<PAGE>

                          SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C.  20549

                                      FORM 10-K

  X          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----                      SECURITIES EXCHANGE ACT OF 1934 

                       For fiscal year ended December 31, 1998

                                          OR

             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----         EXCHANGE ACT OF 1934 (NO FEE REQUIRED)


                 For the transition period from ________ to ________.

                          COMMISSION FILE NUMBER: 000-23501

                     SPIROS DEVELOPMENT CORPORATION II, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                 DELAWARE                                33-0774288
      (State or other jurisdiction                    (I.R.S. Employer
    or incorporation or organization)                Identification No.)

   7475 LUSK BLVD., SAN DIEGO, CALIFORNIA                  92121
  (Address of principal executive offices)               (zip code)


          Registrant's telephone number, including area code (619) 457-2553

                 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF 
                                    THE ACT: NONE

                   SECURITIES REGISTERED PURSUANT TO SECTION 12(g) 
                                     OF THE ACT:
CALLABLE COMMON STOCK, $.001 PAR VALUE. THE CALLABLE COMMON STOCK IS REGISTERED
PURSUANT TO SECTION 12(g) OF THE ACT SEPARATELY AND AS PART OF UNITS, EACH UNIT
CONSISTING OF ONE SHARE OF CALLABLE COMMON STOCK OF SPIROS DEVELOPMENT
CORPORATION II, INC. AND ONE WARRANT (A "WARRANT") TO PURCHASE ONE-FOURTH OF ONE
SHARE OF DURA PHARMACEUTICALS, INC. COMMON STOCK.  THE CALLABLE COMMON STOCK IS
NOT SEPARATELY TRADABLE APART FROM THE UNITS PRIOR TO DECEMBER 31, 1999 OR UPON
THE EARLIER OCCURRENCE OF CERTAIN EVENTS.

<PAGE>

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K  [ ].

     The aggregate market value of the Units held by non-affiliates of the 
registrant as of February 26, 1999 was $35.5 million.  Market value is the 
market value of the Units, each Unit consisting of one share of Callable 
Common Stock of Spiros Development Corporation II, Inc. and a Warrant.  There 
is no quoted market value for the shares of Callable Common Stock apart from 
the Units.  For the purposes of this calculation, shares owned by officers, 
directors (and their affiliates) and 10% or greater shareholders known to the 
registrant have been deemed to be affiliates which should not be construed to 
indicate that any such person possesses the power, direct or indirect, to 
direct or cause the direction of the management or policies of the Registrant 
or that such person is controlled by or under common control with the 
Registrant.

     The number of shares of the Registrant's Callable Common Stock and Special
Common Stock outstanding as of February 26, 1999 were 6,325,000 and 1,000,
respectively.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of Registrant's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on May 19, 1999, to be filed with the
Securities and Exchange Commission on or about April 16, 1999, referred to
herein as the "Proxy Statement," are incorporated as provided in Part III. 

     Certain exhibits filed with the Registrant's prior registration statement,
Forms 10-K and 10-Q are incorporated as provided in Part IV.


                                       2

<PAGE>

                                        INDEX

<TABLE>
<CAPTION>
<S>                                                                           <C>
Part I:
      Item 1.    Business..................................................... 4
      Item 2.    Properties.................................................. 23
      Item 3.    Legal Proceedings........................................... 23
      Item 4.    Submission of Matters to a Vote of Security Holders......... 23


Part II:
      Item 5.    Market for Registrant's Common Equity and Related
                 Shareholder Matters......................................... 24
      Item 6.    Selected Financial Data..................................... 25
      Item 7.    Management's Discussion and Analysis of Financial
                 Condition and Results of Operations......................... 25
      Item 7A.   Quantitative and Qualitative Disclosures about Market Risk.. 27
      Item 8.    Financial Statements and Supplementary Data................. 27
      Item 9.    Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure......................... 27


Part III:
      Item 10.   Directors and Executive Officers of the Registrant.......... 28
      Item 11.   Executive Compensation...................................... 28
      Item 12.   Security Ownership of Certain Beneficial Owners and
                 Management.................................................. 28
      Item 13.   Certain Relationships and Related Transactions.............. 28


Part IV:
      Item 14.   Exhibits, Financial Statement Schedules and Reports on
                 Form 8-K.................................................... 28

                 Signatures.................................................. 31
</TABLE>


                                       3

<PAGE>

                                       PART I

ITEM 1.   BUSINESS

The discussion of Spiros Development Corporation II, Inc.'s ("Spiros Corp. 
II") business contained in this report may contain certain projections, 
estimates and other forward-looking statements that involve a number of risks 
and uncertainties.  For a discussion of factors which may affect the outcome 
projected in such statements, see "Risks and Uncertainties" on pages 19 
through 23 of this Annual Report on Form 10-K. While this outlook represents 
our current judgment on the future direction of the business, such risks and 
uncertainties could cause actual results to differ materially from any future 
performance listed below.  We undertake no obligation to release publicly the 
results of any revisions to these forward-looking statements to reflect 
events and circumstances arising after the date of this annual report. Unless 
the context otherwise requires, "Dura" refers to Dura Pharmaceuticals, Inc., 
a Delaware corporation, and its subsidiaries.

OVERVIEW

Spiros Corp. II was incorporated in the state of Delaware in September 1997 
to continue the development of Spiros-Registered Trademark-, a dry powder 
pulmonary drug delivery system, and to conduct formulation work, clinical 
trials and commercialization for certain specified leading asthma and chronic 
obstructive pulmonary disease, also known as COPD, drugs for use with Spiros. 
Current product development efforts focus on albuterol, beclomethasone, and 
budesonide. We may also expend funds on enhancements to the existing Spiros 
technology and development of a next generation inhaler system. 

We commenced operations on December 22, 1997 when we and Dura completed a 
$101 million initial public offering of 6,325,000 units, each unit consisting 
of one share of our callable common stock and one warrant to purchase 
one-fourth of one share of Dura's common stock.  The offering resulted in net 
proceeds to us of approximately $94 million.  Concurrent with the offering, 
Dura contributed $75 million to our operations. Substantially all funds from 
the offering, the $75 million contribution, and interest earned on these 
funds are expected to be paid to Dura for the development and 
commercialization of Spiros and the use of Spiros with applications for (1) 
albuterol, (2) beclomethasone, (3) budesonide, (4) ipratropium, (5) 
albuterol-ipratropium combination, and (6) additional designated compounds. 
In addition, we may also expend funds on enhancements to existing Spiros 
technology or to conduct technical evaluation projects designed to identify 
additional respiratory drug candidates for further development in Spiros. The 
warrants will be exercisable from January 1, 2000 through December 31, 2002 
at an exercise price of $54.84 per share of Dura common stock. In 
consideration of the warrants and the contribution of $75 million we 
received, Dura has an irrevocable option through December 31, 2002, to 
purchase all, but not less than all, of the then outstanding shares of our 
callable common stock at predetermined prices. However, Dura is not obligated 
to purchase such shares. Such purchase price may be paid, at Dura's option, 
in cash, shares of Dura's common stock, or a combination of cash and stock. 
In addition, Dura received an option through specified dates, to acquire for 
cash exclusive rights for the use of Spiros with albuterol and with a second 
product other than albuterol. 


                                       4

<PAGE>

In connection with the offering, we entered into a number of agreements with
Dura under which Dura currently performs development of the Spiros products as
further discussed below under "Relationship with Dura." 

We do not expect to have our own research, development, clinical, licensing,
administration, manufacturing or marketing employees or facilities, and thus
will be entirely dependent on Dura in these areas. 

In November 1997, Dura submitted on our behalf, a new drug application to the 
FDA for albuterol in the Spiros cassette system which we call Albuterol 
Spiros-TM-. On November 4, 1998, we announced the receipt of a complete 
response letter from the FDA indicating that the new drug application is not 
approvable until and unless certain deficiencies are addressed. The FDA 
requested that Dura and Spiros Corp. II complete additional clinical trials 
on the Spiros system to ensure the system is reliable and to demonstrate that 
the system can achieve the same results as the original clinical trials. The 
FDA has also requested that several chemistry, manufacturing, and control 
issues, as well as certain electromechanical reliability issues be resolved.  
As a result of several meetings with the FDA, we and Dura have determined the 
requirements to address these issues and support a resubmission of the 
Albuterol Spiros new drug application. Additionally, we have placed Albuterol 
Spiros and Beclomethasone Spiros on nearly parallel development tracks. We 
expect to initiate additional clinical studies for both products in late 1999.

ASTHMA AND COPD MARKET

Asthma is a complex physiological disorder characterized by airway 
hyperactivity to a variety of stimuli such as dust, pollen, stress or 
physical exercise, resulting in airway obstruction that is partially or 
temporarily reversible. The U.S. asthma population has grown steadily in 
recent years.  COPD is a complex condition comprising a combination of 
chronic bronchitis, emphysema and airway obstruction.  The disease affects 
males more often than females and is exacerbated by smoking and other insults 
to the lung. Incidence is as high as 20% of the adult male population, though 
only a minority are clinically disabled.  The U.S. combined market for 
inhaled therapeutic drugs to treat asthma and COPD was approximately $2.1 
billion in 1998. 

PULMONARY DRUG DELIVERY SYSTEMS

Inhaled therapeutic drugs have been shown to be effective in treating or
preventing the symptoms of asthma, COPD and other respiratory diseases. When
treating respiratory diseases, inhalation delivery puts the drug directly into
the lung for topical treatment. If administered in capsule, tablet or liquid
form, rather than through inhalation, the patient must take sufficient drug
dosages to achieve a systemic therapeutic blood level to benefit the lungs. In
many instances, this may cause serious side effects by impacting other organs.
Because inhaled therapy delivers the drug directly into the lungs, it provides
comparable efficacy with less risk of systemic side effects at greatly reduced
dosages. Inhalation delivery also yields a fast onset of action, reducing the
time for patient relief. 

TRADITIONAL INHALATION DELIVERY DEVICES

Traditional delivery systems used for administering inhaled drugs include the
following: 

JET NEBULIZERS.  Jet nebulizers aerosolize a liquid solution of medicine, either
ultrasonically or with compressed air, creating a fine mist that patients inhale
slowly over several minutes. Jet nebulizers 


                                       5

<PAGE>

are larger than other inhalation delivery systems and, because of their size, 
are primarily used to deliver aerosol to hospitalized patients, patients with 
acute asthma and patients unable to coordinate the use of other inhalation 
delivery methods. 

METERED DOSE INHALERS.  Metered dose inhalers, also known as MDIs, are the most
popular inhalation delivery system due to their relative convenience and
portability. MDIs consist of a suspension or solution of drug filled into a
canister, sealed with a metering valve and pressurized using a propellant, most
commonly a CFC. Because MDIs contain CFCs as an internal energy source, the
operation is relatively flow rate independent, and the dose exiting the MDI is
relatively consistent. However, it is estimated that only 10% to 20% of the dose
from an MDI actually reaches the lung. The variation in lung deposition is in
large part reflected by the inability of most patients to coordinate actuation
of the system with inhalation. 

DRY POWDER INHALERS. Dry powder inhalers represent a significant advancement in
the development of inhalation delivery systems. Dry powder inhalers are
relatively convenient and portable, and are CFC-free.  They are breath actuated,
so they eliminate the need for hand-lung coordination associated with MDIs.
Although dry powder inhalers overcome the need for coordination of actuation and
inspiration, currently marketed dry powder inhalers require high inspiratory
flow rates and the ultimate dose delivered to the patient is dependent on
inspiratory flow rate. This high inspiratory flow rate is difficult to achieve
for children, the elderly and patients in acute respiratory distress. 

SPIROS

Spiros is a proprietary pulmonary drug delivery system that is designed to
aerosolize drugs in dry powder formulations for delivery to the lungs while
providing certain advantages over traditional pulmonary delivery systems. We
believe new inhalation systems will gradually replace MDIs as the leading
pulmonary delivery systems, due primarily to the phasing out of CFCs and
coordination problems associated with many MDIs. Many companies are studying
alternative propellants, such as hydrofluorocarbons, for use in MDIs. The first
albuterol MDI using such a propellant received FDA approval and is being
marketed by Schering-Plough. However, we believe that any product utilizing
alternative propellants will still suffer from many of the limitations of
currently marketed MDIs, including the need for patients to coordinate breathing
with actuation of the drug delivery system. There are two types of dry powder
inhalers currently in commercial use worldwide, individual dose and multiple
dose. Individual dose dry powder inhalers currently marketed in the U.S. include
the Rotohaler-TM- (developed and marketed by Glaxo Wellcome) and the
Spinhaler-Registered Trademark- (developed and marketed by Fisons Limited).  The
Turbuhaler-Registered Trademark- (developed and marketed by Astra
Pharmaceuticals, Inc.), a multiple dose dry powder inhaler, is the leading dry
powder inhaler in worldwide sales. In 1998, the first Turbuhaler product, the
Pulmicort Turbuhaler, was launched by Astra.   The FDA has also approved two
multiple dose DPIs developed by Glaxo, the Flovent-Registered Trademark-
Rotadisk-Registered Trademark- and the Serevent-Registered Trademark-
Diskus-Registered Trademark-, received FDA approval and launched in early 1998

POTENTIAL ADVANTAGES OF SPIROS.  We believe Spiros may have certain advantages
over other currently used methods of pulmonary drug delivery including: 

     INSPIRATORY FLOW RATE INDEPENDENCE.  Spiros is designed to deliver a
relatively consistent drug dose to the lungs over a wide range of inspiratory
flow rates, which can vary depending on a patient's health, effort or physical
abilities. Tests of Spiros on human subjects have shown a relatively consistent
and significant level of drug deposition throughout the clinically relevant 
inspiratory range. Existing dry powder inhalers can vary significantly in 
their level of drug


                                       6

<PAGE>

deposition depending on the patient's inspiratory flow rate and can deliver 
significantly less drug at the lower flow rates typically associated with 
asthma attacks. 

     MINIMUM NEED FOR PATIENT COORDINATION.  Spiros is breath-actuated and does
not require the user to coordinate inhalation and actuation of the drug delivery
system. MDIs generally require users to coordinate their breathing with
actuation of the MDI. Studies indicate that a significant percentage of
patients, particularly young children and the elderly, do not use MDIs
correctly. Spiros is designed to solve these coordination problems by delivering
the drug to patient's lungs as they inhale. 

     REDUCED SIDE EFFECTS.  Spiros is designed to efficiently deliver drugs to
the lungs, thereby reducing drug deposition to the mouth and throat which could
reduce the possibility of unwanted side effects of certain pharmaceutical
agents, such as coughing and local irritation. With MDIs, a significant portion
of the dose is delivered to the mouth and throat and is swallowed. 

     PATIENT CONVENIENCE.  Spiros is designed to be convenient for patients,
with features such as breath actuation (Spiros is triggered by inhalation),
portability (light-weight and small size), quick delivery time, simple
operation, dose delivery feedback and multi-dose capability. Spiros also allows
the patient to see the actual number of doses remaining in a cassette or blister
pack and an LED light provides a warning of the need to replace Spiros prior to
the end of its useful life. 

     FREE OF CHLOROFLUOROCARBON PROPELLANTS.  CFC propellants have ozone 
destructive characteristics. They are subject to worldwide regulations aimed 
at eliminating their usage within the decade. Spiros does not use CFCs while 
most MDIs, currently the most popular form of aerosol drug delivery, use 
CFCs. Virtually all of the world's industrial nations, under the auspices of 
the United Nations Environmental Program, have pledged to cease use of CFCs 
by the year 2000. Continued use of CFCs in medical products has been 
permitted under annual exemptions. As a result of the planned phase out of 
CFCs, we believe that DPIs will become a leading method for pulmonary drug 
delivery. 

CORE SPIROS TECHNOLOGY  

The core technology contained in Spiros, which gives rise to the flow rate
independent delivery, is an aerosol generator that uses electromechanical energy
to disperse dry powder to form an aerosol for inhalation. The main components of
the aerosol generator include the impeller, the motor, the breath- actuated
switch, and the dosing chamber. When the switch is activated, the electric
circuit is completed and the impeller rotates. The action of the impeller on the
dry powder formulation supplies the energy to disperse the drug and provide a
zero-velocity cloud of aerosolized drug for inhalation.  The cloud of
aerosolized drug is suspended in the dosing chamber and is delivered to the
lungs only as the patient inhales. 

Two separate Spiros systems are currently under development, both utilizing the
same core technology with distinct powder storage systems. Because of the
physical and chemical requirements of the specific drugs deliverable by Spiros,
as well as the varying needs of the patients and marketplace, we believe that
our cassette and blisterdisk systems will provide flexibility for delivery of
many different types of drugs. 

CASSETTE SYSTEM.  The cassette system was the first Spiros system developed. The
powder storage system in this system is a 30-dose plastic cassette packed in a
foil pouch. In order to take a dose using the cassette system, the patient first
opens the lid of the Spiros generator to load the cassette. When the lid is
closed, the cassette rotates to deliver a dose of drug into the dosing chamber.
The 


                                       7

<PAGE>

dosing chamber contains the impeller. When the patient inhales through the 
mouthpiece, the impeller is automatically activated. The action of the 
impeller on the powder in the chamber generates the aerosol, which the 
patient inhales. The patient then closes the lid. When the 30-dose cassette 
is empty, the patient opens the lid and presses an ejection button on the 
bottom of the system to remove the empty cassette and load a new cassette. 

The Spiros cassette system has been produced in clinical trial quantities. 
Dura is currently working with outside vendors on our behalf to complete the 
necessary tooling for commercial scale production. 

BLISTERDISK SYSTEM.  Once a cassette is removed from the foil package it is 
no longer protected from fluctuations in the relative humidity. Although some 
drugs and powder formulations are sufficiently stable using the cassette 
system, many other dry powders are sensitive to relative humidity. In those 
cases, exposure to moisture causes clumping of the powder, which can no 
longer be readily aerosolized to the required aerodynamic diameter. The 
blisterdisk system is being developed for drugs that require a barrier 
against moisture or light. This system utilizes powder-filled sealed foil 
blisters, which prevent moisture build-up into the powder. The blisterdisk 
system has been designed to contain 16 doses per blisterdisk and is believed 
to be sufficiently flexible to accommodate a wide variety of drugs. In order 
to take a dose using the blisterdisk system, the patient will open the 
mouthpiece cover, push a button to open the blister and inhale through the 
mouthpiece to actuate the impeller and aerosolize the dose. As the patient 
closes the mouthpiece cover, the next blister is advanced to the dosing 
position. 

The Spiros blisterdisk system design has evolved to the stage that units for 
clinical trials have been produced. No product is currently under active 
development on the Spiros blisterdisk system on behalf of Spiros Corp. II.

SPIROS PRODUCTS IN DEVELOPMENT

We have selected five compounds to develop for delivery through Spiros: a 
beta-agonist, albuterol, two steroids, beclomethasone and budesonide, an 
anticholinergic, ipratropium, and a combination of albuterol and ipratropium. 
However, to focus resources on the development of the steroid products and 
albuterol, we have temporarily suspended work on the ipratropium and the 
albuterol-ipratropium combination products and will review the opportunity 
for these products at a later date. 

ALBUTEROL.  Albuterol, a beta-agonist, provides rapid symptomatic relief of
reversible bronchospasm. When administered by inhalation, it produces
significant bronchodilation promptly and its effects are demonstrable for a
number of hours. Albuterol is the most widely accepted asthma medication in the
world. In 1998, U.S. sales of albuterol were approximately $425 million as
measured by average wholesale prices. 

To address the issues raised in the FDA's complete response letter received in
November 1998, we and Dura expect to initiate the additional clinical trials in
late 1999 with a targeted launch date in 2001, pending FDA approval.  There can
be no assurance of FDA approval in a timely manner, if at all.  

BECLOMETHASONE.  Beclomethasone is a steroid used to treat the inflammatory 
component of asthma and certain symptoms of COPD. Systemic side effects 
resulting from the inhalation of beclomethasone are less than those that 
occur with steroids taken in capsule, tablet or liquid form. Beclomethasone 
was first launched in MDI form as Vanceril by Schering-Plough and later as 
Beclovent by Glaxo. In 1998, U.S. sales of beclomethasone were approximately 
$195 million as 


                                       8

<PAGE>

measured by average wholesale prices.  In the first quarter of 1997, Dura 
completed dose ranging studies of a one dosage strength of beclomethasone in 
the Spiros cassette system under an investigational new drug application. In 
the fourth quarter of 1997, Dura commenced a late-stage 12-week trial in 
humans to demonstrate safety and efficacy. Enrollment of patients was 
completed by the second quarter of 1998. As a result of feedback received 
from the FDA regarding Albuterol Spiros, Dura, on our behalf, must conduct 
additional clinical trials for Beclomethasone Spiros-TM-. We presenty expect 
to commence such studies in late 1999. Pending successful trial outcome, Dura 
plans, on our behalf, to file a new drug application for Beclomthasone Spiros 
and to launch the product, pending approval, in 2001. There can be no 
assurance of FDA approval in a timely manner, if at all.

BUDESONIDE. Budesonide is a new generation steroid used to treat the 
inflammatory component of asthma. Budesonide has been marketed in several 
dosage forms outside of the U.S., but to date has only been available in the 
U.S. in nasal spray form. However, in June 1997, the FDA approved for 
marketing in the U.S. a dry powder formulation of budesonide for delivery 
through Astra's Pulmicort Turbuhaler. In 1997, worldwide sales of budesonide 
were estimated to be greater than $600 million as measured by average 
wholesale prices.  Dura, on our behalf, has begun formulation of budesonide 
for delivery through Spiros, and expects to initiate clinical trials in late 
1999.  

IPRATROPIUM AND ALBUTEROL-IPRATROPIUM COMBINATION.  Ipratropium is an
anticholinergic bronchodilator. Ipratropium is most commonly prescribed for the
long-term management of COPD (including chronic bronchitis and emphysema) and
for the treatment of asthmatic patients who are poorly controlled by, or who
experience troublesome side effects from, beta-agonists such as albuterol.
Ipratropium acts at a site that is different from the site where beta-agonists
act and thus affords an alternative approach to the treatment of airway
obstruction. Albuterol and ipratropium are frequently prescribed in combination
for patients with COPD or asthma. Boehringer Ingelheim has marketed an
albuterol-ipratropium combination product, Combivent, outside of the U.S. for a
number of years. Combivent was approved for marketing in the U.S. in early 1997
and has recently been launched in MDI form. Based on the substantial work
performed with albuterol and the feasibility study conducted with ipratropium,
we believe that developing an albuterol-ipratropium formulation for delivery
using Spiros will be feasible. However, to focus resources on the development of
the steroid products and albuterol, we have temporarily suspended work on the
ipratropium and the albuterol-ipratropium combination products and will review
the opportunity for these products at a later date.

OTHER PRODUCT DEVELOPMENT EFFORTS

Our Board of Directors has the right, with the consent of Dura, to select
additional designated compounds for the treatment of respiratory diseases,
including asthma, allergy, cystic fibrosis or respiratory infection for delivery
using Spiros. 

In the event that we obtain the rights to any designated compounds, we will
conduct technical evaluations of the applicable compounds as candidates for
delivery through Spiros. Technical evaluations will generally include patent
evaluation, establishment of analytical methods, micronization of drug
substance, preliminary formulation development, preliminary aerosol
characterization, preliminary stability evaluation and animal bioavailability,
efficacy and toxicology evaluation. Technical evaluations may also include
initial safety and efficacy studies in humans. 

In the event that we obtain additional funds, through the exercise of a product
option, such funds may be used for the development of a next-generation inhaler
or enhancements to the existing Spiros technology.


                                       9

<PAGE>

RELATIONSHIP WITH DURA

The following is a summary of certain provisions of our agreements with Dura.
The summary is qualified in its entirety by reference to the full text of such
agreements, copies of which may be obtained upon request to us.
 
STOCK PURCHASE OPTION

According to our certificate of incorporation, Dura, as holder of all issued and
outstanding shares of special common stock, will have the right to purchase all,
but not less than all, of our callable common stock outstanding at the time the
right is exercised. The purchase option will be exercisable at any time
beginning on December 22, 1997 and ending on the earlier of (1) December 31,
2002 or (2) the 90th day after the date we provide Dura with certain notice.
Dura may, at its election, extend such period by providing additional funding
for the continued development of the Spiros products, but in no event beyond
December 31, 2002. If the purchase option is exercised, the exercise price,
calculated on a per share basis, will be as follows:

<TABLE>
<CAPTION>

If the callable common stock is
acquired under the purchase option     Exercise price
----------------------------------------------------------------------------
<S>                                                                <C>
Before January 1, 2000                                         $   24.01

On or after January 1, 2000 and on or before March 31, 2000        25.26
On or after April 1, 2000 and on or before June 30, 2000           26.57
On or after July 1, 2000 and on or before September 30, 2000       27.96
On or after October 1, 2000 and on or before December 31, 2000     29.41

On or after January 1, 2001 and on or before March 31, 2001        31.10
On or after April 1, 2001 and on or before June 30, 2001           32.88
On or after July 1, 2001 and on or before September 30, 2001       34.77
On or after October 1, 2001 and on or before December 31, 2001     36.76

On or after January 1, 2002 and on or before March 31, 2002        38.87
On or after April 1, 2002 and on or before June 30, 2002           41.10
On or after July 1, 2002 and on or before September 30, 2002       43.46
On or after October 1, 2002 and on or before December 31, 2002     45.95
</TABLE>

The exercise price was mutually determined by us and Dura, giving consideration
to (1) a compound annual rate of return upon exercise, as required by potential
investors, to be achieved upon any exercise of the purchase option, (2) the
implied returns to investors purchasing securities with a similar structure
historically, (3) the comparability of the offering to those prior offerings,
(4) the value of the warrants, (5) the nature of Spiros products, (6) the
agreements between us and Dura, and (7) other factors as we and Dura deemed
appropriate and advice given by the underwriters of the offering.

The exercise price may be paid in cash or shares of Dura common stock, or any
combination of cash and stock, at Dura's sole discretion. Any such shares of
Dura common stock will be valued based upon the average of the closing price for
Dura common stock on the Nasdaq National Market for 10 trading days immediately
preceding the date of the exercise notice. In the event the purchase option were
transferred, the payment by the subsequent holder of the majority of the special
common stock could also be made in cash or, if such holder or its parent is a
company 


                                       10

<PAGE>

whose common equity securities are listed on a national securities exchange 
or admitted to unlisted trading priviledges or listed on the Nasdaq National 
Market, in the sole discretion of such holder, in shares of such listed 
common equity security.

Dura owns all of our issued and outstanding special common stock, which grants 
Dura the purchase option and confers certain voting and other rights, 
including the right to elect two directors to our board. Under our 
certificate of incorporation, we are prohibited, until the expiration of the 
purchase option, from taking or permitting certain actions inconsistent with 
Dura's rights under the purchase option. Examples of prohibited actions on 
our part without the consent of Dura include (1) paying dividends, (2) 
issuing additional shares of capital stock, (3) borrowing more than $1 
million in total, (4) merging, liquidating, or selling all or substantially 
all of our assets, or (5) altering the terms of the purchase option. At 
present, Dura has indicated it has no intention of transferring its shares of 
special common stock.

TECHNOLOGY LICENSE AGREEMENT

We have entered into a technology license agreement with Dura. Under the
agreement, Dura granted us an exclusive, worldwide, perpetual, royalty-bearing
license to use the core Spiros technology in research, development and
commercialization (except with respect to beclomethasone in Asia) of the Spiros
products, including rights to patents, patent applications and other
intellectual property rights.
 
As consideration for these license rights granted to us by Dura, we will pay
Dura a technology access fee equal to the greater of (a) 5% of the Net Sales of
each Spiros product or (b) $2 million for all Spiros products in any calendar
year beginning in 1998. Our obligation will terminate, on a country-by-country
basis, (a) within 10 years from the first sale of such Spiros product in those
countries where no patents covering such product are issued and (b) in those
countries where patents covering the Spiros products are issued, upon the
expiration of the last-to-expire patent covering such Spiros product in such
country.
 
In addition, we granted Dura (a) a worldwide, exclusive, royalty-free license to
use the core technology and the program technology to develop the Spiros
products under the terms of our development agreement, (b) a worldwide,
exclusive, royalty-bearing license to use the program technology to sell Spiros
products worldwide under the terms of our manufacturing and marketing agreement,
(c) upon Dura's exercise of the option for Albuterol Spiros, a worldwide,
exclusive, royalty-free, irrevocable, perpetual license to the program
technology to develop, manufacture and commercialize Albuterol Spiros, (d) upon
Dura's exercise of the product option, a worldwide, exclusive, royalty-free,
irrevocable, perpetual license to the program technology to develop, manufacture
and commercialize sell the Spiros product for which the option is exercised, and
(e) a worldwide, exclusive, royalty-free, irrevocable, perpetual license to the
program technology, including technology relating to enhancements to the
existing Spiros technology or any next generation inhaler system, to develop,
manufacture and commercialize products other than the Spiros products, including
products that compete with the Spiros products.
 
Under this agreement, Dura must use commercially reasonable efforts to secure
the rights of third parties in technology that is necessary or useful to the
development of the Spiros products. We have no obligation to accept any grant of
such rights or to assume any obligation without our prior written consent. If we
desire to obtain any such rights, we and Dura both agree to negotiate in good
faith regarding the allocation of any royalty, license fee or other payments
payable to the third party and the assumption of any obligations applicable to
such license. 


                                       11

<PAGE>
 
Until the expiration of the purchase option, Dura will direct and cause, at our
expense, appropriate patent applications to be prepared, prosecuted and
maintained with respect to patents licensed to us and with respect to any
technology developed or acquired on behalf of us by Dura. Upon the termination
of the unexercised purchase option, all patents and patent applications
developed or acquired by Dura on our behalf will be assigned to us.
 
Under the terms of the technology agreement, if we or Dura receive notice of
alleged infringement of any patent, the other party must be notified of such
infringement. All recoveries in any action to enforce patent rights will be
retained by the parties in proportion to costs paid by the parties in enforcing
such action.
 
We have agreed to indemnify Dura against certain third party claims, 
including patent infringement claims, relating to our use of the program 
technology or breach of the technology agreement, development agreement or 
manufacturing and marketing agreement. Dura agreed to indemnify us against 
certain third party claims, including patent infringement claims, relating to 
Dura's use of the program technology, performance of development or breach of 
the same agreements. 

Prior to the expiration of the purchase option, without Dura's prior written
consent we cannot (a) license, sublicense, encumber or otherwise transfer any
rights in the program technology; (b) make, use or sell any of the program
technology; or (c) authorize, cause or assist in any way any other person to do
any of the above. Following the expiration or termination of the purchase
option, these limitations will cease to be applicable.  Thereafter, we will have
the right to license, sublicense, encumber or otherwise transfer the program
technology for use with any Spiros products that have not been acquired by Dura
through the exercise of either product option. Dura may assign its rights and
delegate its obligations under the technology agreement only to an affiliate of
Dura, certain successors of Dura or certain persons that acquire substantially
all of Dura's assets.
 
The technology agreement will remain in full force and effect indefinitely,
unless terminated by (a) mutual agreement of the parties or (b) Dura's exercise
of the purchase option. 
 
Either Dura or we may terminate the technology agreement prior to its expiration
if the other party (a) breaches any material obligation under the technology
agreement or the development agreement, which breach continues for a period of
60 days after written notice of such breach, (b) enters into any voluntary
proceeding in bankruptcy, reorganization or an arrangement for the benefit of
its creditors, or its Board of Directors or stockholders authorize such action
or (c) fails to dismiss any such proceeding within 60 days after the same is
involuntarily commenced. If we terminate the technology agreement, our license
to use the program technology will continue, except with respect to any Spiros
products that have been previously acquired by Dura through exercise of the
product Options. We will be free to enter into arrangements with third parties
to research, develop and commercialize the Spiros products. If Dura terminates
the technology agreement, (a) our license to use the core Spiros technology
under the technology agreement will terminate, (b) all of our rights to the
program technology will revert to Dura, and (c) all rights to develop, use and
sell the Spiros products will revert to Dura. Both parties will use reasonable
efforts for a period of 120 days after the technology agreement is terminated by
Dura to reach agreement on royalties and other compensation to be paid to us by
Dura, solely with respect to the Spiros products and the program technology. In
the absence of such agreement, the matter will be submitted to binding
arbitration. There can be no assurance that, upon termination of the 


                                       12

<PAGE>

technology agreement by us, we will be able to make alternative arrangements 
for the research, development and commercialization of some or all of the 
Spiros products.
 
ALBUTEROL AND PRODUCT OPTION AGREEMENT

We entered into the albuterol and product option agreement with Dura under which
Dura may obtain (a) the assets related to Albuterol Spiros and (b) the assets
related to the other option product.
 
The assets related to the product acquired under this agreement include (a) the
relevant Spiros product, (b) the compound as formulated for use in the product,
(c) a perpetual, sublicensable, non-exclusive, royalty-free license to the
technology owned, developed, or acquired by Dura during the term of the
development agreement applicable to the product for use solely with the product,
and (d) all applications and documents filed with the FDA or a foreign
regulatory authority to obtain regulatory approval to commence commercial sale
or use of the product. 

The option to acquire Albuterol Spiros is exercisable commencing December 22,
1997 and ending on the earlier of (1) 360 days after receipt of FDA approval to
market Albuterol Spiros or (2) the date Dura ceases to manufacture or market
Albuterol Spiros in accordance with the terms of the manufacturing and marketing
agreement.  

Upon exercise of the option to acquire Albuterol Spiros, Dura will make a single
payment to us in cash equal to (a) the aggregate purchase option exercise price,
assuming acquisition of all shares of callable common stock in December 2001,
multiplied by (b) a fraction, the numerator of which will equal the development
and commercialization costs and expenses incurred by us in connection with the
development and commercialization of Albuterol Spiros and the denominator of
which will equal the funds available for development of Spiros products. 
Proceeds, if any, from the exercise of any product option are excluded.
 
The other product option is exercisable with respect to each other Spiros
product commencing December 22, 1997 and ending 90 days after receipt of FDA
approval to market such Spiros product. This option may only be exercised with
respect to a single Spiros product.
 
Upon exercise of the other product option, Dura will make a single payment to us
in cash equal to 110% of (a) the aggregate purchase option exercise price,
assuming acquisition of all shares of callable common stock in December 2001,
multiplied by (b) a fraction, the numerator of which will equal the development
and commercialization costs and expenses incurred by us in connection with the
development of such product and the denominator of which will equal the funds
available for development of Spiros products.  Proceeds, if any, from the
exercise of any product option are excluded. 
 
Any payments received by us with respect to the exercise of either product
option will be available to us to further develop Spiros products. 
 
The product option agreement will automatically terminate in the event that we
terminate the technology agreement, the development agreement or the
manufacturing and marketing agreement, consistent with the terms of those
agreements. Additionally, the product option agreement will terminate on the
date the purchase option terminates, whether by exercise or otherwise.


                                       13

<PAGE>

DEVELOPMENT AGREEMENT

We entered into a development agreement with Dura under which Dura agreed to use
commercially reasonable efforts to develop the Spiros products and to make
certain other expenditures. Dura will furnish all labor, supervision, services,
supplies, and materials necessary to perform the development.
 
Dura also agreed to use commercially reasonable efforts to obtain the rights to,
and to sublicense to us, any patent or technology license held by a third party
that Dura reasonably determines to be necessary or useful to enable Dura to
conduct the development. Dura will act as our exclusive agent for the filing and
prosecuting of all regulatory applications and permits required for FDA approval
in Dura's name and any other necessary regulatory approvals for the Spiros
products. In the event that the purchase option expires unexercised, Dura will
use its reasonable efforts to cause all applications and documents filed with
the FDA or a foreign regulatory authority to obtain regulatory approvals for the
Spiros products, with respect to which Dura has not acquired exclusive rights,
to be assigned to us.
 
Dura will conduct the development in accordance with an annual workplan and
budget. Dura provides us with annual workplans and budgets, which are subject to
approval and acceptance by our board of directors. Dura must report any
significant deviations from an annual workplan and budget in a timely manner.
Further, our reimbursement for expenditures to Dura may not exceed in any
calendar year 120% of the amount allocated in the applicable annual workplan and
budget, unless otherwise approved by us.
 
During the term of the development agreement, both companies will provide the
other with quarterly reports with respect to all payments due and all credits
taken for such quarter. Dura's quarterly report to us includes a statement of
the development costs as defined in the agreement incurred during the quarter
and a summary of work performed for us. Additionally, each company is required
to maintain and make available for inspection by an independent public
accountant selected by the requesting party such records of the other party as
may be necessary to verify the accuracy of reports and payments made under the
development agreement. The inspection may occur once in each calendar year and
upon reasonable notice and during regular business hours.
 
Payments to Dura under the development agreement will be made for the full
amount of all of Dura's research and development expenses, general and
administrative expenses, capital equipment costs, and all other costs and
expenses incurred by Dura in performing the activities described above. Our
payments are limited to the maximum amount of the funds we have available.
Development costs will include development expenses, including salaries,
benefits, supplies, and facilities and overhead allocations, that are billed at
a rate of fully burdened cost plus 25%.  Services provided by third parties will
be billed at a rate of cost plus 20%. This pricing structure is considered by
Dura to be consistent with contractual relationships it has had with other third
parties. 

If either company determines that the development of a particular Spiros product
should be discontinued because continued development is not feasible or is
uneconomic, or that the development should be expanded to include additional
compounds, then both companies will use reasonable efforts to agree on the
nature of the development and the identity of any other compound to be
developed.
 
Under the development agreement, the costs of the manufacture and sale of Spiros
products to conduct clinical trials necessary to obtain FDA approval or any
other required regulatory 


                                       14

<PAGE>

approval are included in development costs. Dura will pay us any revenue 
received from the sale of such Spiros products prior to receipt of FDA 
approval to market.
 
Either company may terminate the development agreement prior to its expiration
if the other party (a) breaches any material obligation under the technology
agreement or the development agreement, which breach continues for a period of
60 days after written notice thereof, (b) enters into any voluntary proceeding
in bankruptcy, reorganization or an arrangement for the benefit of its
creditors, or its Board of Directors or stockholders authorize such action or
(c) fails to dismiss any such proceeding within 60 days after the same is
involuntarily commenced.
  
Dura's obligation to perform development work under the development agreement
will terminate when we have cash or cash equivalents of less than $5 million. 
This is projected by us to occur during the second half of 2000 based on our
current development program. Dura may elect to provide additional funding for
the development of the Spiros products in its sole discretion.
 
Dura may assign its rights and delegate its obligations under the development
agreement only to an affiliate of Dura, certain successors of Dura or certain
persons that acquired substantially all of the assets of Dura. We may not assign
our rights or delegate our obligations under the agreement.
 
MANUFACTURING AND MARKETING AGREEMENT

We have entered into a manufacturing and marketing agreement with Dura under
which we granted to Dura an exclusive, worldwide license to manufacture and
market the Spiros products. Dura will pay us on a quarterly basis a royalty of
7% of the net sales of each Spiros product. The royalty begins upon receipt of
FDA approval to market such product. Prior to the expiration of the option to
acquire assets related to Albuterol Spiros, no royalty payment is due with
respect to net sales of Albuterol Spiros.
 
Under the manufacturing and marketing agreement, Dura agreed to use diligent
efforts to commence sales of each Spiros product promptly upon receiving FDA
approval for such product. Dura will be responsible for maintaining competent,
qualified sales personnel, and agreed not to make any representations
inconsistent with the approved labeling of each Spiros product. 
 
"Net sales" for purposes of the manufacturing and marketing agreement and the
technology agreement is defined as the gross amount invoiced for sales of the
Spiros products by Dura or its sublicensees, if any, to third parties less (1)
discounts actually allowed, (2) credits for claims, allowances, retroactive
price reductions or returned Spiros products, (3) prepaid freight charges
incurred in transporting Spiros products to customers, (4) sales taxes and other
governmental charges actually paid in connection with the sales, but excluding
income taxes, and (5) royalty obligations paid to the inventor of certain
aspects of the Spiros technology. Net sales will not include sales between or
among Dura, its affiliates and its sublicensees unless such sales are for end
use rather than for purposes of resale.
 
The manufacturing and marketing agreement will terminate (a) upon the exercise
or termination of the purchase option or (b) by mutual agreement of the parties
at any time. In the event Dura exercises either product option, the
manufacturing and marketing agreement will terminate with respect to relevant
product, but will otherwise continue in full force and effect.


                                       15

<PAGE>

SERVICES AGREEMENT

We have entered into a services agreement with Dura. Dura provides certain
management and administrative services to us, performed either internally or
externally on our behalf, at the rate of $100,000 per calendar quarter. This
agreement terminates on the earlier of (1) the exercise of the purchase option
or (2) 12 months after expiration of the purchase option.

SPECIAL COMMON STOCK

There are currently 1,000 shares of our special common stock issued, all of
which are held by Dura. The special common stock does not confer on its holder
the right to vote at any meeting of our stockholders except as required by law
or referred to in the next paragraph.  The holder of special common stock is 
entitled to elect two of our directors. The special common stock also does not
have rights to any of our profits. In the event we are dissolved, our callable
common stock has a priority over the special common stock with respect to return
of capital.  The special common stock is not otherwise entitled to participate
in any way in our profits or assets. We do not presently intend to issue any
additional shares of special common stock.
 
Until the expiration of the purchase option, no resolution or act of us or our
board of directors to authorize or permit any of the following will be effective
without the prior written approval of the holders of a majority of the
outstanding special common stock: (1) the allotment or issue of shares or other
securities of us or the creation of any right to such an allotment or issue; (2)
the reduction of our authorized capital stock; (3) the alteration of or any
change to the rights, powers, preferences and restrictions of the special common
stock; (4) outstanding borrowings of an aggregate of more than $1 million at any
one time; (5) the sale or other disposition of or the creation of any lien or
liens on the whole or a material part of our business or assets; (6) the
declaration or payment of dividends or the making of any other distributions to
our stockholders; (7) the merger, consolidation or reorganization of us with or
into any other corporation; (8) the sale, liquidation or other disposition of
all or substantially all of our assets; (9) the alteration or amendment of
Articles IV or VII of our certificate of incorporation; and (10) the adoption,
amendment or repeal of our bylaws. 

As a result, Dura, as the holder of the outstanding special common stock, could
preclude the holders of a majority of the shares of our callable common stock
and our board of directors from taking any of the actions described above for so
long as Dura continues to hold its shares. Dura may transfer or sell all, but
not less than all, of its shares of special common stock. As a result, an
unrelated third party may acquire rights associated with the special common
stock, including the rights discussed in this section. Any resolution to wind up
our affairs or to liquidate us will confer upon the holders of the special
common stock a right to vote. Shares of special common stock will carry a number
of votes equal to the total number of votes carried by our callable common stock
at the time outstanding.  For a discussion of risks associated with Dura's
ownership of special common stock, see "Risks and Uncertainties" below.

SALES AND MARKETING

We will rely entirely on Dura under the manufacturing and marketing agreement
for our sales and marketing efforts. Under the manufacturing and marketing
agreement, Dura will submit an annual marketing plan to be approved by us. 


                                       16

<PAGE>

COMPETITION

There are at least 10 companies currently involved in the development, marketing
or sales of dry powder pulmonary drug delivery systems. There are two types of
DPIs currently in commercial use worldwide, individual dose and multiple dose.
Individual dose dry powder inhalers currently marketed in the U.S. include the
Rotohaler-TM- (developed and marketed by Glaxo) and the Spinhaler-Registered
Trademark- (developed and marketed by Fisons Limited). The Turbuhaler-Registered
Trademark- (developed and marketed by Astra), a multiple dose dry powder
inhaler, is the leading dry powder inhaler in worldwide sales. In 1998, the
first Turbuhaler product, the Pulmicort Turbuhaler, was launched by Astra. The
FDA has also approved two multiple dose dry powder inhalers developed by Glaxo,
the Flovent-Registered Trademark- Rotadisk-Registered Trademark- and the
Serevent-Registered Trademark- Diskus-Registered Trademark-, both launched in
early 1998.

Many of these companies, which include large pharmaceutical firms with financial
and marketing resources and development capabilities substantially greater than
ours, are engaged in developing, marketing and selling products that compete
with our proposed products. In addition, Dura may develop or acquire products,
which may compete with Spiros products. Further, other products now in use or
under development by others may be more effective than our current or future
products. The industry is characterized by rapid technological change, and
competitors may develop their products more rapidly than we are able.
Competitors may also be able to complete the regulatory process sooner, and
therefore, may begin to market their products in advance of our products.  We
believe that competition among both prescription pharmaceuticals and pulmonary
delivery systems will be based on, among other things, product efficacy, safety,
reliability, availability and price. 

MANUFACTURING

A substantial amount of the work under the development agreement and the
manufacturing and marketing agreement will be conducted at Dura's facilities.
Dura has informed us that it believes that its available facilities are
sufficient to satisfy its obligations under the development agreement and the
manufacturing and marketing agreement. However, the same facilities may be used
by Dura for work performed on its own account and in the performance of third
party contracts.

PATENTS AND PROPRIETARY RIGHTS

Dura presently holds five U.S. patents and four U.S. patent applications
relating to the Spiros technology to be further developed by us. The issued
patents include a patent with claims covering the use in Spiros of an impeller
to create an aerosol cloud of a drug intended for inhalation, which expires in
2011.  Dura has also filed certain continuations in part and foreign patent
applications relating to Spiros.  All of the above patents and patent
applications, relating to the Spiros technology, together with their respective
continuations in part and foreign patent applications, have been licensed to us
under the technology agreement.  Until the expiration or termination of the
purchase option, Dura is required to file patent applications, at our expense,
with respect to inventions included in our technology. Dura will be the owner,
while we will be the exclusive licensee for use with the Spiros products of any
patents included in our technology. Our success will therefore depend in part
upon the ability of Dura or us, as the case may be, to obtain strong patent
protection both in the United States and other countries.

We consider the protection of discoveries in connection with our development
activities important to our business. We intend to seek patent protection in the
U.S. and selected foreign countries where deemed appropriate. Dura has also
filed certain foreign patent applications relating to Spiros technology. 


                                       17

<PAGE>

We also rely upon trade secrets, unpatented proprietary know-how and continuing
technological innovation to develop its competitive position. For a discussion
of risks related to our intellectual property rights, see "Risks and
Uncertainties" below.

GOVERNMENT REGULATION

The manufacturing and marketing of Spiros products are subject to regulation by
Federal and state government authorities. In the U.S., pharmaceuticals and drug
delivery systems, including Spiros, are also subject to rigorous FDA regulation
and may be subject to regulation by other jurisdictions, including the State of
California. The Federal Food, Drug, and Cosmetic Act and the Public Health
Service Act govern the testing, manufacture, safety, efficacy, labeling,
storage, record keeping, approval, advertising and promotion of Spiros products.
Product development and approval within this regulatory framework takes a number
of years and involves the expenditure of substantial resources. 

To obtain FDA approval for each of the Spiros products, Dura, on our behalf, is
required to conduct each of the following steps and possibly others:
(1) laboratory and possibly animal tests, (2) the submission to the FDA of an
IND application, which must become effective before human clinical trials may
commence, (3) adequate and well-controlled human clinical trials to establish
safety and efficacy, (4) the submission of an NDA to the FDA for marketing
approval, and (5) FDA approval of the new drug application prior to any
commercial sale or shipment. The new drug application must include, in addition
to a compilation of preclinical and clinical data, complete information about
product performance and manufacturing facilities and processes. Prior to
completion of the regulatory review process, the FDA may conduct an inspection
of the facility, manufacturing procedures, operating systems and personnel
qualifications. In addition to obtaining FDA approval for each product, each
domestic drug and/or device manufacturing facility must be registered with and
approved by the FDA. Domestic manufacturing facilities are subject to biennial
inspections by the FDA and inspections by other jurisdictions and must comply
with good manufacturing practice for both drugs and devices. To supply products
for use in the U.S., foreign manufacturing establishments must comply with
current good manufacturing practice and other requirements and are subject to
periodic inspection by the FDA or by regulatory authorities in such countries
under reciprocal agreements with the FDA. 

Preclinical testing includes laboratory evaluation of product chemistry and
animal studies, if appropriate, to assess the safety and efficacy of the product
and its formulation. The results of the preclinical tests are submitted to the
FDA as part of an IND application, and unless the FDA objects, the IND
application will become effective 30 days following its receipt by the FDA, thus
allowing the product to be tested in humans. 

Clinical trials involve the administration of the pharmaceutical product to
healthy volunteers or to patients identified as having the condition for which
the pharmaceutical agent is being tested. The pharmaceutical product is
administered under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with Good Clinical Practice and
protocols previously submitted to the FDA as part of the IND application that
detail the objectives of the study, the parameters used to monitor safety and
the efficacy criteria evaluated. Each clinical study is conducted under the
auspices of an independent Institutional Review Board at the institution at
which the study is conducted. The IRB considers, among other things, the design
of the study, ethical factors, the safety of the human subjects and the possible
liability risk for the institution. 

Clinical trials for new products are typically conducted in three sequential
phases that may overlap. In Phase I, the initial introduction of the
pharmaceutical into healthy human volunteers, the 


                                       18

<PAGE>

emphasis is on testing for safety (adverse effects), dosage tolerance, 
metabolism, distribution, excretion and clinical pharmacology. Phase II 
involves studies in a limited patient population to determine the initial 
efficacy of the pharmaceutical for specific targeted indications, to 
determine dosage tolerance and optimal dosage and to identify possible 
adverse side effect and safety risks. Once a compound is found to be 
effective and to have an acceptable safety profile in Phase II evaluations, 
Phase III trials are undertaken to more fully evaluate clinical outcomes. The 
FDA reviews both the clinical plans and the results of the trials and may 
require the study to be discontinued at any time if there are significant 
safety issues. 

The results of the preclinical and clinical trials for pharmaceutical drug
products such as those being developed by Dura, on our behalf, are submitted to
the FDA in the form of an NDA for marketing approval. FDA approval can take
several months to several years, or approval may be denied. The approval process
can be affected by a number of factors, including the severity of the side
effects, the availability of alternative treatments and the risks and benefits
demonstrated in clinical trials. Additional animal studies or clinical trials
may be requested during the FDA review process and may delay marketing approval.
After FDA approval for the initial indication, further clinical trials are
necessary to gain approval for the use of the product for any additional
indications. The FDA may also require post-marketing testing and surveillance to
monitor for adverse effects, which can involve significant additional expense. 

The FDA has considerable discretion to decide what requirements must be met
prior to approval. We believe, based upon the FDA's historical practice with
respect to drug inhalers, that the FDA will regulate each combination of Spiros
with a compound as a discrete pharmaceutical or drug product requiring separate
approval as a new drug. 

The Federal Food, Drug, and Cosmetic Act permits the export of unapproved drugs
to a foreign country, provided the product complies with the laws of that
country and has valid marketing authorization in at least one of a list of
designated "Tier 1" countries.  Once a product is exported to a qualified
foreign country, we will be subject to the applicable foreign regulatory
requirements governing human clinical trials and marketing approval in that
country.  The requirements relating to the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country and
there can be no assurance that we will be able to meet and fulfill the statutory
requirements in a particular country.  

RESEARCH AND DEVELOPMENT EXPENSES

We incurred research and development expenses for the period from September 23,
1997 (date of incorporation) through December 31, 1997, and the year ended
December 31, 1998, of $7.0 million and $50.8 million, respectively.
 
HUMAN RESOURCES

We have no employees.  The officers, Dr. David S. Kabakoff, Chairman, President
and Chief Executive Officer, Erle T. Mast, Vice President and Chief Financial
Officer, and Mitchell R. Woodbury, Secretary, are employees of Dura.

RISKS AND UNCERTAINTIES 

SPIROS REQUIRES SIGNIFICANT ADDITIONAL DEVELOPMENT WHICH IS COSTLY, 
TIME-CONSUMING AND MAY NEVER BE COMMERCIALLY SUCCESSFUL.  Spiros will require 
significant additional development efforts as well as clinical testing.  This 
work is very costly and time consuming.  Even after spending 


                                       19

<PAGE>

significant amounts of money and time, the development of any Spiros product 
may not be successful. Moreover, even if Spiros does receive regulatory 
approval, Spiros may never be commercially successful, have all of the patent 
and other protections necessary to prevent competitors from producing similar 
products and may infringe on patent or other proprietary rights of third 
parties.  The failure of Spiros to receive timely regulatory approval and 
achieve commercial success would have an adverse effect on our business.

BEFORE ANY SPIROS PRODUCT CAN BE MARKETED, CERTAIN REQUIRED GOVERNMENTAL
APPROVALS WILL HAVE TO BE OBTAINED, WHICH IS NOT ASSURED; FAILURE TO OBTAIN SUCH
APPROVALS WOULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.  The development,
testing, manufacturing and marketing of pharmaceutical products are subject to
extensive regulation by governmental authorities, including the FDA.  Each
Spiros product will have to obtain approval from the FDA before that product can
be manufactured or marketed.  The review and approval process mandated by the
FDA is very rigorous, requiring testing as well determining manufacturing
capability and product performance. FDA review can be delayed beyond the
expectations of us, our shareholders or securities analysts covering our
securities. None of the products currently in development may ever be approved
by the FDA.  Failure to obtain approvals would have an adverse effect on our
business and results of operations.

OUR REGULATORY APPLICATION SUBMITTED TO THE FDA FOR ALBUTEROL SPIROS-TM- WILL 
NOT BE APPROVED WITHOUT ADDITIONAL CLINICAL TRIALS, WHICH WILL DELAY THE 
COMMERCIALIZATION OF ALBUTEROL SPIROS.  On November 4, 1998, Dura and Spiros 
Corp. II announced the receipt of a complete response letter from the FDA.  
The letter indicated that the new drug application submitted by Dura on our 
behalf for Albuterol Spiros will not be approved unless we address certain 
deficiencies. The FDA requested that we complete additional clinical trials 
on the Spiros inhaler to ensure the inhaler is reliable and to replicate 
clinical outcomes of the initial trials. The FDA also requested that several 
chemistry, manufacturing and control issues, as well as certain 
electromechanical reliability issues be resolved.  As a result of a series of 
meetings with the FDA, we and Dura have determined the requirements to 
address these issues to support the resubmission of the new drug application 
for Albuterol Spiros. Dura on our behalf, expects to initiate clinical trials 
for both Albuterol Spiros and Beclomethasone Spiros in the fourth quarter of 
1999 and to commercialize these products in 2001, pending successful 
development and FDA approval. We cannot predict or assure the successful 
outcome of additional trials to support the resubmission of the new drug 
applciation, or if the FDA will ever approve this new drug application.

WE MAY NOT HAVE SUFFICIENT FUNDS TO COMPLETE THE DEVELOPMENT OF ANY SPIROS
PRODUCT. Based on our current development plan and budget for the Spiros
projects, we expect to expend all of our existing funds in the second half of
2000. Further, we do not believe that our current available funds will be
adequate to complete the development or regulatory review process for any of the
Spiros products. Until the expiration of Dura's purchase option, we are
significantly restricted from raising additional funds without Dura's consent.
While Dura may, at its sole option, provide funds for further development of the
Spiros products or infuse additional cash into Spiros Corp. II through the
exercise of the albuterol or product options, it is not obligated to do so. If
the purchase option is not exercised, we would have to raise substantial funding
while hiring, or otherwise obtaining access to, research and management
personnel. We may not be successful in doing any of these tasks. Failure to do
so would have an adverse effect on our business and results of operations.

WE ARE DEPENDENT ON DURA FOR ALL ACTIVITIES IN THE DEVELOPMENT OF SPIROS
PRODUCTS. We do not have manufacturing or marketing capabilities. Under our
agreements with Dura, we are obligated to only utilize Dura's manufacturing
facilities for manufacturing in the U.S. during the term of the manufacturing
and marketing agreement. Dura has the right to use contract manufacturers and
currently plans to rely on third parties to manufacture certain components of
Spiros. There can be no assurance that Dura's facilities or those of its
contract manufacturers will be satisfactory for our needs. In addition, Dura or
its contract manufacturers may require additional FDA approval prior to


                                       20

<PAGE>

commencing manufacturing of Spiros products. There can be no assurance that 
the Spiros products can be manufactured, whether by Dura or a contract 
manufacturer, on a commercial scale for commercially reasonable cost or on a 
timely basis. We have no experience in sales, marketing or distribution. 
Under the manufacturing and marketing agreement, Dura has exclusive worldwide 
marketing rights to the Spiros products. Dura's sales and marketing force may 
not be able to establish commercially successful sales and distribution 
capabilities for the Spiros products. 

Dura will determine unilaterally certain activities to be undertaken under the
development agreement. In all events Dura will have substantial influence over
all activities and procedures (including the timing and priorities thereof) to
be undertaken under our agreements with Dura. Dura has no obligation to complete
any development or other activity after all of our funds have been spent. Dura's
own projects and other third party projects may compete for time and resources
with projects undertaken under our agreement with Dura. The resources that Dura
uses under these agreements may therefore be limited.

DURA WILL NEED TO SIGNIFICANTLY EXPAND ITS MANUFACTURING CAPABILITY AND COMPLY
WITH GOVERNMENT REGULATIONS BEFORE WE CAN MANUFACTURE OUR SPIROS PRODUCT.    
Dura will need to significantly expand its current manufacturing operations and
comply with government regulations in the U.S. and other countries to obtain
marketing approval.  In addition, Dura's manufacturing facility must be
registered with and licensed by various regulatory authorities and must comply
with requirements of the FDA and the State of California. Dura intends to
utilize third parties to produce components of and assemble the Spiros inhaler. 
Such third parties have only produced limited quantities of components and
assembled limited numbers of inhalers.  These third parties will be required to
significantly scale up their activities and to produce components which meet
applicable specifications on a timely and consistent basis.  Such third parties
may not be successful in attaining acceptable service levels or meeting
regulatory  requirements which would have an adverse effect on our ability to
commercialize the Spiros products.

THE PHARMACEUTICAL INDUSTRY IS EXTREMELY COMPETITIVE AND WE MAY NOT BE
SUCCESSFUL.  Many companies, including large pharmaceutical firms with financial
and marketing resources and development capabilities substantially greater than
ours, are engaged in developing, marketing and selling products that compete
with those offered or planned to be offered by us.  The selling prices of such
products typically decline as competition increases.  Further, other products
now in use or under development by others may be more effective than our current
or future products.  The industry is characterized by rapid technological
change, and competitors may develop their products more rapidly than we are
able.  Competitors may also be able to complete the regulatory process sooner,
and therefore, may begin to market their products in advance of our products. 
Our failure to effectively respond to the competitive pressures of our industry
would have an adverse effect on our business and results of operations.

WE DO NOT HAVE A LONG OPERATING HISTORY AND THERE IS NO ASSURANCE OF
PROFITABILITY OR DIVIDENDS. We were recently formed and have no operating
history upon which investors may base an evaluation of our likely financial
performance. We anticipate that substantially all of our available funds will be
expended prior to the earliest receipt of any significant revenues, resulting in
significant losses. Further, even if the Spiros products are developed or
marketed under the agreements with Dura, they may not be able to be marketed
profitably. Even if such Spiros products are commercialized profitably, the
initial losses incurred by us may never be recovered. We are prevented from
paying dividends on our common stock without the approval of Dura, and
accordingly, do not expect to pay any dividends. 


                                       21

<PAGE>

WE HAVE NO ASSURANCE THAT DURA WILL EXERCISE ITS OPTIONS.  Dura is not obligated
to exercise its purchase option, the albuterol option or the product option, and
it will exercise such options only if, in the opinion of Dura's Board of
Directors, it is in Dura's best interest to do so. Even if the Spiros products
are developed and approved, if Dura does not exercise any of its options, we
will be required to find alternative ways to commercially market or exploit the
Spiros products. We may not be able to do so. If we determine to market the
Spiros products ourselves, we will require substantial additional funds. We may
not be able to raise funds when needed. Similarly, if we determine to license
the Spiros products to third parties, such arrangements, if available, may be on
terms less favorable to us than the terms of our arrangements with Dura. 

THERE IS NO ASSURANCE THAT THE PURCHASE OPTION WILL BE REPRESENTATIVE OF THE
VALUE OF SPIROS CORP. II.  The purchase option exercise price was set as of the
date of the closing of the Offering and therefore may not be representative of
the value of our common stock at the time of the exercise of the Purchase
Option. 

POTENTIAL COMPETITION FROM DURA MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS. 
Dura is engaged in ongoing licensing and development of new products. While Dura
has licensed the rights to develop, manufacture and commercialize the Spiros
products, Dura is not prohibited from developing other products using Spiros,
including those that may compete with the Spiros products, or from in-licensing
or acquiring products that may compete with the Spiros products. Dura's
activities may lead to the development, in-licensing or acquisition of products
that compete with the Spiros products being developed by us. It is possible that
Dura's rights with respect to such competitive products could reduce Dura's
incentive to exercise the albuterol option, the product option or the purchase
option. 

DURA HAS THE ABILITY TO LIMIT CERTAIN OF OUR ACTIVITIES.  Until the 
expiration of the purchase option, Dura must approve certain of our 
activities, including: (i) the issuance of our securities; (ii) borrowing an 
aggregate of more than $1 million at any one time; (iii) the sale or other 
disposition of a material part of our business or assets; (iv) the 
declaration or payment of dividends or the making of any other distributions 
to our shareholders; (v) the merger or consolidation of us with or into any 
other corporation; and (vi) the adoption, amendment or repeal of our Bylaws. 
Accordingly, Dura could preclude our shareholders and  Board of Directors 
from taking any of the foregoing actions during such period. Dura, as holder 
of all of the outstanding special common stock, may transfer or sell all, but 
not less than all, of such shares.  As a result, an unrelated third party may 
acquire rights associated with the special common stock, including the rights 
discussed in this section and the right to exercise the albuterol option, the 
product option and the purchase option.  There can be no assurance that any 
transferee of the special common stock will have the same financial resources 
or development, manufacturing or marketing capabilities as Dura, which may 
reduce the likelihood of the exercise of the albuterol option, the product 
option or the purchase option. 

OUR ABILITY TO OBTAIN PATENTS AND PROTECT OUR PROPRIETARY RIGHTS IS UNCERTAIN
AND COULD RESULT IN AN ADVERSE EFFECT ON OUR BUSINESS.  Our ability to obtain
patents on current or future products or formulations, defend our patents,
maintain trade secrets and operate without infringing upon the proprietary
rights of others both in the U.S. and abroad is uncertain.  Patents may never
issue.  Even if issued or licensed to us, patents may not be enforceable,
provide substantial protection from competition or be of commercial benefit to
us.  Even if all these are true, we may not possess the financial resources
necessary to enforce or defend any of our patent rights.  Our success will also
depend upon avoiding the infringement of patents issued to competitors and upon
maintaining the technology licenses upon which certain of our products are
based.  Litigation, which is costly, may be necessary to enforce our patent and
license rights or to determine the scope and validity of proprietary rights of
third parties. 


                                       22

<PAGE>

We may be required to obtain licenses to patents or other proprietary rights of
others. These licenses may not be made available on terms acceptable to us, if
at all. If we do not obtain such licenses, we could encounter delays in Spiros
product market introductions or could find that the development, manufacture or
sale of the Spiros products requiring such licenses to be impossible.  Moreover,
we could incur substantial costs and diversion of management time in defending
ourselves in any suits brought against us claiming infringement of the patent
rights of others or in asserting our patent rights. 

We are aware of foreign patents granted to third parties in the United Kingdom
that claim proprietary rights in areas that may overlap with certain Spiros
technology. In the event that we determine to market any Spiros product in the
United Kingdom and further determine that such activity would infringe upon such
third party patents, we may need to either design around these patents, obtain
licenses to such patents, or avoid marketing products in the United Kingdom and
other areas in Europe in which these patents provide protection. 

OUR STOCK PRICE IS VOLATILE AND YOU MAY NOT GET A RETURN ON YOUR INVESTMENT. 
The market prices for securities of emerging companies, including ours, have
historically been highly volatile. Future announcements concerning us or our
competitors may have a significant impact on the market price of our Units. 
Such announcements might include (1) financial results, (2) the results of
clinical testing of our or our competitors' products, (3) regulatory
developments, (4) technological innovations, (5) new commercial products, (6)
changes to government regulations, (7) regulatory decisions on commercialization
of products, (8) developments concerning proprietary rights, or (9) litigation
or public concern as to safety of our products.

WE MAY BE IMPACTED BY YEAR 2000 ISSUES WHICH COULD HAVE AN ADVERSE ON OUR 
BUSINESS.  We rely on Dura for our operating and financial systems.  We have 
made inquiries of Dura, and Dura has responded that it recognizes the need to 
ensure its operations will not be adversely impacted by the inability of 
Dura's systems to process data having dates on or after January 1, 2000.  
Processing errors due to software failure arising from calculations using the 
year 2000 date are a recognized risk.  Dura has advised us that during 1998 
they completed the identifications of their system with year 2000 exposure. 
They expect to complete their year 2000 evaluation, testing and contingency 
planning by June 30, 1999. Dura's identification of their most significant 
year 2000 exposure does not involve the research and development work Dura is 
performing on our behalf.  While we believe that Dura's efforts are adequate 
to address the year 2000 concerns, there can be no assurance that the systems 
of other companies on which Dura's systems and operations rely will be 
converted on a timely basis and will not have a material effect on us.  In 
addition, the potential impact of the year 2000 on others with whom we, 
through agreements with Dura, do business cannot be reasonably estimated at 
this time.  The cost of Dura's year 2000 initiatives will be paid entirely by 
Dura.

ITEM 2.   PROPERTIES

Our corporate offices are located in Dura's executive offices in San Diego,
California. We do not own or lease any facilities.

ITEM 3.   LEGAL PROCEEDINGS

None.

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

None.


                                       23

<PAGE>

                                       PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

 
The following table sets forth the high and low sale prices of our units as
reported on the Nasdaq National Market, without retail mark-up, mark-down, or
commissions, for the period December 18, 1997 through December 31, 1997 and by
quarter for 1998. Each unit consists of one share of our callable common stock
and a warrant for Dura common stock. There is no quoted market for the shares of
callable common stock apart from the units.

<TABLE>
<CAPTION>
                                            Units
                                       High         Low
                                     -------       -------
<S>                              <C>            <C>
1997
Fourth Quarter                   $      17.75   $     16.50

1998
First Quarter                    $      19.00   $     13.75
Second Quarter                   $      17.38   $     15.88
Third Quarter                    $      17.00   $      9.38
Fourth Quarter                   $      11.75   $      6.63
</TABLE>

At February 26, 1999, the closing price of our units was $8.38. At February 26,
1999 there was one holder of record and approximately 1,500 beneficial holders
of record of units and one holder of special common stock.

We have not paid any dividends on our callable common stock and do not expect to
do so in the foreseeable future.  Holders of our callable common stock are
entitled to receive any such dividends as may be recommended by the board of
directors and approved by the holder of the special shares. The special common
stock is not entitled to receive dividends.

In September 1997, Spiros Corp. II sold to Dura 1,000 shares of special 
common stock for aggregate proceeds of $1,000.  The issuance of the special 
common stock was not registered pursuant to the Securities Act of 1933, as 
amended, (the "Act") and the special common stock was issued in connection 
with our formation.  The special common stock was exempt from registration 
pursuant to Section 4(2) of the Act.

On December 22, 1997, Spiros Corp. II and Dura completed the offering of 
6,325,000 Units. Each Unit consists of one share of Common Stock of Spiros 
Corp. II and one Warrant to purchase one-fourth of one share of Dura common 
stock, pursuant to a registration statement on Form S-1/S-3 (No. 
333-37673/37673-01). The registration statement was declared effective on 
December 16, 1997. The net proceeds from the offering were invested in cash, 
cash equivalents and short-term investments. As of December 31, 1998, Spiros 
Corp. II has used $45.5 million of its cash, cash equivalents and short-term 
investments for its operating activities and has $118.9 million of working 
capital. 


                                       24

<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

The following data has been derived from our audited financial statements. The
information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 and our Financial Statements and notes thereto in Item 8.


                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
                             September 23,                       September 23,
                                  1997                               1997
                                (date of                           (date of
                             incorporation)                     incorporation)
                                through         Year ended          through
                              December 31,     December 31,      December 31,
                                  1997             1998              1998
                                 ------           -------           ------
<S>                            <C>             <C>                <C>
 Total revenues                 $   222         $  8,239           $  8,461
 Net loss                       $(6,924)        $(43,793)          $(50,717)
 Net loss per share:
    basic and diluted             (1.09)        $  (6.92)          $  (8.02)

<CAPTION>
                          December 31, 1997  December 31, 1998
                         ------------------  -------------------
<S>                      <C>                 <C>
 Total assets                $ 170,506            $ 123,796
 Total liabilities           $   8,425            $   4,878
</TABLE>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL

Spiros Development Corporation II, Inc. ("Spiros Corp. II") was incorporated in
the state of Delaware on September 23, 1997 for the purpose of continuing the
development of Spiros-Registered Trademark-, a dry powder pulmonary drug
delivery system, and to conduct formulation work, clinical trials and
commercialization for certain specified leading asthma and chronic obstructive
pulmonary disease ("COPD") drugs for use with Spiros.  Spiros Corp. II commenced
operations on December 22, 1997.

On December 22, 1997, we and Dura Pharmaceuticals, Inc. ("Dura") completed an 
initial public offering of 6,325,000 units, each unit consisting of one share 
of callable common stock of our company and one warrant to purchase 
one-fourth of one share of Dura common stock at a price of $54.84 per share.  
The offering resulted in net proceeds to Spiros Corp. II of approximately $94 
million.  Concurrently, Dura contributed $75 million to our company.  
Substantially all funds from the offering and the $75 million contribution 
from Dura and interest earned thereon, are expected to be paid to Dura for 
the development and commercialization of Spiros and the use of Spiros with 
certain drugs pursuant to various agreements as described below.  Through 
December 31, 1999, the units will trade publicly. Effective January 1, 2000, 
the units will separate into the two underlying securities.

                                       25

<PAGE>

Dura, as holder of 100% of the outstanding shares of our special common 
stock, has an irrevocable option to purchase all, but not less than all, of 
the issued and outstanding shares of our common stock at predetermined 
prices.  Dura may exercise the purchase option at any time through the 
earlier of (a) December 31, 2002, (b) the 90th day after the date we provide 
Dura with our quarterly financial statements showing cash or cash equivalents 
of less than $5 million, although Dura may extend such period by providing 
additional funding for the continued development of Spiros, but in no event 
beyond December 31, 2002, or (c) upon termination of the technology license, 
development, or the manufacturing agreements between the Spiros Corp. II and 
Dura.  If the Purchase Option is exercised, the per share price will be 
$24.01 through December 31, 1999, increasing on a quarterly basis to $45.95 
per share through December 31, 2002.  The purchase price may be paid, at 
Dura's discretion, in cash, shares of Dura common stock, or any combination 
thereof.

In December 1997, Spiros Corp. II and Dura entered into a technology license
agreement. Dura granted to Spiros Corp. II an exclusive, worldwide, perpetual
royalty-bearing license to use technology owned by Dura relating to the use of
Spiros with the asthma and COPD drugs albuterol, beclomethasone, ipratropium,
budesonide, and a combination of albuterol and ipratropium.  Spiros Corp. II and
Dura also executed a series of agreements, which provide for the development,
marketing, and manufacturing of Spiros with specified compounds and for the
provision of general and administrative services by Dura.  Since Dura conducts
all of our current activities under these agreements, we do not maintain any
research staff or occupy any research facilities.

On November 4, 1998, we announced the receipt of a complete response letter 
from the FDA indicating that the new drug application is not approvable until 
and unless certain deficiencies are addressed. The FDA has requested 
additional clinical trials on the to-be-marketed Spiros inhaler in order to 
ensure inhaler reliability and replicate clinical outcomes of the initial 
trials. The FDA has also requested that several chemistry, manufacturing, and 
control issues, as well as certain electromechanical reliability issues be 
resolved.  As a result of several meetings with the FDA, Dura and Spiros 
Corp. II have determined the requirements to address these issues and support 
a resubmission of the Albuterol Spiros NDA.  Dura expects to initiate the 
additional clinical trials in late 1999 with a targeted launch date in 2001, 
pending FDA approval. In addition, in February 1999 we announced that we will 
temporarily suspend work on the ipratropium and albuterol-ipratropium 
combination products and will review the opportunity for these products at a 
later date.

RESULTS OF OPERATIONS

Spiros Corp. II commenced operations in December 1997 and incurred a net loss of
$6.9 million for the period ended December 31, 1997 on research and development
expenses of $7 million. For the year ended December 31, 1998, we incurred a net
loss of $43.8 million. Research and development expenses for 1998 were $50.8
million. Interest income for the period ended December 31, 1997 and the year
ended December 31, 1998 was $222,000 and $8.2 million, respectively. The
increase in activity in 1998 as compared to 1997 reflects the fact that our
operations commenced late in 1997.
 
LIQUIDITY AND CAPITAL RESOURCES

Our initial capitalization totaled $169 million, consisting of net proceeds from
the Offering of approximately $94 million and a $75 million contribution from
Dura.  At December 31, 1998, we had cash, cash equivalents, and short-term
investments totaling $123.6 million and working 


                                       26

<PAGE>

capital totaling $118.9 million, a decrease of $46.9 million and $43.2 
million, respectively, from December 31, 1997. These decreases are due to 
research and development costs incurred in 1998. We believe that our working 
capital and expected cash flows from our cash and short-term investments will 
be sufficient to fund our cash requirements through at least December 31, 
1999.  

YEAR 2000 COMPLIANCE

We rely on Dura for our operating and financial systems.  We have made 
inquiries of Dura and Dura has responded that it recognizes the need to 
ensure its operations will not be adversely impacted by the inability of 
Dura's systems to process data having dates on or after January 1, 2000.  
Processing errors due to software failure arising from calculations using the 
year 2000 date are a recognized risk.  Dura has advised us that during 1998 
they completed the identifications of their system with year 2000 exposure. 
They expect to complete their year 2000 evaluation, testing and contingency 
planning by June 30, 1999. Dura's identification of their most significant 
year 2000 exposure does not involve the research and development work Dura is 
performing on our behalf.  While we believe Dura's efforts are adequate to 
address the year 2000 concerns, there can be no assurance that the systems of 
other companies on which Dura's systems and operations rely will be converted 
on a timely basis and will not have a material effect on us.  In addition, 
the potential impact of the year 2000 on others with whom we, through 
agreements with Dura, do business cannot be reasonably estimated at this 
time.  The cost of Dura's Year 2000 initiatives will be paid entirely by Dura.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We invest our excess cash and short term investments in U.S. government and 
corporate debt securities with high quality credit ratings and maturities of 
less than two years. These investments are not held for trading or other 
speculative purposes. Changes in interest rates affect the investment income 
we earn on our investments and, therefore, impact our cash flows and results 
of operations. We are not exposed to risks for changes in foreign currency 
exchange rates, commodity prices, or any other market rates.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements are filed as part of this Annual Report on Form 10-K
(see Item 14).

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

None.

                                       27

<PAGE>

                                      PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a)  Identification of Directors.  The information under the caption "Election
of Directors," appearing in the Proxy Statement to be filed on or about April
16, 1999, is incorporated herein by reference.

(b)  Identification of Executive Officers.  The information under the caption
"Executive Officers," appearing in the Proxy Statement to be filed on or about
April 16, 1999, is incorporated herein by reference.

(c)  Compliance with Section 16 (a) of the Exchange Act.  The information under
the caption "Section 16 (a) Beneficial Ownership Reporting Compliance,"
appearing in the Proxy Statement to be filed on or about April 16, 1999, is
incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

The information under the heading "Executive Compensation and Other
Information," appearing in the Proxy Statement to be filed on or about April 16,
1999, is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information under the headings "Principal Stockholders" and "Security
Ownership of Management," appearing in the Proxy Statement to be filed on or
about April 16, 1999, is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the headings "Election of Directors," "Executive 
Compensation and Other Information" and "Certain Relationships and Related 
Transactions," appearing in the Proxy Statement to be filed on or about April 
16, 1999, is incorporated herein by reference.

                                      PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  1.   INDEX TO FINANCIAL STATEMENTS
          Independent Auditors' Report
          Balance Sheet
          Statement of Operations
          Statement of Shareholders' Equity
          Statement of Cash Flows
          Notes to Financial Statements


                                       28

<PAGE>

(a)  2.   INDEX TO FINANCIAL STATEMENT SCHEDULES

Financial statement schedules are omitted because they are not required, are not
applicable or the information is included in the financial statements or notes
thereto.

(a)  3.   EXHIBITS

<TABLE>
<CAPTION>

      Exhibit No.  Description
      -----------  -----------
 <S>               <C>
 (1)  3.1          Amended and Restated Certificate of Incorporation.

 (1)  3.2          Amended and Restated Bylaws.

 (2)  4.1          Purchase option held by Dura Pharmaceuticals, Inc. to
                   purchase all of the outstanding Callable Common Stock of
                   Spiros Corp. II (included in Exhibit 3.1).

 (2)  4.2          Specimen Unit Certificate.

 (2)  4.3          Specimen Certificate of Callable Common Stock.

 (2)  4.4          Stock Certificate of Special Common Stock.

 (2)  10.1         Technology License Agreement dated December 22, 1997 between
                   Spiros Corp. II, Dura Pharmaceuticals, Inc., Dura Delivery 
                   Systems, Inc. and Spiros Development Corporation.

 (2)  10.2         Development Agreement dated December 22, 1997 between Spiros
                   Corp. II and Dura Pharmaceuticals, Inc.

 (2)  10.3         Albuterol and Product Option Agreement dated December 22,
                   1997 between Spiros Corp. II and Dura Pharmaceuticals, Inc.

 (2)  10.4         Manufacturing and Marketing Agreement dated December 22,
                   1997 between Spiros Corp. II and Dura Pharmaceuticals, Inc.

 (2)  10.5         Services Agreement dated December 22, 1997 between Spiros
                   Corp. II and Dura Pharmaceuticals, Inc.

 (2)  10.6 +       1997 Stock Option Plan.

 (2)  10.7 +       Form of Notice of Grant of Stock Option.

 (2)  10.8 +       Form of Stock Option Agreement.

 (1)  10.9 +       Form of Indemnification Agreement between Spiros Corp. II
                   and each of its directors.


                                       29

<PAGE>

 (1)  10.10 +      Form of Indemnification Agreement between Spiros Corp. II
                   and each of its officers.

      23.1         Independent Auditors' Consent

      24.1         Power of Attorney (See Signature page).

      27.1         Financial Data Schedule.

      (1)          Incorporated by reference to Spiros Corp. II's Registration
                   Statement on Forms S-1/S-3 (No. 333-37673/37673-01), filed
                   on October 10, 1997, as amended.
      (2)          Incorporated by reference to Spiros Corp. II's Form 10-K for
                   the year ended December 31, 1997.
      +

</TABLE>

(b)  REPORTS ON FORM 8-K.

None.

SUPPLEMENTAL INFORMATION

The Annual Report on Form 10-K and Proxy material will be furnished to our 
shareholders subsequent to the filing of this report and we will furnish such 
proxy material to the Securities and Exchange Commission at that time.


                                       30

<PAGE>

                                      SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.

Date:      MARCH  30,  1999        SPIROS DEVELOPMENT CORPORATION II, INC.
    ---------------------------
                                   By:   /s/ David S. Kabakoff
                                        ----------------------------------
                                        David S. Kabakoff, Ph.D.
                                        Chairman, President and Chief 
                                        Executive Officer

                                 POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints David S. Kabakoff and Erle T. Mast, or either of them,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes may lawfully do or cause to be done
by virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS ANNUAL
REPORT ON FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

Signature                                  Title                       Date
---------                                  -----                       ----

 /s/ David S. Kabakoff            Chairman, President and         March 30, 1999
----------------------------      Chief Executive Officer         --------------
(David S. Kabakoff, Ph.D.)     (Principal Executive Officer)

 /s/ Erle T. Mast                   Vice President and            March 30, 1999
----------------------------      Chief Financial Officer         --------------
(Erle T. Mast)         (Principal Financial and Accounting Officer)

/s/ Cam L. Garner                        Director                 March 30, 1999
----------------------------                                      --------------
(Cam L. Garner)



/s/ Sol Lizerbram                        Director                 March 30, 1999
----------------------------                                      --------------
(Sol Lizerbram)

 /s/ Alain B. Schreiber                  Director                 March 30, 1999
----------------------------                                      --------------
(Alain B. Schreiber, D.O.)

/s/ William H. Rastetter                 Director                 March 30, 1999
----------------------------                                      --------------
(William H. Rastetter)


                                       31

<PAGE>

                                   EXHIBIT INDEX
                                         TO
                                     FORM 10-K
<TABLE>
<CAPTION>

      Exhibit No.  Description
      -----------  -----------
<S>                <C>
 (1)  3.1          Amended and Restated Certificate of Incorporation.

 (1)  3.2          Amended and Restated By-laws.

 (2)  4.1          Purchase option held by Dura Pharmaceuticals, Inc. to
                   purchase all of the outstanding Callable Common Stock of
                   Spiros Corp. II (included in Exhibit 3.1).

 (2)  4.2          Specimen Unit Certificate.

 (2)  4.3          Specimen Certificate of Callable Common Stock.

 (2)  4.4          Stock Certificate of Special Common Stock.

 (2)  10.1         Technology License Agreement dated December 22, 1997
                   between Spiros Corp. II, Dura Pharmaceuticals, Inc.,  Dura
                   Delivery Systems, Inc. and Spiros Development Corporation.

 (2)  10.2         Development Agreement dated December 22, 1997 between
                   Spiros Corp. II and Dura Pharmaceuticals, Inc.

 (2)  10.3         Albuterol and Product Option Agreement dated December 22,
                   1997 between Spiros Corp. II and Dura Pharmaceuticals, Inc.

 (2)  10.4         Manufacturing and Marketing Agreement dated December 22,
                   1997 between Spiros Corp. II and Dura Pharmaceuticals, Inc.

 (2)  10.5         Services Agreement dated December 22, 1997 between Spiros
                   Corp. II and Dura Pharmaceuticals, Inc.

 (2)  10.6 +       1997 Stock Option Plan.

 (2)  10.7 +       Form of Notice of Grant of Stock Option.

 (2)  10.8 +       Form of Stock Option Agreement.

 (1)  10. 9 +      Form of Indemnification Agreement between Spiros Corp. II
                   and each of its directors.

 (1)  10.10 +      Form of Indemnification Agreement between Spiros Corp. II
                   and each of its officers.


                                       32

<PAGE>

      23.1         Independent Auditors' Consent.

      24.1         Power of Attorney (See Signature page).

      27.1         Financial Data Schedule.

      (1)          Incorporated by reference to Spiros Corp. II's Registration
                   Statement on Forms S-1/S-3 (No. 333-37673/37673-01), filed
                   on October 10, 1997, as amended.
      (2)          Incorporated by reference to Spiros Corp. II's Form 10-K
                   for the year ended December 31, 1997.
      +            Management contract or compensation plan or arrangement.

</TABLE>


                                       33

<PAGE>

                      SPIROS DEVELOPMENT CORPORATION II, INC.

                           INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                            PAGE
<S>                                                                          <C>
Independent Auditors' Report                                                 F-1

Balance Sheets as of December 31, 1997 and 1998                              F-2

Statements of Operations for the Year Ended December 31, 1998,
  and the Periods September 23, 1997 (Date of Incorporation) through
  December 31, 1997 and 1998                                                 F-3

Statement of Shareholders' Equity for the Period September 23, 1997 (Date
  of Incorporation) through December 31, 1998                                F-4

Statements of Cash Flows for the Year Ended December 31, 1998,
  and the Periods September 23, 1997 (Date of Incorporation) through
  December 31, 1997 and 1998                                                 F-5

Notes to Financial Statements                                                F-6

</TABLE>


<PAGE>

                            INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders of Spiros Development Corporation II,
Inc.:

We have audited the accompanying balance sheets of Spiros Development
Corporation II, Inc. (a development stage enterprise) (the "Company") as of
December 31, 1997 and 1998, and the related statements of operations,
shareholders' equity and cash flows for  the year ended December 31, 1998 and
the periods September 23, 1997 (date of incorporation) through December 31, 1997
and 1998.  These financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on the financial
statements based on our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1998, and the results of its operations and its cash flows for the year ended
December 31, 1998 and the periods September 23, 1997 (date of incorporation)
through December 31, 1997 and 1998 in conformity with generally accepted
accounting principles.


/s/ Deloitte & Touche LLP

San Diego, California
February 9, 1999


                                         F-1
<PAGE>

SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE ENTERPRISE)


BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                           1997           1998
<S>                                                     <C>            <C>
ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                             $ 139,035      $  20,535
  Short-term investments                                   31,471        103,069
  Other current assets                                                       192
                                                        ---------      ---------

     Total current assets                                 170,506        123,796
                                                        ---------      ---------

TOTAL                                                   $ 170,506      $ 123,796
                                                        ---------      ---------
                                                        ---------      ---------


LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Payable to Dura Pharmaceuticals, Inc.                   $   8,399      $   4,597
  Accrued liabilities                                          26            281
                                                        ---------      ---------

     Total current liabilities                              8,425          4,878
                                                        ---------      ---------

COMMITMENTS AND CONTINGENCIES (Note 5)

SHAREHOLDERS' EQUITY:
 Special common stock, par value $1.00, 1,000 shares
  authorized, issued and outstanding                            1              1
 Callable common stock, par value $.001, 7,500,000
  shares authorized; 6,325,000 shares issued and
  outstanding                                                   6              6
  Additional paid-in capital                              168,977        169,404
  Accumulated other comprehensive income                       21            224
  Accumulated deficit                                      (6,924)       (50,717)
                                                        ---------      ---------

     Total shareholders' equity                           162,081        118,918
                                                        ---------      ---------

TOTAL                                                   $ 170,506      $ 123,796
                                                        ---------      ---------
                                                        ---------      ---------

</TABLE>

See accompanying notes to financial statements.


                                         F-2
<PAGE>

SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE ENTERPRISE)


STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE
PERIODS SEPTEMBER 23, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                     SEPTEMBER 23, 1997                        SEPTEMBER 23, 1997
                                  (DATE OF INCORPORATION)                   (DATE OF INCORPORATION)
                                          THROUGH            YEAR ENDED             THROUGH
                                     DECEMBER 31, 1997    DECEMBER 31, 1998    DECEMBER 31, 1998
                                     -----------------    -----------------    -----------------
<S>                               <C>                    <C>                <C>
REVENUES:
  Interest income                        $     222           $   8,239           $   8,461
                                         ---------           ---------           ---------
EXPENSES:
  Research and development                   7,040              50,799              57,839
  General and administrative                   106               1,026               1,132
                                         ---------           ---------           ---------

     Total                                   7,146              51,825              58,971
                                         ---------           ---------           ---------

OPERATING LOSS BEFORE INCOME TAXES          (6,924)            (43,586)            (50,510)
PROVISION FOR INCOME TAXES                                         207                 207
                                         ---------           ---------           ---------

NET LOSS                                 $  (6,924)          $ (43,793)          $ (50,717)
                                         ---------           ---------           ---------
                                         ---------           ---------           ---------

NET LOSS PER SHARE:
  Basic and diluted                      $   (1.09)          $   (6.92)          $   (8.02)
                                         ---------           ---------           ---------
                                         ---------           ---------           ---------

WEIGHTED AVERAGE NUMBER OF
  COMMON SHARES:
  Basic and diluted                          6,325               6,325               6,325

</TABLE>

See accompanying notes to financial statements.


                                         F-3
<PAGE>

SPIROS DEVELOPMENT CORPORATION II, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD SEPTEMBER 23, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                       SPECIAL            CALLABLE      ADDITIONAL                 ACCUMULATED
                                     COMMON STOCK       COMMON STOCK      PAID-IN   COMPREHENSIVE  OTHER COMP.  ACCUMULATED
                                   SHARES    AMOUNT    SHARES  AMOUNT     CAPITAL       LOSS         INCOME       DEFICIT     TOTAL
<S>                               <C>       <C>        <C>     <C>      <C>         <C>            <C>          <C>        <C>
BALANCE, SETEMBER 23, 1997 (Date
 of Incorporation)

Sale of special common stock           1     $   1                                                                         $     1

Sale of callable common stock                          6,325   $   6     $ 93,961                                           93,967

Contribution from Dura
Pharmaceuticals, Inc.                                                      75,000                                           75,000

Compensation expense for stock
  options granted                                                              16                                               16

Comprehensive loss:
  Net loss                                                                             $ (6,924)                $ (6,924)   (6,924)
  Unrealized gain on investments                                                             21       $   21                    21
                                                                                       --------
     Comprehensive loss                                                                  (6,903)
                                    ----      ----    ------    ----     --------      --------       ------    --------   -------
                                                                                       --------
BALANCE, DECEMBER 31, 1997             1         1     6,325       6      168,977                         21      (6,924)  162,081
                                    ----      ----    ------    ----     --------                     ------    --------   -------

Additional issuance costs on
 sale of callable common stock                                                (71)                                             (71)

Compensation expense for stock
  options granted                                                             498                                              498

Comprehensive loss:
  Net loss                                                                              (43,793)                 (43,793)  (43,793)
  Unrealized gain on investments                                                            203          203                   203
                                                                                       --------
     Comprehensive loss                                                                $(43,590)
                                    ----      ----    ------    ----     --------      --------       ------    --------   -------
                                                                                       --------
BALANCE, DECEMBER 31, 1998             1     $   1     6,325    $  6     $169,404                   $    224    $(50,717) $118,918
                                    ----      ----    ------    ----     --------                     ------    --------   -------
                                    ----      ----    ------    ----     --------                     ------    --------   -------

</TABLE>

See accompanying notes to financial statements.

                                         F-4
<PAGE>

SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE
PERIODS SEPTEMBER 23, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                     SEPTEMBER 23,1997                        SEPTEMBER 23,1997
                                                                  (DATE OF INCORPORATION)                  (DATE OF INCORPORATION)
                                                                          THROUGH           YEAR ENDED             THROUGH
                                                                    DECEMBER 31, 1997    DECEMBER 31, 1998    DECEMBER 31, 1998
                                                                    -----------------    -----------------    -----------------
<S>                                                               <C>                    <C>               <C>
OPERATING ACTIVITIES:
  Net loss                                                            $   (6,924)         $  (43,793)            $  (50,717)
  Adjustments to reconcile net loss to net cash provided
   by operating activities:
   Compensation expense for stock options granted                             16                 498                    514
   Changes in assets and liabilities:
     Other current assets                                                                       (192)                  (192)
     Payable to Dura Pharmaceuticals, Inc.                                 7,110              (2,513)                 4,597
     Accrued liabilities                                                      26                 255                    281
                                                                      ----------          ----------             ----------

       Net cash provided by (used in) operating activities                   228             (45,745)               (45,517)
                                                                      ----------          ----------             ----------

INVESTING ACTIVITIES:
  Purchases of short-term investments                                    (31,450)           (142,908)              (174,358)
  Sales of short-term investments                                                             71,513                 71,513
                                                                      ----------          ----------             ----------

       Net cash used in investing activities                             (31,450)            (71,395)              (102,845)
                                                                      ----------          ----------             ----------

FINANCING ACTIVITIES:
  Net proceeds from issuance of special common and
   callable common stock                                                  93,968                 (71)                93,897
  Contribution from Dura Pharmaceuticals, Inc. for purchase option        75,000                                     75,000
  Increase (decrease) in payable to Dura Pharmaceuticals, Inc.            
   for issuance costs                                                      1,289              (1,289)
                                                                      ----------          ----------             ----------

       Net cash provided by (used in) financing activities               170,257              (1,360)               168,897
                                                                      ----------          ----------             ----------

NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                                   139,035            (118,500)                20,535

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF PERIOD                                                                        139,035
                                                                      ----------          ----------             ----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                              $139,035             $20,535                $20,535
                                                                      ----------          ----------             ----------
                                                                      ----------          ----------             ----------
</TABLE>

See accompanying notes to financial statements.


                                         F-5

<PAGE>

SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.   ORGANIZATION

     Spiros Development Corporation II, Inc. (the "Company") was incorporated in
     the state of Delaware on September 23, 1997 for the purpose of continuing
     the development of Spiros-Registered Trademark-, a dry powder pulmonary
     drug delivery system, and to conduct formulation work, clinical trials and
     commercialization for certain specified leading asthma and chronic
     obstructive pulmonary disease ("COPD") drugs for use with Spiros.  The
     Company commenced operations on December 22, 1997.

     On December 22, 1997, the Company and Dura Pharmaceuticals, Inc. ("Dura")
     completed an initial public offering (the "Offering") of 6,325,000 Units,
     each Unit consisting of one share of callable common stock of the Company
     and one warrant to purchase one-fourth of one share of Dura common stock.
     The offering resulted in net proceeds to the Company of approximately $94
     million.  Concurrently, Dura contributed $75 million to the Company.
     Substantially all funds from the Offering, the $75 million contribution and
     interest earned thereon, are expected to be paid to Dura for the
     development and commercialization of Spiros and the use of Spiros with
     certain drugs pursuant to various agreements (Note 5).

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF PRESENTATION - Because the Company has not yet completed product
     development, obtained regulatory approval or verified the market acceptance
     and demand for Spiros, its activities have been accounted for as those of a
     "development stage enterprise," as set forth in Statement of Financial
     Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
     Development Stage Enterprises."

     USE OF ESTIMATES  - The preparation of financial statements in conformity
     with generally accepted accounting principles requires management to make
     estimates and assumptions that affect amounts reported in the financial
     statements and related notes. Changes in those estimates may affect amounts
     reported in future periods.

     CASH AND CASH EQUIVALENTS - The Company considers cash equivalents to
     include only highly liquid securities with an original maturity of three
     months or less.  Investments with an original maturity of more than three
     months from the date of acquisition are considered short-term investments.

     SHORT-TERM INVESTMENTS - The Company has classified all of its short-term
     investments as available-for-sale.  The entire amount of the Company's
     portfolio is available for current operations.  Investments are carried at
     fair value as determined by quoted market prices, with unrealized gains and
     losses reported as accumulated other comprehensive income within
     shareholders' equity.  Investment income is recognized when earned and
     includes the amortization of premiums and discounts on investments.  The
     Company invests its excess cash in money market and fixed income securities
     of companies with strong credit ratings and U.S. government obligations.

     RESEARCH AND DEVELOPMENT COSTS - Research and development costs are
     expensed as incurred.


                                         F-6
<PAGE>

     STOCK BASED COMPENSATION - As permitted by SFAS No. 123, "Accounting for
     Stock Based Compensation," the Company accounts for the costs associated
     with stock option grants to employees in accordance with Accounting
     Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
     and related interpretations ("APB 25").  Compensation expense for costs
     associated with stock option grants to non-employees is recognized ratably
     over the vesting period.

     COMPREHENSIVE INCOME - Effective January 1, 1998, the Company adopted
     Statement of Financial Accounting Standards No. 130, "Reporting
     Comprehensive Income" ("SFAS 130"). SFAS 130 requires reporting and
     displaying comprehensive income (loss) and its components which, for the
     Company, includes net loss and unrealized income (loss) on investments
     (Note 3). In accordance with SFAS 130, the accumulated balance of other
     comprehensive income is disclosed as a separate component of shareholders'
     equity.

     NET LOSS PER SHARE - The Company incurred a net loss for the periods ended
     December 31, 1997 and 1998, and as such, the weighted average number of
     shares of Callable Common Stock used for basic and diluted earnings per
     share does not include potential common shares from outstanding stock
     options as their inclusion would be antidilutive.  The weighted average
     number of shares also exclude shares of special common stock ("Special
     Shares") outstanding since such shares are not entitled to participate in
     the profits of the Company.

3.   COMPREHENSIVE LOSS

     For the periods ended December 31, 1997 and 1998, and the period September
     23, 1997 (date of incorporation) through December 31, 1998, comprehensive
     loss consisted of (in thousands):

<TABLE>
<CAPTION>
                                             September 23, 1997                                  September 23, 1997
                                                  (date of                                            (date of
                                                incorporation)                                      incorporation)
                                                   through              Year ended                     through
                                                 December 31,          December 31,                  December 31,
                                                   1997                    1998                         1998
                                                   ----                    ----                         ----
          <S>                                <C>                       <C>                       <C>
          Net Loss                                $(6,924)              $(43,793)                    $(50,717)

          Other Comprehensive Income:
            Unrealized Income
              on Investments                           21                    203                          224
                                                  -------               --------                     --------
          Comprehensive Loss                      $(6,903)              $(43,590)                    $(50,493)
                                                  -------               --------                     --------
                                                  -------               --------                     --------
</TABLE>

                                         F-7
<PAGE>

4.   SHORT-TERM INVESTMENTS

     The following is a summary of short-term investments as of December 31,
     1997 and 1998 (in thousands):

<TABLE>
<CAPTION>

                                                  Unrealized      Estimated
                                        Cost         Gains       Fair Value
<S>                                  <C>          <C>            <C>
December 31, 1997:
  U.S. corporate debt securities     $ 31,450      $      21     $   31,471
                                     --------      ---------     ----------
December 31, 1998:
  U.S. government securities           $5,127             $6         $5,133
  U.S. corporate debt securities       97,718            218         97,936
                                     --------      ---------     ----------

Total                                $102,845           $224       $103,069
                                     --------      ---------     ----------
                                     --------      ---------     ----------
</TABLE>

     The following is a summary of the amortized cost and estimated fair value
     of short-term investments by contractual maturity at December 31, 1998 (in
     thousands):

<TABLE>
<CAPTION>

                                                                  Estimated
                                                        Cost     Fair Value
<S>                                                <C>           <C>
Due in one year or less                            $  58,554      $  58,642
Due after one year through two years                  44,291         44,427
                                                   ---------      ---------

Total                                              $ 102,845      $ 103,069
                                                   ---------      ---------
                                                   ---------      ---------
</TABLE>

5.   ARRANGEMENTS WITH DURA PHARMACEUTICALS, INC.

     The Company and Dura are party to various agreements entered into in
     December 1997 which provide for the development, marketing, and
     manufacturing of Spiros with specified compounds and for the provision of
     general and administrative services by Dura.  A summary of these agreements
     is presented below.

     TECHNOLOGY LICENSE AGREEMENT - Under this agreement, Dura granted to the
     Company an exclusive, worldwide (except for the use of beclomethasone in
     certain parts of Asia), perpetual, royalty-bearing license to use
     technology owned or controlled by Dura relating to the use of Spiros (the
     "Core Technology") with the following asthma and COPD drugs: albuterol (a
     beta-agonist), beclomethasone (an anti-inflammatory), budesonide (an
     anti-inflammatory), ipratropium (an anticholinergic), and an
     albuterol/ipratropium combination drug (collectively, the "Spiros
     Products").  In consideration for these rights, the Company will pay,
     commencing in 1998, an annual technology access fee equal to the greater of
     (a) 5% of the net sales of each Spiros Product, or (b) $2 million.  For
     1998, the Company paid a technology access fee of $2 million. This
     obligation will terminate, on a country-by-country basis, (a) within 10
     years from the first sale of such Spiros Product in those countries where
     no patents covering such product are issued and (b) in those countries
     where patents covering the Spiros Products are issued, upon the last
     expiration of the applicable patents.

     The Technology License Agreement will remain in effect indefinitely, unless
     terminated by mutual agreement of the Company and Dura or upon Dura's
     exercise or expiration of its Purchase Option (see Note 6).


                                         F-8
<PAGE>

     ALBUTEROL AND PRODUCT OPTION AGREEMENT - Under this agreement, the Company
     granted to Dura the option to acquire for specified time periods the
     Albuterol Option and the Product Option. Pursuant to the Albuterol Option,
     Dura has the right to acquire from the Company all assets related to the
     use of Spiros with albuterol. The Albuterol Option is currently exercisable
     and expires 360 days after receipt of U.S. Food and Drug Administration
     (the "FDA") approval to market. Pursuant to the Product Option, Dura has
     the right to acquire from the Company all assets and rights related to the
     use of Spiros with a second product other than albuterol. The Product
     Option is currently exercisable and expires 90 days after receipt of FDA
     approval to market such Spiros Product.  The formula for determining the
     purchase price for each of the products is set forth in the agreement and
     is based, in part, on the costs incurred by the Company for the development
     of the products.

     DEVELOPMENT AGREEMENT - Under this agreement, the Company has engaged Dura
     to develop Spiros for use with the Spiros Products.  Dura furnishes all
     labor, supervision, services, supplies, and materials necessary to perform
     the development activities and obtain regulatory approvals for the sale and
     marketing of the Spiros Products.  These activities are carried out by Dura
     in accordance with annual workplans and budgets which are subject to
     approval and acceptance by the Company's Board of Directors.  Payments to
     Dura for services provided under the Development Agreement are based on
     fully-burdened costs incurred by Dura plus rates ranging from 20 to 25
     percent of such costs.

     MANUFACTURING AND MARKETING AGREEMENT - Under this agreement, the Company
     granted to Dura an exclusive, worldwide license to manufacture and market
     the Spiros Products.  Dura will pay the Company on a quarterly basis a
     royalty of 7% of the net sales of each Spiros Product.  Prior to the
     expiration of the Product Option for albuterol, no royalty payment will be
     made with respect to net sales of the albuterol product.  The Manufacturing
     and Marketing Agreement will terminate upon exercise or termination of the
     Purchase Option or by mutual agreement of the Company and Dura at any time.
     In the event Dura exercises either of its options under the Albuterol and
     Product Purchase Option Agreement, the Manufacturing and Marketing
     Agreement will terminate with respect to the applicable Spiros Product.

     SERVICES AGREEMENT - Under this agreement, Dura provides certain management
     and administrative services to the Company and is compensated $100,000 per
     calendar quarter. In 1998, the Company reimbursed Dura $1.3 million for
     costs and expenses incurred by Dura in connection with the Offering, net of
     amounts reimbursed by the underwriters. The Services Agreement terminates
     upon exercise by Dura of the Purchase Option or 12 months after the
     expiration of the Purchase Option.

     The Company's President and Chief Executive Officer, Vice President and
     Chief Financial Officer, and Secretary are also officers of Dura.  In
     addition, two members of the Company's board of directors are officers of
     Dura, one of whom is the Company's president.

6.   SHAREHOLDERS' EQUITY

     The Company's authorized capital stock consists of 7,500,000 shares of
     Common Stock, of which 6,325,000 shares were issued and outstanding as of
     December 31, 1997 and 1998, and 1,000 shares of Special Shares, of which
     1,000 shares were issued and outstanding as of December 31, 1997 and 1998.

     Dura, as the holder of 100% of the Special Shares, has an irrevocable
     option (the "Purchase Option") to purchase all, but not less than all, of
     the issued and outstanding shares of the Company's Callable Common Stock at
     predetermined prices.  Dura may exercise the Purchase Option at any time
     through the earlier of (a) December 31, 2002, (b) the 90th day after the
     date the Company provides Dura with quarterly financial statements of the
     Company showing cash or cash equivalents of less than $5 million, although
     Dura may extend such period by providing additional funding for the
     continued development


                                         F-9
<PAGE>

     of the Spiros Products, but in no event beyond December 31, 2002, or (c)
     upon termination of the Technology License, Development, or the
     Manufacturing and Marketing Agreements between the Company and Dura (Note
     5).  If the Purchase Option is exercised, the per share purchase price will
     be $24.01 through December 31, 1999, increasing on quarterly basis to
     $45.95 per share through December 31, 2002.  The Purchase Option price may
     be paid, at Dura's discretion, in cash, shares of Dura common stock, or any
     combination thereof.  Dura has no legal obligation to exercise the Purchase
     Option.  Through December 31, 1999, each share of the Company's Callable
     Common Stock is combined to trade publicly as a unit with one warrant,
     expiring on January 1, 2003, to purchase one-fourth of one share of Dura's
     common stock at a price per share of $54.84.

     As holder of the Special Shares, Dura also has the right to elect two
     members of the Company's board of directors and must approve certain
     corporate transactions as set forth in the Company's Amended and Restated
     Certificate of Incorporation, including (i) the allotment or issue of
     shares or other securities of the Company or the creation of any right to
     such an allotment or issue; (ii) the reduction of the Company's authorized
     capital stock; (iii) the alteration of or any change to the rights, powers,
     preferences and restrictions of the Special Shares; (iv) outstanding
     borrowings of an aggregate of more than $1 million at any one time; (v) the
     sale or other disposition of or the creation of any lien or liens on the
     whole or a material part of the Company's business or assets; (vi) the
     declaration or payment of dividends or the making of any other
     distributions to the Company's shareholders; (vii) the merger,
     consolidation or reorganization of the Company with or into any other
     corporation; (viii) the sale, liquidation or other disposition of all or
     substantially all of the assets of the Company; (ix) the alteration or
     amendment of Articles IV or VII of the Company's Amended and Restated
     Certificate of Incorporation; and (x) the adoption, amendment or repeal of
     the Bylaws of the Company.  As holder of the Special Shares, however, Dura
     does not have the right to any profits of the Company.

7.   STOCK COMPENSATION PLAN

     The Company adopted the 1997 Stock Option Plan (the "Plan"), which provides
     for the initial issuance of up to 700,000 stock options to employees, board
     members, and consultants or other independent advisors who provide services
     to the Company.  The number of shares issuable under the Plan is subject to
     an automatic annual increase on February 15 of each calendar year,
     beginning with the 1998 calendar year, by the number of shares necessary to
     cause the total number shares authorized under the Plan to be equal to 15%
     of the then outstanding shares of Common Stock of the Company.  On February
     15, 1998, the total number of authorized shares increased to 948,750.
     Generally, options are to be granted at prices equal to at least 100% of
     the fair market value of the Company's Common Stock at the date of grant,
     expire not later than 10 years from the date of grant, and become vested
     upon Dura's exercise of its Purchase Option (Note 6) or five years from the
     date of grant, whichever is earlier.  Options shall be canceled if the
     optionee ceases to provide services to the Company prior to the vesting
     date.


                                         F-10

<PAGE>
The following table summarizes stock option activity under the Plan:

<TABLE>
<CAPTION>
                                                                   Shares          
                                                        ---------------------------     Average
                                                                         Options       Exercise
                                                          Options     Available for    Price Per
                                                        Outstanding      Grant           Share
                                                        -----------   -------------    ---------
<S>                                                     <C>           <C>              <C>
Balance, September 23, 1997 (date of incorporation)
  Options authorized                                                     700,000
  Options granted                                         548,000       (548,000)      $  14.00
                                                        ---------      ---------
Balance, December 31, 1997                                548,000        152,000       $  14.00
  Options authorized                                                     248,750
  Options granted                                         272,000       (272,000)      $  14.35
                                                        ---------      ---------
Balance, December 31, 1998                                820,000        128,750       $  14.12
                                                        ---------      ---------
                                                        ---------      ---------
</TABLE>

No options were exercisable as of December 31, 1997 and 1998.


     The following table summarizes information concerning outstanding options
as of December 31, 1998:

<TABLE>
<CAPTION>
                                          WEIGHTED
                                           AVERAGE       WEIGHTED
                                          REMAINING       AVERAGE
        RANGE OF            NUMBER     CONTRACTUAL LIFE  EXERCISE
     EXERCISE PRICES     OUTSTANDING       (YEARS)         PRICE
---------------------- --------------- ---------------- ----------
<S>                    <C>             <C>              <C>
     $14.00 - $15.88       820,000           9.1          $14.12
</TABLE>

     In accordance with SFAS No. 123, the Company applies the provisions of 
APB 25 in accounting for stock options granted to employees and, accordingly, 
no compensation expense has been recognized for options granted to employees. 
 In accordance with SFAS 123, options granted to non-employees are accounted 
for based on their estimated fair value at grant date. Compensation expense 
equal to the options' estimated fair value is recognized over the vesting 
period. During the periods ended December 31, 1997 and 1998, 341,000 and 
232,000 options were granted to non-employees for which the Company recorded 
compensation expense of $16,000 and $498,000, respectively. If the Company 
had elected to recognize compensation expense for options granted to 
employees based on the estimated fair value of the options as of the grant 
date, the net loss for the years ended December 31, 1997 and 1998 would have 
been increased by $10,000 and $271,000, respectively. The estimated weighted 
average fair value at grant date of options granted during the period ended 
December 31, 1997 and 1998 was $4.58 and $3.99, respectively. The fair value 
was estimated using the Black-Scholes option-pricing model with the following 
assumptions:

<TABLE>
<CAPTION>
                                                   1997           1998
                                                   ----           ----
<S>                                             <C>         <C>
Expected dividend yield                            None           None

Expected stock price volatility                     30%            30%

Risk-free interest rate                           5.7 %        4.4 - 5.7 %

Expected life of options                        4 years     3.1 - 3.9 years
</TABLE>

                                         F-11
<PAGE>

8.   INCOME TAXES

     The provision for income taxes for the year ended December 31, 1998 totaled
     $207,000, which consisted entirely of current state income taxes. As of
     December 31, 1997 and 1998, the Company had deferred tax assets totaling
     approximately $2.4 and $17.5 million, respectively, which relate primarily
     to federal net operating loss carryforwards of approximately $50 million
     which begin expiring in 2012.  Because the Company performs research and
     development and the prospect of generating future earnings is uncertain,
     the deferred tax assets have been fully reserved.




                                         F-12