996, an increase of 97%. 
The increase was due primarily to support of the Company's increased research
efforts including administrative staffing, business development activities and
marketing activities.  General and administrative expenses are expected to
continue to increase to support increased levels of research, development and
manufacturing activities.

     Net interest income increased to $730,000 in the first quarter of 1997
compared to $235,000 in the first quarter of 1996, an increase of 211%. 
Interest income was earned on larger cash and investment balances held by the
Company in the quarter ended March 31, 1997, compared to the same period in
1996.  The higher cash and investment balances are a result of the Company
receiving milestone and research funding payments from collaborative partners as
well as the completion of a private placement of the Company's Common Stock in
February 1997 which raised net proceeds of $30.4 million.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has financed its operations primarily through private 
placements and public offerings of its equity securities, contract research 
and milestone revenues, interest income earned on its investments of cash and 
financing of equipment acquisitions. On February 7, 1997 the Company 
completed a private placement of its Common Stock, selling 1.8 million newly 
issued shares for net proceeds of $30.4 million. At March 31, 1997, the 
Company had cash, cash equivalents and short-term investments of 
approximately $67.8 million.

     The Company's operations generated cash of $1.9 million in the three months
ended March 31, 1997, as compared to the Company's operations using $3.0 million
for the three months ended March 31, 1996. The increase in cash flow from
operations is due primarily to the increase in advance payments received under
the Company's collaborative agreements for work to be performed in future
periods. Cash generated from operations differed from the Company's net
operating losses in these periods due principally to depreciation expenses,
decreases in accounts receivable and increases in accounts payable and accrued
liabilities. 

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

     The Company believes that its cash, cash equivalents and short-term
investments as of March 31, 1997 of approximately $67.8 million, together with
interest income and possible additional equipment financing, will be sufficient
to meet its operating expense and capital expenditure requirements at least


                                                                Page 8 of 15


<PAGE>

through 1998.  However, the Company's capital needs will depend on many factors,
including continued scientific progress in its research and development
arrangements, progress with pre-clinical and clinical trials, the time and costs
involved in obtaining regulatory approvals, the costs of developing and the rate
of scale-up of the Company's powder processing and packaging technologies, the
timing and cost of its late-stage clinical and early commercial production
facility, the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims, the need to acquire licenses to new technologies and
the status of competitive products.  To satisfy its long-term needs, the Company
intends to seek additional funding, as necessary, from corporate partners and
from the sale of securities.  There can be no assurance that additional funds,
if and when required, will be available to the Company on favorable terms, if at
all.

RISK FACTORS 

EARLY STAGE COMPANY.  Inhale is in an early stage of development.  There can be
no assurance that the Company's pulmonary delivery technology will prove to be
technically feasible or commercially applicable to a range of macromolecules and
other drugs.  Only four of the Company's pulmonary delivery formulations,
insulin, Interleukin-1 Receptor, salmon calcitonin and a peptide for the
treatment of osteoporosis have been subject to any human clinical testing. 
Although many of the underlying drug compounds with which the Company is working
have been tested in humans by others using alternative delivery routes, Inhale's
potential products will require extensive research, development, preclinical and
clinical testing, and may involve lengthy regulatory review.  There can be no
assurance that any of the Company's potential products will prove safe and
effective in clinical trials, meet applicable regulatory standards, be capable
of being produced in commercial quantities at acceptable cost or be successfully
marketed.  Moreover, even if the Company's products prove to be safe and
effective and are approved for marketing by the United States Food and Drug
Administration ("FDA") and other regulatory authorities, there can be no
assurance that health care providers, payors or patients will accept the
Company's products.  Any failure of the Company to achieve technical
feasibility, demonstrate safety, achieve clinical efficacy, obtain regulatory
approval or, together with partners, successfully market products, would have a
material adverse effect on the Company.

HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY.  The Company
has not been profitable since inception and, through March 31, 1997, had
incurred a cumulative deficit of approximately $29.7 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,
preclinical and clinical testing activities and manufacturing scale-up efforts
expand and as the Company plans and builds its late stage clinical and early
commercial production facility.  All of the Company's potential products are in
research or in the early stages of development, and no revenues have been
generated from approved product sales.  The Company's revenues to date have
consisted primarily of payments under short-term research and feasibility
agreements and development contracts.  To achieve and sustain profitable
operations, the Company, alone or with others, must successfully develop, obtain
regulatory approval for, manufacture, introduce, market and sell products
utilizing its pulmonary drug delivery system.  There can be no assurance that
the Company can generate sufficient product or contract research revenue to
become profitable or to sustain profitability.

DEPENDENCE UPON PARTNERS.  The Company currently does not possess the resources
necessary to develop, complete the FDA approval process for, or commercialize
any of its potential therapeutic products.  The Company's ability to apply its
pulmonary delivery system to a broad range of drugs will depend upon its ability
to establish and maintain collaborative arrangements since many of the drugs
currently approved for sale or in clinical testing are covered by third party
patents.  The Company has entered into collaborative arrangements with certain
of its partners to fund clinical trials, assist in obtaining regulatory approval
and commercialize certain products.  Inhale has also entered into agreements
with partners to test the feasibility of its pulmonary delivery system with
certain of their proprietary molecules.  There can be no assurance that the
Company will be able to enter into additional collaborations or that its
feasibility agreements will lead to collaborations.  There also can be no
assurance that the Company will be able to maintain any such collaborative
arrangements or feasibility agreements or that any such collaborative
arrangements or feasibility agreements will be successful.  The failure of the
Company to enter into or maintain such collaborative arrangements and
feasibility agreements would have a material adverse effect on the


                                                                Page 9 of 15


<PAGE>

Company. Moreover, the inability of the Company to enter into a collaborative 
arrangement with the owner of any patented drug may preclude the Company from 
working with such drug.

     The Company's existing partners have the rights to pursue parallel
development of other drug delivery systems which may compete with the Company's
pulmonary drug delivery system and to terminate their agreements with the
Company at any time without significant penalty.  The Company anticipates that
any future partners would have similar rights.  Although the Company intends
generally to formulate and manufacture powders for partners and to supply
inhalation devices for such powders, certain partners may choose to formulate or
manufacture their own powders, or to develop or supply their own device, thereby
limiting one or more potential sources of revenue for Inhale.  In addition, the
Company anticipates that it may be precluded from entering into arrangements
with companies whose products compete with products sold by its partners.  The
Company also will have limited or no control over the resources that any partner
may devote to the Company's products, over partners' development efforts,
including the design and conduct of clinical trials, and over the pricing of any
such products.  The pharmaceutical and biotechnology industries are
consolidating, and acquisitions by, or of, the Company's existing or potential
collaborative partners may affect the initiation or continuation of any such
collaborations.  There can be no assurances that any of the Company's present or
future collaborative partners will perform their obligations as expected, will
devote sufficient resources to the development, clinical testing or marketing of
the Company's potential products or will not terminate their agreements with the
Company prematurely.  Any parallel development by a partner of alternate drug
delivery systems, development by a partner rather than by Inhale of components
of the delivery system, preclusion from entering into competitive arrangements,
failure to obtain timely regulatory approvals, premature termination of an
agreement, or failure by a partner to devote sufficient resources to the
development and commercialization of the Company's products would have a
material adverse effect on the Company.

DEPENDENCE UPON PROPRIETARY TECHNOLOGY, UNCERTAINTY OF OBTAINING LICENSES OR
DEVELOPING TECHNOLOGY.  The Company's success will depend in part upon
protecting its proprietary technology from infringement, misappropriation,
duplication and discovery.  The Company intends to rely principally on a
combination of patent law, trade secrets and contract law to protect its
proprietary technology in the United States and abroad.  Inhale has filed patent
applications covering certain aspects of its device, powder processing
technology, and powder formulations and pulmonary route of delivery for certain
molecules, and plans to file additional patent applications.  On October 17,
1995 the United States Patent and Trademark Office ("PTO") issued U.S. Patent
No. 5,458,135 to Inhale covering the use of its device as a method for
delivering powder formulations of drugs to the lung.  There can be no assurance
that any of the patents applied for by the Company will issue, or that any
patents that issue will be valid and enforceable.  Even if such patents are
enforceable, the Company anticipates that any attempt to enforce its patents
could be time consuming and costly.

     The patent positions of pharmaceutical, biotechnology and drug delivery
companies, including Inhale, are uncertain and involve complex legal and factual
issues.  Additionally, the coverage claimed in a patent application can be
significantly reduced before the patent is issued.  As a consequence, the
Company does not know whether any of its patent applications will result in the
issuance of patents or, if any patents issue, whether they will provide
significant proprietary protection or will be circumvented or invalidated. Since
patent applications in the United States are maintained in secrecy until patents
issue, and since publication of discoveries in the scientific or patent
literature often lag behind actual discoveries, the Company cannot be certain
that it was the first inventor of inventions covered by its pending patent
applications or that it was the first to file patent applications for such
inventions.  Moreover, the Company may have to participate in interference
proceedings declared by the PTO to determine priority of invention, which could
result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company.  There can be no assurance that the Company's patents,
if issued, would be held valid by a court of competent jurisdiction.  An adverse
outcome could subject the Company to significant liabilities to third parties,
require disputed rights to be licensed from or to third parties or require the
Company to cease using the technology in dispute.

     The Company is aware of numerous pending and issued United States and
foreign patent rights and other proprietary rights owned by third parties that
relate to aerosol devices and delivery, pharmaceutical formulations, dry powder
processing technology and the pulmonary route of delivery for 


                                                                Page 10 of 15


<PAGE>

certain macromolecules.  The Company cannot predict with any certainty which, 
if any, patents and patent applications will be considered relevant to the 
Company's technology by authorities in the various jurisdictions where such 
rights exist, nor can the Company predict with certainty which, if any, of 
these rights will or may be asserted against it by such third parties.  The 
Company is aware of an alternate dry powder processing technology which 
Inhale is not using for its current products under development but may desire 
to use for certain products in the future.  The ownership of this powder 
processing technology is unclear and the Company is aware that multiple 
parties, including Inhale, claim patent, trade secret and other rights in the 
technology.  If the Company determines that this alternate powder processing 
technology is relevant to the development of future products and further 
determines that a license to this alternate powder processing technology is 
needed, there can be no assurance that the Company can obtain a license from 
the relevant party or parties on commercially reasonable terms, if at all.  
There can be no assurance that the Company can obtain any license to any 
technology that the Company determines it needs, on reasonable terms, if at 
all, or that Inhale could develop or otherwise obtain alternate technology.  
The failure of the Company to obtain licenses if needed would have a material 
adverse effect on the Company.

     Third parties from time to time have asserted and may assert that the
Company is employing technology that they believe is based on issued patents,
trade secrets or know-how of others.  In addition, future patents may issue to
third parties which the Company's technology may infringe.  The Company could
incur substantial costs in defending itself and its partners against any such
claims.  Furthermore, parties making such claims may be able to obtain
injunctive or other equitable relief which could effectively block the Company's
ability to further develop or commercialize some or all of its products in the
United States and abroad, and could result in the award of substantial damages.
In the event of a claim of infringement, the Company and its partners may be
required to obtain one or more licenses from third parties.  There can be no
assurances that the Company or its partners will be able to obtain such licenses
at a reasonable cost, if at all.  Defense of any lawsuit or failure to obtain
any such license could have a material adverse effect on the Company. 

     The Company's ability to develop and commercialize its technology will be
affected by the Company's or its partners' access to the drugs which are to be
formulated.  Many drugs, including powder formulations of certain drugs which
are presently under development by the Company, are subject to issued and
pending United States and foreign patent rights which may be owned by competing
entities.  There are issued patents and pending patent applications relating to
the pulmonary delivery of macromolecule drugs, including several for which the
Company is developing pulmonary delivery formulations.  Specifically, a patent
has been granted in Europe which is directed to aerosol formulations of serine
protease inhibitors, including alpha-1 antitrypsin, for the treatment of the
lung.  The resulting patent situation is highly complex, and the ability of any
one company to commercialize a particular biopharmaceutical drug is highly
unpredictable.  The Company intends generally to rely on the ability of its
partners to provide access to the drugs which are to be formulated for pulmonary
delivery.  There can be no assurance that the Company's partners will be able to
provide access to drug candidates for formulation for pulmonary delivery or
that, if such access is provided, the Company or its partners will not be
accused of, or determined to be, infringing a third party's rights and will not
be prohibited from working with the drug or be found liable for damages that may
not be subject to indemnification.  Any such restriction on access or liability
for damages would have a material adverse effect on the Company.

     The Company also will rely on trade secrets and contract law to protect
certain of its proprietary technology.  There can be no assurance that any such
contract will not be breached, or that if breached, the Company will have
adequate remedies.  Furthermore, there can be no assurance that any of the
Company's trade secrets will not become known or independently discovered by
third parties.

     The PTO has recently adopted changes to the United States patent law which
change the term of issued patents, subject to certain transition periods, to 20
years from the date of filing rather than 17 years from date of issuance.
Beginning in June 1995, the patent term became 20 years from the earliest
effective filing date of the underlying patent application.  Such change may
reduce the effective term of protection for patents that are pending for more
than three years in the PTO.  In addition, as of January 1996, all inventors who
work outside of the United 


                                                                Page 11 of 15


<PAGE>

States are able to establish a date of invention on the same basis as those 
working in the United States.  Such change could adversely affect the ability 
of the Company to prevail in a priority of invention dispute with a third 
party located or doing work outside of the United States.  While the Company 
cannot predict the effect that such changes will have on its business, such 
changes could have a material adverse effect on the Company's ability to 
protect its proprietary information and sustain the commercial viability of 
its products.  Furthermore, the possibility of extensive delays in such 
process, could effectively further reduce the term during which a marketed 
product could be protected by patents.

GOVERNMENT REGULATION; UNCERTAINTY OF OBTAINING REGULATORY APPROVAL.  The
production and marketing of the Company's products and its ongoing research and
development activities are subject to regulation by numerous governmental
authorities in the United States and other countries.  Prior to marketing a new
dosage form of any drug, including one developed for use with the Company's
pulmonary drug delivery system, whether or not such drug was already approved
for marketing in another dosage form, the product must undergo rigorous
preclinical and clinical testing and an extensive review process mandated by the
FDA and equivalent foreign authorities.  These processes generally take a number
of years and require the expenditure of substantial resources.  None of the
Company's proposed products has been submitted to the FDA for marketing
approval.  The Company has no experiences obtaining such regulatory approval,
does not have the expertise or other resources to do so and intends to rely on
its partners to fund clinical testing and to obtain product approvals.

     The time required for completing such testing and obtaining such approvals
is uncertain.  Further refinement of the device prototype, further scale-up of
the powder processing system and automated powder filling and packaging system
will need to be accomplished before initiation of later stage clinical trials.
Any delay in any of these components of product development may delay testing.
In addition, delays or rejections may be encountered based upon changes in FDA
policy during the period of product development.  Similar delays may also be
encountered in other countries.  If regulatory approval of a product is granted,
such approval may entail limitations on the indicated uses for which the product
may be marketed, and the marketed product, its manufacturer, and its
manufacturing facilities remain subject to continual review and periodic
inspections.  Later discovery of previously unknown problems with a product,
manufacturer, or facility may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market.  There can be
no assurance that regulatory approval will be obtained for any products
developed by the Company on a timely basis, or at all.  The failure to obtain
timely regulatory approval of its products, any product marketing limitations or
a product withdrawal would have a material adverse effect on the Company.

HIGHLY COMPETITIVE INDUSTRY; RISK OF TECHNOLOGICAL OBSOLESCENCE.  The
biotechnology and pharmaceutical industries are highly competitive and rapidly
evolving and significant developments are expected to continue at a rapid pace.
The Company's success depends upon maintaining a competitive position in the
development of products and technologies for pulmonary delivery of
pharmaceutical drugs.  If a competing company were to develop or acquire rights
to a better dry powder pulmonary delivery device or fine powder processing
technology, a better system for efficiently and reproducibly delivering drugs to
the deep lung, a non-invasive drug delivery system which is more attractive for
the delivery of drugs than pulmonary delivery, or an invasive delivery system
which overcomes some of the drawbacks of current invasive systems for chronic or
subchronic indications (such as a sustained release system), the Company's
business would be materially adversely affected.

     The Company is in competition with pharmaceutical, biotechnology and drug
delivery companies, hospitals, research organizations, individual scientists and
nonprofit organizations 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 delivery systems, intranasal delivery
systems, transdermal systems and colonic absorption systems.  Several of these
companies may have or be developing dry powder devices that could be used for
pulmonary delivery.  The Company is also aware of other companies currently
engaged in the development and commercialization of pulmonary drug delivery
systems and enhanced injectable drug delivery systems.  Many of these companies
and entities have greater research and development capabilities, experience,
manufacturing, marketing, financial and managerial resources than the Company
and represent significant competition for the Company.  Acquisitions of
competing drug delivery companies by large pharmaceutical companies could
enhance competitors' financial, marketing and other resources.  


                                                                Page 12 of 15


<PAGE>

Accordingly, the Company's competitors may succeed in developing competing 
technologies, obtaining FDA approval for products more rapidly than the 
Company and gaining market acceptance.  There can be no assurance that 
developments by others will not render the Company's products or technologies 
uncompetitive or obsolete.

P
ART II:  OTHER INFORMATION



Item 1.   Legal Proceedings  -  Not Applicable


Item 2.   Changes in Securities  -  None


Item 3.   Defaults upon Senior Securities  -  None


Item 4.   Submission of Matters to a Vote of Security Holders  -  None
     

Item 5.   Other Information  -  None



                                                                Page 13 of 15


<PAGE>



Item 6.   Exhibits and Reports on Form 8-K

     (#)  Exhibits

     The following exhibits are filed herewith or incorporated by reference

 EXHIBIT                           EXHIBIT TITLE             
- ------------------------------------------------------------------------------
3.1 (3)   Restated Articles of Incorporation of the Registrant.
3.2 (1)   Bylaws of the Registrant.
4.1       Reference is made to Exhibits 3.1 through 3.2.
4.2 (1)   Restated Investor Rights Agreement among the Registrant and certain
          other persons named therein, dated April 29, 1993, as amended 
          October 29, 1993.
4.5 (1)   Warrant to purchase 18,182 Shares of Series C Preferred Stock between
          the Registrant and Phoenix Leasing Incorporated, dated 
          October 29, 1993.
4.6 (1)   Specimen stock certificate.
4.9 (2)   Stock Purchase Agreement between the Registrant and Pfizer Inc., dated
          January 18, 1995.
4.10 (8)  Warrant to purchase 10,000 shares of Common Stock between the
          Registrant and Thomas J. Peirona, dated November 1, 1996.
4.11 (8)  Warrant to purchase 10,000 shares of Common Stock between the
          Registrant and Kiet Nguyen, dated November 1, 1996.
4.12 (9)  Form of Stock Purchase Agreement between the Registrant and the
          Selling Shareholders dated January 28, 1997.
10.1 (4)  Registrant's 1994 Equity Incentive Plan (the "Equity Incentive Plan").
10.2 (1)  Form of Incentive Stock Option under the Equity Incentive Plan.
10.3 (1)  Form of Nonstatutory Stock Option under the Equity Incentive Plan.
10.4 (7)  Registrant's 1994 Non-Employee Directors' Stock Option Plan, as
          amended.
10.5 (1)  Registrant's 1994 Employee Stock Purchase Plan.
10.6 (1)  Standard Industrial Lease between the Registrant and W.F. Batton &
          Co., Inc., dated September 17, 1992, as amended September 18, 1992.
10.7 (1)  Master Equipment Lease between the Registrant and Phoenix Leasing
          Incorporated, dated August 15, 1992 and Schedules i to 4 thereto.
10.8 (1)  Senior Loan and Security Agreement between the Registrant and Phoenix
          Leasing Incorporated, dated September 15, 1993.
10.9 (1)  Sublicense Agreement between the Registrant and John S. Patton, dated
          September 13, 1991.
10.10(2)  Offer Letter, dated September 16, 1994, from the Registrant to Jack M.
          Anthony.
10.11(2)  Addendum to Lease dated September 17, 1992, between the Registrant and
          W.F. Batton & Marie A. Batton.
10.12(6)  Lease dated May 31, 1995, between the Registrant and W.F. Batton
          & Marie A. Batton.
10.13(6)  Addendum Number One to Lease dated September 17, 1992, between
          the Registrant and W.F. Batton & Marie A. Batton.
10.14(6)  Addendum to Lease dated May 31, 1995 between the Registrant and
          W.F. Batton & Marie A. Batton.
10.15(6)  Addendum Number Two to Lease dated September 17, 1992, between
          the Registrant and W.F. Batton & Marie A. Batton.
10.16(5)  Stock Purchase Agreement between the Registrant and Baxter World
          Trade Corporation, dated March 1, 1996.
10.17(8)  Sublease and Lease Agreement, dated October 2, 1996 between the
          Registrant and T.M.T. Associates L.L.C.
27.1      Financial Data Schedule
___________

(1)  Incorporated by reference to the indicated exhibit in the Company's
     Registration Statement (No. 33-75942), as amended.



                                                                Page 14 of 15


<PAGE>


(2)  Incorporated by reference to the indicated exhibit in the Company's
     Registration Statement (No. 33-89502), as amended.
(3)  Incorporated by reference to the indicated exhibit in the Company's Annual
     Report on Form 10-K for the year ended December 31, 1994.
(4)  Incorporated by reference to the Company's Registration Statement on Form
     S-8 (No. 333-07969).
(5)  Incorporated by reference to the indicated exhibit in the Company's
     Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(6)  Incorporated by reference to the indicated exhibit in the Company's Annual
     Report on Form 10-K for the year ended December 31, 1995.
(7)  Incorporated by reference to the indicated exhibit in the company's
     Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
(8)  Incorporated by reference to the indicated exhibit in the Company's
     Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
(9)  Incorporated by reference to the Company's Registration Statement on Form
     S-3 (No. 333-20787)
               

 (b) Reports on Form 8-K.     
          
     On February 6, 1997 the Company filed a report on Form 8-K providing an
update of the Company's activities.     
          
 (c) See Exhibits listed under Item 14(a)(3).     
          


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

                                               INHALE THERAPEUTIC SYSTEMS




DATE: May 13, 1997                             BY: /S/Robert B. Chess 
                                                  -------------------------
                                                  Robert  B. Chess
                                                  President, Chief Executive
                                                  Officer and Director


DATE: May 13, 1997                             BY: /S/Judi R. Lum        
                                                  -------------------------
                                                  Judi R. Lum
                                                  Chief Financial Officer




                                                                Page 15 of 15







<TABLE> <S> <C>


<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR INHALE THERAPEUTIC SYSTEMS FOR THE THREE MONTH
PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               MAR-31-1997
<CASH>                                          36,662
<SECURITIES>                                    31,123
<RECEIVABLES>                                        0
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                                   887
<PP&E>                                               0
<DEPRECIATION>                                       0
<TOTAL-ASSETS>                                  73,017
<CURRENT-LIABILITIES>                            9,215
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                        93,415
<OTHER-SE>                                    (29,788)
<TOTAL-LIABILITY-AND-EQUITY>                    73,017
<SALES>                                              0
<TOTAL-REVENUES>                                 3,177
<CGS>                                                0
<TOTAL-COSTS>                                        0
<OTHER-EXPENSES>                                 5,951
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                (2,044)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                            (2,044)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   (2,044)
<EPS-PRIMARY>                                   (0.16)
<EPS-DILUTED>                                   (0.16)
        

</TABLE>