<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 June 30, 1997

                                      or,

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

For the transition period from _____________ to _____________

                      COMMISSION FILE NUMBER: 0-23556
                                           
                        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)    

                              1525 INDUSTRIAL WAY
                          BELMONT,  CALIFORNIA  94002
                    (Address of principal executive offices)
                                           
                                  650-631-3100
             (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

The number of outstanding shares of the registrant's Common Stock, no par 
value, was 13,683,960 as of August 1, 1997.



<PAGE>

                              INHALE THERAPEUTIC SYSTEMS
                                        INDEX
                                           
                                           
                                           

PART I: FINANCIAL INFORMATION                                            PAGE


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

         Condensed Balance Sheets - June 30, 1997 and December 31, 1996 . .3

         Condensed Statements of Operations for the three and six month 
            periods ended June 30, 1997 and 1996  . . . . . . . . . . . . .4
         
         Condensed Statements of Cash Flows for the six month period 
            ended June 30, 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>
                                                          June 30, 1997     December 31, 1996
                                                          -------------     -----------------
                                                           (unaudited)           (Note) 
                                   ASSETS
<S>                                                         <C>                 <C>
Current assets:
  Cash and cash equivalents                                 $  33,149           $  18,568
  Short-term investments                                       28,020              17,741
  Note receivable                                               5,000                -   
  Other current assets                                          1,797               1,239
                                                            ---------           ---------
     Total current assets                                      67,966              37,548

Property and equipment, net                                     6,701               3,770
Deposits and other assets                                         135                 174
                                                            ---------           ---------
                                                            $  74,802           $  41,492
                                                            ---------           ---------
                                                            ---------           ---------

                       LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued liabilities                  $   5,160           $   3,042
  Accrued compensation                                          1,257                 479
  Deferred revenue                                              6,208               2,723
                                                            ---------           ---------
     Total current liabilities                                 12,625               6,244
 
Equipment financing obligations                                   162                 187
 
Shareholders' equity:
  Common stock, no par value: 30,000
   shares authorized, 13,681 shares and
   11,835 shares issued and outstanding at 
   June 30, 1997 and December 31, 1996, 
   respectively                                                94,055              62,840
  Deferred compensation                                            (7)                (88)
  Accumulated deficit                                         (32,033)            (27,691)
                                                            ---------           ---------
     Total shareholders' equity                                62,015              35,061
                                                            ---------           ---------
                                                            $  74,802           $  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) 


<TABLE>
<CAPTION>

                                              THREE MONTHS ENDED JUNE 30,    SIX MONTHS ENDED JUNE 30,
                                              ---------------------------    -------------------------
                                                    1997             1996           1997          1996
                                              ----------       ----------    -----------    ----------
<S>                                           <C>              <C>           <C>            <C>
Contract research revenue                     $    3,973       $    1,448    $     7,150    $    2,930 
  
Operating costs and expenses:                         
    Research and development                       5,644            3,516         10,213         6,433 
    General and administrative                     1,517              854          2,899         1,555 

                                              ----------       ----------    -----------    ----------
Total operating costs and expenses                 7,161            4,370         13,112         7,988 
                                              ----------       ----------    -----------    ----------
  
Loss from operations                              (3,188)          (2,922)        (5,962)       (5,058)
  
Interest income, net                                 890              437          1,620           672 

                                              ----------       ----------    -----------    ----------
Net loss                                      $   (2,298)      $   (2,485)   $    (4,342)   $   (4,386)
                                              ----------       ----------    -----------    ----------
                                              ----------       ----------    -----------    ----------

Net loss per share                            $    (0.17)      $    (0.22)   $     (0.33)   $    (0.41)
                                              ----------       ----------    -----------    ----------
                                              ----------       ----------    -----------    ----------

Shares used in computing net loss per share       13,648           11,387         13,263        10,769 
                                              ----------       ----------    -----------    ----------
                                              ----------       ----------    -----------    ----------
</TABLE>



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>
                                                                                   SIX MONTHS
                                                                                  ENDED JUNE 30,
                                                                             -----------------------
                                                                                 1997           1996
                                                                             -----------------------
<S>                                                                          <C>            <C>
Cash flows from operating activities:
   Cash provided by (used in) operations                                     $(1,733)       $(4,077)

Cash flows from investing activities:
   Purchases of available for sale securities, net of sales and maturities   (10,266)       (10,250)
   Purchases of property and equipment                                        (3,919)          (955)
                                                                             -------       --------
Net cash provided by (used in) investing activities                          (14,185)       (11,205)

Cash flows from financing activities:
   Payments of equipment financing obligations                                  (103)          (143)
   Issuance of common stock, net of issuance costs                            30,602         19,542
                                                                             -------       --------
   Net cash provided by financing activities                                  31,099         19,399

Net increase (decrease) in cash and cash equivalents                          14,581          4,117

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

Cash and cash equivalents at end of period                                   $33,149       $  7,951
                                                                             -------       --------
                                                                             -------       --------
</TABLE>



SEE ACCOMPANYING NOTES.



                                                                  Page 5 of 15

<PAGE>

                              INHALE THERAPEUTIC SYSTEMS
                                           

                       NOTES TO CONDENSED FINANCIAL STATEMENTS
                                    June 30, 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 June 30, 1997 and the related 
statements of operations for the three and six month periods ended  June 30, 
1997 and 1996 and cash flows for the six month periods ended June 30, 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 71% of the 
Company's revenue in the six month period ended June 30, 1997.  Contract 
revenue from two partners accounted for 87% 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.  NOTE RECEIVABLE

    In April 1997 the Company provided the landlord of its facility in 
Belmont, California a short term loan of $5.0 million.  The loan bears 
interest at 8.0%. The Company receives monthly interest payments and the 
principal is due and payable at the end of the six-month loan term.  In 
addition, the loan is secured by a deed of trust on the facility.  The loan 
is recorded on the balance sheet at June 30, 1997 as a note receivable.

4.  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 


                                                                  Page 6 of 15

<PAGE>

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 three and six month periods ended March 31, 1997 and June 30, 
1997. 

5.  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. 


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 and six month periods ended June 30, 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 June 30, 1997, the Company incurred a cumulative net loss 
of approximately $32.0 million.  The 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. Typically, 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.


                                                              Page 7 of 15

<PAGE>

RESULTS OF OPERATIONS

    Revenue in the second quarter of 1997 was $3,973,000, as compared to 
$1,448,000 in the second quarter of 1996, an increase of 174%.  Revenues for 
the six months ended June 30, 1997 were $7,150,000 as compared to $2,930,000 
for the six months ended June 30, 1996, an increase of 144%. The increase in 
revenue for both the three and six month periods was primarily due to the 
signing of additional corporate partners in 1997 as well as the expansion of 
the Company's existing collaborative agreements. Revenue for the first and 
second 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 expenses.

    Research and development expenses increased to approximately $5,644,000 
in the second quarter of 1997 from $3,516,000 in the comparable period of 
1996, an increase of 61%.  Research and development expenses for the six 
months ended June 30, 1997 were $10,213,000 compared to $6,433,000 for the 
six months ended June 30, 1996, an increase of 59%.  The increase for the 
three and six month periods ended June 30, 1997 is primarily attributed to 
continued expansion of research activities resulting from an increase in the 
number of projects, additional hiring of scientific personnel, costs 
associated with the development of the Company's commercial manufacturing 
facility 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 initial commercial 
manufacturing.

    General and administrative expenses increased to $1,517,000 in the second 
quarter of 1997 from $854,000 in the second quarter of 1996, an increase of 
78%. For the six month period ended June 30, 1997 general and administrative 
expenses were $2,899,000 compared to $1,555,000 in the comparable period of 
1996, an increase of 86%.  The increase for the three and six month periods 
ended June 30, 1997 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 $890,000 in the second quarter of 1997 
compared to $437,000 in the second quarter of 1996, an increase of 104%.  Net 
interest income increased to $1,620,000 for the six months ended June 30, 
1997 compared to $672,000 for the six months ended June 30, 1996.  Interest 
income was earned on larger cash and investment balances held by the Company 
in the three and six month periods ended June 30, 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 June 30, 1997, the 
Company had cash, cash equivalents and short-term investments of 
approximately $61.2 million.

    The Company's operations used cash of $1.7 million in the six months 
ended June 30, 1997, as compared to $4.1 million used in the six months ended 
June 30, 1996. The decrease in cash usage from operations is due primarily to 
the increase in payments received under the Company's collaborative 
agreements for work to be performed in future periods. Cash used in 
operations differed from the Company's net operating losses in these periods 
due principally to depreciation expenses, decreases in accounts receivable 
and increases in other current assets, notes receivable, accounts payable, 
deferred revenue and accrued liabilities. 

In the six months ended June 30, 1997 the Company purchased property and 
equipment of $3.9 million as compared to $1.0 million for the same period in 
1996.  The increase is primarily due to the expansion of the Company's 
facilities.


                                                                  Page 8 of 15

<PAGE>

    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 June 30, 1997 together with interest income and possible 
additional equipment financing, will be sufficient to meet its operating 
expense and capital expenditure requirements at least 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 June 30, 1997, 
had incurred a cumulative deficit of approximately $32.0 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 


                                                                 Page 9 of 15

<PAGE>

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 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.


                                                                 Page 10 of 15

<PAGE>

    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 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 will be able to obtain a 
license from the relevant party or parties on commercially reasonable terms, 
if at all.  There can be no assurance that the Company will be able to 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 assurance 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 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 


                                                                Page 11 of 15

<PAGE>

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 experience 
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.  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.


                                                                Page 12 of 15

<PAGE>

P
ART II:  OTHER INFORMATION



Item 1.  Legal Proceedings  -  Not Applicable


Item 2.  Changes in Securities  

         (c)  On February 7, 1997, the Company sold 1,800,000 shares of Common
         Stock to several institutional investors for an aggregate offering
         price of $32,400,000 pursuant to Section 4(2) of the Securities Act of
         1933, as amended.  Vector Securities International, Inc. acted as
         placement agent in connection with the sale and was paid a fee equal
         to 5.5% of the aggregate purchase price.

         On June 27, 1997 the Company issued 28,165 shares of Common Stock to
         Pafra Limited ("Pafra") in consideration of certain intellectual
         property rights granted to the Company by Pafra pursuant to the
         Assignment of the Permazyme Technology, and Related Agreements and
         Goodwill, dated June 27,1997, between the Company and Pafra.  The
         issuance was made pursuant to Section 4(2) of the Securities Act.


Item 3.  Defaults upon Senior Securities  -  None


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

    (a)  The Annual Meeting of Shareholders of Inhale Therapeutic Systems
         was held on June 17, 1997.
    
    (b)  The matters voted upon at the meeting and the voting of
         shareholders with respect thereto are as follows:
    
         The election of Robert B. Chess, John S. Patton, Terry L. Opdendyk,
         Mark J. Gabrielson, James B. Glavin and Melvin Perelman to the Board
         of Directors to hold office until the next annual meeting of
         shareholders and until his successor is elected and has qualified, or
         until such director's earlier death, resignation or removal:


                                  For          Withheld
                                  ---          --------
         Robert B. Chess          9,046,072       5,068
         John S. Patton           9,046,572       4,568
         Terry L. Opdendyk        9,046,572       4,568
         Mark J. Gabrielson       9,046,072       5,068
         James B. Glavin          9,045,472       5,668
         Melvin Perelman, Ph.D.   9,031,496      19,644
    
    
         Ratification of the selection of Ernst & Young, LLP as independent
         auditors of the Company for its fiscal year ending December 31, 1997:
    
         For: 9,042,456          Against: 6,726          Abstain: 1,958 

         Based on the voting results, each of the directors nominated was
         elected and the ratification of Ernst & Young, LLP was approved.
    

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.
 
    No reports were filed on Form 8-K during the quarter ended June 30, 1997
 
(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: August 13, 1997      BY: /S/ROBERT B. CHESS     
                               -----------------------
                                Robert  B. Chess
                                President, Chief Executive Officer and Director


DATE: August 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 AND SIX MONTH
PERIODS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               JUN-30-1997
<CASH>                                          33,449
<SECURITIES>                                    28,020
<RECEIVABLES>                                    5,000
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                                 1,797
<PP&E>                                          10,533
<DEPRECIATION>                                 (3,832)
<TOTAL-ASSETS>                                  74,802
<CURRENT-LIABILITIES>                           12,625
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                        94,055
<OTHER-SE>                                           0
<TOTAL-LIABILITY-AND-EQUITY>                    74,802
<SALES>                                              0
<TOTAL-REVENUES>                                 7,150
<CGS>                                                0
<TOTAL-COSTS>                                        0
<OTHER-EXPENSES>                                13,112
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                      0
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                            (4,342)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   (4,342)
<EPS-PRIMARY>                                   (0.33)
<EPS-DILUTED>                                        0
        

</TABLE>