<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, 1997

                                     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.

     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   .
                                                  ---   ---

<PAGE>

     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 27, 1998 was $77,902,555. 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 27, 1998 were 6,325,000 and
1,000, respectively.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held on May 20, 1998, to be filed with the
Securities and Exchange Commission on or about April 9, 1998, referred to
herein as the "Proxy Statement," are incorporated as provided in Part III.

<PAGE>


                                      INDEX

Part I:
        Item 1.  Business......................................................4
        Item 2.  Properties...................................................24
        Item 3.  Legal Proceedings............................................24
        Item 4.  Submission of Matters to a Vote of Security Holders..........24


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..........................26
        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...........27
        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...................................................30



<PAGE>

                                     PART I

ITEM 1.   BUSINESS

The discussion of Spiros Development Corporation II, Inc.'s ("Spiros Corp.
II" or the "Company") 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 18 through 24 of this Annual Report on Form 10-K.
While this outlook represents management's 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. The
Company undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events and
circumstances arising after the date hereof. Unless the context otherwise
requires, "Dura" refers to Dura Pharmaceuticals, Inc., a Delaware
corporation, and its subsidiaries.

OVERVIEW

The Company was incorporated in the state of Delaware on September 23, 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 ("COPD") drugs for use with Spiros. Spiros
Corp. II may also expend funds on enhancements to the existing Spiros
technology, initial development of a next generation inhaler system and the
acquisition of capital equipment to be used in the manufacture of the Spiros
Products. Finally, Spiros Corp. II plans to use a portion of its funding to
conduct technical evaluation projects designed to identify additional
respiratory drug candidates for further development. The Company commenced
operations on December 22, 1997.

On December 22, 1997, the Company and Dura Pharmaceuticals, Inc. ("Dura")
completed a $101 million initial public offering (the "Offering") of
6,325,000 Units, each Unit consisting of one share of callable common stock
of the Company (the "Common Stock") and one warrant (the "SDCII Warrants") to
purchase one-fourth of one share of Dura's 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 (the "Available Funds"), are expected to be paid to Dura for the
development and commercialization of Spiros and the use of Spiros with
applications for albuterol, beclomethasone, ipratropium,
albuterol-ipratropium combination, budesonide and additional designated
compounds (the "Compounds"). In addition, the Company may also expend funds
on enhancements to the existing Spiros technology, the acquisition of capital
equipment to be used in the manufacture of the Spiros products, or to conduct
technical evaluation projects designed to identify additional respiratory
drug candidates for further development in Spiros. The SDCII 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 SDCII
Warrants and the contribution of $75 million to Spiros Corp. II, Dura has an
irrevocable option (the "Purchase Option") through December 31, 2002, to
purchase all, but not less than all, of the then outstanding shares of Spiros
Corp. II callable common stock at predetermined prices. However, Dura is not
obligated to purchase such shares of Spiros Corp. II. Such purchase price may
be paid, at Dura's option, in cash, shares of Dura's common stock, or a
combination thereof. In addition, Dura received an option through specified
dates, to acquire Spiros Corp. II's exclusive rights for the use of Spiros
with albuterol (the "Albuterol Option") and with a second product other than
albuterol (the "Product Option") for cash.

In connection with the Offering, the Company also entered into the Technology
License Agreement, Albuterol and Product Option Agreement, Development
Agreement, Manufacturing and Marketing Agreement, and Services Agreement as
further discussed below under "Relationship with Dura."

Spiros Corp. II is not expected to have its own research, development,
clinical, licensing, administration, manufacturing or marketing employees or
facilities and thus will be entirely dependent on Dura in these areas.

                                       4
<PAGE>


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 number of people with asthma has grown steadily
in recent years and is now believed to be over 200 million worldwide. COPD is
a complex condition comprising a combination of chronic bronchitis, emphysema
and airway obstruction. The U.S. combined market for therapeutic drugs to
treat asthma and COPD was approximately $2.9 billion in 1997. The primary
categories of therapeutic drugs used in the treatment of asthma and COPD
include bronchodilators and anti-inflammatories. Bronchodilators dilate the
airways and include beta agonists (such as albuterol and bitolterol),
xanthines (such as theophylline) and anticholinergics (such as ipratropium).
Anti-inflammatories reduce inflammation and include steroids (such as
beclomethasone, budesonide, flunisolide and triamcinolone).

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 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 lung, it
provides comparable efficacy with less risk of systemic side effects at
greatly reduced dosages. Inhalation delivery also yields a fast onset of
action, hastening 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 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
exacerbation in a clinic or emergency room environment, and patients unable
to coordinate the use of other inhalation delivery technology.

METERED DOSE INHALERS. Metered dose inhalers ("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 which
is sealed with a metering valve and pressurized using a propellant, most
commonly a chlorofluorocarbon ("CFC"). Because MDIs contain an internal
energy source, the CFCs, 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 percent of the dose from an MDI actually
deposits in 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 ("DPIs") represent a significant
advancement in the development of inhalation delivery systems. Dry powder
inhalers are relatively convenient and portable, and are CFC-free. DPIs are
breath actuated, so they eliminate the need for hand-lung coordination
associated with MDIs. Although DPIs overcome the need for coordination of
actuation and inspiration, currently marketed DPIs 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 pediatrics, the elderly and patients in acute respiratory
distress.

SPIROS

Spiros is a proprietary pulmonary drug delivery system that is designed to
aerosolize pharmaceuticals in dry powder formulations for delivery to the lungs
while providing certain advantages over traditional pulmonary delivery systems.
The Company believes 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

                                       5
<PAGE>

studying alternative propellants, such as hydrofluorocarbons ("HFAs"), for
use in MDIs, and the first albuterol MDI using an HFA propellant has obtained
the United States Food and Drug Administration ("FDA") approval and is being
marketed by Schering-Plough. However, the Company believes 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 DPIs currently in commercial use worldwide, individual dose and
multiple dose. Individual dose DPIs currently marketed in the U.S. include
the Rotohaler-TM- (developed and marketed by Glaxo Wellcome, Inc. ("Glaxo"))
and the Spinhaler-Registered Trademark- (developed and marketed by Fisons
Limited). The Turbuhaler-Registered Trademark- (developed and marketed by
Astra Pharmaceuticals ("Astra")), a multiple dose DPI, is the leading DPI in
worldwide sales. In June 1997, the FDA approved the first Turbuhaler product,
the Pulmicort Turbuhaler, for marketing in the U.S., which Astra launched in
early 1998. Recently the FDA also approved two multiple dose DPIs developed
by Glaxo.

POTENTIAL ADVANTAGES OF SPIROS. The Company believes 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 DPIs can
        vary significantly in their level of drug 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 and 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, the Company believes 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

                                       6
<PAGE>

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 ("PSS").
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, the Company believes that its 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 PSS 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
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 an empty cassette and load a new cassette.

The Spiros cassette system has been produced in clinical trial quantities and
is being used in ongoing clinical trials of albuterol and beclomethasone.
Dura is currently working with outside vendors on Spiros Corp. II's 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 agglomeration 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 prototype stage and
units that are suitable for laboratory testing have been produced. Further
refinements in the design of this system aimed at producing units suitable
for clinical trials are in progress.

SPIROS PRODUCTS IN DEVELOPMENT

Spiros Corp. II has 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 a
beta-agonist and an anticholinergic (albuterol-ipratropium). There can be no
assurance that the pharmaceutical products currently in development by Spiros
Corp. II or that any products that may be developed in the future will be
approved by the FDA. In addition, there can be no assurance that FDA review
or other actions will not involve delays that could adversely affect the time
to market and the sale of the products.

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. The leading branded MDI products are Proventil, sold by
Schering-Plough, and Ventolin, sold by Glaxo. In 1997, U.S. sales of
albuterol were approximately $700 million as measured by average wholesale
prices.

In 1994, an Investigational New Drug ("IND") application was filed with the
FDA to begin clinical testing of an albuterol dry powder formulation with the
Spiros cassette system. In April 1996, dosing of subjects in a clinical trial
focusing on dose selection using a formulation of powdered albuterol with
Spiros was completed. In March 1997,

                                       7
<PAGE>

patient dosing was completed in long-term and short-term pivotal clinical
trials. In November 1997, Dura submitted an New Drug Application ("NDA") with
the FDA for albuterol in the Spiros cassette system. In January, 1998 the FDA
informed Dura that the application was accepted for filing. The NDA includes
the results of clinical trials that were designed to demonstrate
comparability of the Spiros delivery system to a leading branded albuterol
MDI product. Three pivotal studies, in addition to a number of dose finding
and performance verification studies, were conducted for the submission.

An open label study of albuterol in the Spiros cassette system is currently
in progress. Interim results of this study were provided to the FDA in the
NDA and results of the full study must be submitted to and reviewed by the
FDA prior to product approval. Dura, on behalf of Spiros Corp. II, is
planning market launch of albuterol in the Spiros cassette system in late
1998 or early 1999, pending FDA approval. There can be no assurance of
receipt 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 1997, U.S. sales of beclomethasone were approximately
$180 million as 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 IND, and Dura commenced
a Phase III pivotal 12-week clinical trial to demonstrate safety and efficacy
in the fourth quarter of 1997. Enrollment of patients is currently scheduled
to be completed by the second quarter of 1998. Dura plans to submit, on
behalf of Spiros Corp. II, an NDA for beclomethasone in early 1999.

IPRATROPIUM. 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. Ipratropium in
MDI form is marketed as Atrovent by Boehringer Ingelheim. In 1997, U.S. sales
of ipratropium were approximately $230 million as measured by average
wholesale prices. Dura has conducted initial preclinical formulation studies
using ipratropium in order to demonstrate that delivery via Spiros is
feasible. The Company currently anticipates that ipratropium will be the
first compound formulated for delivery through the Spiros blisterdisk system.
Dura, on behalf of Spiros Corp. II, has been in product development for a
formulation of ipratropium for delivery through Spiros and is preparing an IND
under which initial dose ranging clinical trials will be conducted. Such
trials are scheduled to begin in the second half of 1998.

ALBUTEROL-IPRATROPIUM COMBINATION.  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, Spiros Corp. II believes that developing an
albuterol-ipratropium formulation for delivery using Spiros will be feasible
and intends to commence the development of this formulation in 1998.

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, which Astra launched in early 1998. In
1997, worldwide sales of budesonide were estimated to be greater than $600
million as measured by average wholesale prices. Dura, on behalf of Spiros
Corp. II, has begun formulation of budesonide for delivery through Spiros.

                                       8
<PAGE>

OTHER PRODUCT DEVELOPMENT EFFORTS

The Board of Directors of Spiros Corp. II 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 Spiros Corp. II obtains the rights to any designated
compounds, Spiros Corp. II 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 additional funds become available to Spiros Corp. II,
whether through the exercise of the Albuterol Option or the Product Option,
such funds will become part of the Available Funds, and a portion of such
funds may be used for additional development of a next generation inhaler
system and certain other enhancements to the existing Spiros technology and
to fund the acquisition of capital equipment to be used to manufacture the
Spiros Products.

RELATIONSHIP WITH DURA

The following is a summary of certain provisions of the Stock Purchase
Option, the Technology Agreement, the Albuterol and Product Option Agreement,
the Development Agreement, the Manufacturing and Marketing Agreement and the
Services Agreement. 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 the Company.

STOCK PURCHASE OPTION

Dura, as the holder of all of the issued and outstanding Special Shares will
have the right, as set forth in Spiros Corp. II's Amended and Restated
Certificate of Incorporation, to purchase all, but not less than all, of the
Spiros Corp. II Common Stock outstanding at the time such right is exercised.
The Purchase Option will be exercisable upon the exercise notice given at any
time beginning on the closing date of the Offering and ending on the earlier
of (i) December 31, 2002 or (ii) the 90th day after the date Spiros Corp. II
provides Dura (as such holder) with certain notice, although following the
receipt of such notice Dura may, at its election, extend such period by
providing additional funding for the continued development of Spiros Products
(but in no event beyond December 31, 2002). If the Purchase Option is
exercised, the Purchase Option Exercise Price, calculated on a per share
basis, will be as follows:

<TABLE>
<CAPTION>

If the Spiros Corp. II Common Stock is
Acquired Pursuant to 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

                                       9

<PAGE>

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 Purchase Option Exercise Price was determined by Dura and Spiros Corp.
II, giving consideration to the compound annual rate of return, as required
by potential investors, to be achieved upon any exercise of the Purchase
Option, the implied returns to investors purchasing securities with a similar
structure historically and the comparability of the Offering to those prior
offerings, the value of the Warrants, the nature of Spiros Products, the
agreements between Dura and Spiros Corp. II, and such other factors as Dura
and Spiros Corp. II deemed appropriate and advice given by the underwriters
of the Offering.

The Purchase Option Exercise Price may be paid in cash or shares of Dura
Common Stock, or any combination of the foregoing, 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 Shares could be made in cash or, if
such holder or its parent is a company whose common equity securities are
listed on a national securities exchange or admitted to unlisted trading
privileges 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 the issued and outstanding Special Shares, which grants Dura
the Purchase Option and confers certain voting and other rights, including
the right to elect two directors of Spiros Corp. II. Under its Amended and
Restated Certificate of Incorporation, Spiros Corp. II will be prohibited,
until the expiration of the Purchase Option, from taking or permitting
certain actions inconsistent with Dura's rights under the Purchase Option.
For example, until the expiration of the Purchase Option, Spiros Corp. II
will not be able to, among other things, without the consent of Dura, pay any
dividends, issue additional shares of capital stock, have outstanding
borrowings in excess of an aggregate of $1 million, or merge, liquidate or
sell all or substantially all of its assets or alter the Purchase Option. At
present, Dura has indicated it has no intention of transferring such Special
Shares.

TECHNOLOGY LICENSE AGREEMENT

Dura and Spiros Corp. II entered into a Technology License Agreement (the
"Technology Agreement"), under which Dura granted Spiros Corp. II 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.

In consideration for these license rights granted to Spiros Corp. II by Dura,
Spiros Corp. II 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. Spiros Corp. II's
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, Spiros Corp. II granted Dura (a) a worldwide, exclusive,
royalty-free license to use the core technology and the program technology to
develop the Spiros Products pursuant to the terms of the Development
Agreement, (b) a worldwide, exclusive, royalty-bearing license to use the
program technology to sell Spiros Products worldwide pursuant to the terms of
the Manufacturing and Marketing Agreement, (c) upon Dura's exercise of the
Albuterol Option, a worldwide, exclusive, royalty-free, irrevocable,
perpetual license to the program technology to develop, manufacture and
commercialize the Albuterol Product, (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 Product 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,

                                      10
<PAGE>

manufacture and commercialize products other than the Spiros Products,
including products that compete with the Spiros Products.

Under the Technology 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. Spiros Corp. II has no
obligation to accept any grant of such rights or to assume any obligation
without its prior written consent. If Spiros Corp. II desires to obtain any
such rights, Dura and Spiros Corp. II 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.

Until the expiration of the Purchase Option, Dura will direct and cause, at
Spiros Corp. II's expense, appropriate patent applications to be prepared,
prosecuted and maintained with respect to patents licensed to Spiros Corp. II
and with respect to any technology developed or acquired on behalf of Spiros
Corp. II by Dura. Upon the termination of the unexercised Purchase Option,
all patents and patent applications developed or acquired on behalf of Spiros
Corp. II will be assigned to Spiros Corp. II.

Pursuant to the terms of the Technology Agreement, if Spiros Corp. II or Dura
receives notice of alleged infringement of any patent, it must notify the
other party of such infringement and all recoveries in any action to enforce
patent rights shall be retained by the parties in proportion to the
respective portion of expenses borne by the parties in enforcing such action.

Spiros Corp. II agreed to indemnify Dura against certain third party claims,
including patent infringement claims, relating to the Spiros Corp. II's use
of the program technology or breach of the Technology Agreement, Development
Agreement or Manufacturing and Marketing Agreement. Dura agreed to indemnify
Spiros Corp. II 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 Technology Agreement, Development
Agreement or Manufacturing and Marketing Agreement.

Prior to the expiration of the Purchase Option, Spiros Corp. II cannot
without Dura's prior written consent (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 foregoing. Following the expiration or
termination of the Purchase Option, the foregoing limitations will cease to
be applicable and Spiros Corp. II 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
the Albuterol Option or the 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 acquired
substantially all of the assets of Dura.

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 Spiros Corp. II 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 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. If Spiros Corp. II terminates
the Technology Agreement, Spiros Corp. II's 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 Albuterol
Option or the Product Option), and Spiros Corp. II 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) Spiros
Corp. II's license to use the core Spiros technology under the Technology
Agreement will terminate, (b) all of Spiros Corp. II's 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. Dura and Spiros Corp. II will use
reasonable efforts for a period of 120 days after the Technology Agreement is
terminated by Dura to reach

                                      11
<PAGE>

agreement on royalties and other compensation to be paid by Dura to Spiros
Corp. II solely with respect to the Spiros Products and the program
technology and, in the absence of such agreement, the matter will be
submitted to binding arbitration. There can be no assurance that, upon
termination of the Technology Agreement by Spiros Corp. II, it 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

Dura and Spiros Corp. II entered into the Albuterol and Product Option
Agreement pursuant to which Dura will obtain (a) the assets related to the
Albuterol Spiros Product (the "Albuterol Program Assets") and (b) the assets
related to the Product Option Spiros Product (the "Spiros Product Program
Assets").

The Albuterol Program Assets include (a) the Albuterol Product, (b) albuterol
as formulated for use in the Albuterol Product, (c) a perpetual,
sublicensable, non-exclusive, royalty-free license to the technology owned by
Dura or developed or acquired by Dura during the term of the Development
Agreement applicable to the Albuterol Product for use solely with the
Albuterol 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 Albuterol Product. The Albuterol Option is
exercisable commencing on the date of the closing of the Offerings and ending
on the earlier of (i) 360 days after receipt of FDA approval to market the
Albuterol Product or (ii) the date Dura ceases to manufacture or market the
Albuterol Product in accordance with the terms of the Manufacturing and
Marketing Agreement.

Upon exercise of the Albuterol Option, Dura will make a single payment to
Spiros Corp. II in cash equal to (a) the aggregate Purchase Option Exercise
Price, assuming acquisition of all shares of Spiros Corp. II Common Stock
issued pursuant to the Offerings four years following closing of the
Offerings, multiplied by (b) a fraction, the numerator of which will equal
the development and commercialization costs and expenses incurred by Spiros
Corp. II in connection with the development and commercialization of the
Albuterol Product and the denominator of which will equal the Available Funds
(excluding the Proceeds, if any, from the exercise of the Albuterol Option or
the Product Option).

The Spiros Product Program Assets include (a) the Option Product, (b) the
compound to be delivered by the Option Product, as formulated for use
specifically in the Option Product, (c) a perpetual, sublicensable,
non-exclusive, royalty-free license to the technology owned by Dura or
developed or acquired by Dura during the term of the Development Agreement
applicable to the Option Product for use solely with the Option 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 Option Product. The Product Option is exercisable with respect to each
Spiros Product commencing on the date of the closing of the Offerings and
ending 90 days after receipt of FDA approval to market such Spiros Product;
provided, however, that the Product Option may only be exercised with respect
to a single Spiros Product.

Upon exercise of the Product Option, Dura will make a single payment to
Spiros Corp. II in cash equal to 110% of (a) the aggregate Purchase Option
Exercise Price, assuming acquisition of all shares of Spiros Corp. II Common
Stock issued pursuant to the Offering four years following the closing of the
Offering in December 2001, multiplied by (b) a fraction, the numerator of
which will equal the development and commercialization costs and expenses
incurred by Spiros Corp. II in connection with the development of the Option
Product and the denominator of which will equal the Available Funds
(excluding the proceeds, if any, from the exercise of the Albuterol Option or
the Product Option).

Any payments received by Spiros Corp. II with respect to the exercise of the
Albuterol Option and the Product Option will become part of the Available
Funds.

The Albuterol and Product Option Agreement will automatically terminate in
the event that Spiros Corp. II terminates the Technology Agreement, the
Development Agreement or the Manufacturing and Marketing

                                      12
<PAGE>

Agreement, consistent with the terms of those agreements. Additionally, the
Albuterol and Product Option Agreement will terminate on the date the
Purchase Option terminates, whether by exercise or otherwise.

DEVELOPMENT AGREEMENT

Dura and Spiros Corp. II entered into the Development Agreement under which
Dura agreed to use commercially reasonable efforts to develop the program
technology for the purpose of the development of 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 Spiros Corp. II, 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 Spiros
Corp. II's exclusive agent for the filing and prosecuting of all regulatory
applications and permits required to obtain 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 Spiros Corp. II.

Dura will conduct the development in accordance with an annual workplan and
budget. At the closing of the Offering, Dura provided Spiros Corp. II with a
workplan and budget covering December 1997 through December 31, 1998.
Thereafter, Dura and Spiros Corp. II will prepare annual workplans and
budgets. The annual workplans and budgets are subject to approval and
acceptance by Spiros Corp. II's Board of Directors. Dura must report any
significant deviations from an annual workplan and budget in a timely manner.
Further, reimbursement for expenditures from Spiros Corp. II may not exceed
in any calendar year 120% of the amount allocated in the applicable annual
workplan and budget, unless otherwise approved by Spiros Corp. II.

During the term of the Development Agreement, each of Dura and Spiros Corp.
II will provide the other with quarterly reports with respect to all payments
due and all credits taken for such quarter, including, in the case of Dura, a
statement of the Development Costs (defined below) incurred during such
quarter and a summary of work performed for Spiros Corp. II. Additionally,
each of Spiros Corp. II and Dura is required to maintain and make available
for inspection by an independent public accountant selected by the requesting
party, once in each calendar year and upon reasonable notice and during
regular business hours, such records of the other party as may be necessary
to verify the accuracy of reports and payments made in respect of the
Development Agreement.

Payments to Dura under the Development Agreement for Dura's work in
performing the development 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 (the "Development
Costs") incurred by Dura in performing the activities described above, up to
the maximum amount of the funds available to Spiros Corp. II, which include
substantially all of the Available Funds. 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%; provided, however, that 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. Development Costs also include costs for development conducted
by Dura from October 10, 1997 through the date of the closing of the Offering.

If Spiros Corp. II or Dura 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 one or more Designated Compounds, then Spiros Corp. II and Dura will
use reasonable efforts to agree on the nature of the development and the
identity of any other compound on which unexpended Available Funds will be
spent.

Under the Development Agreement, the manufacture and sale of Spiros Products
for the sole purpose of conducting clinical trials necessary to obtain FDA
approval or any other required regulatory approval will be charged to Spiros

                                      13
<PAGE>

Corp. II as Development Costs. Dura will remit to Spiros Corp. II any revenue
received by it from the sale of such Spiros Products prior to receipt of FDA
approval to market.

Either Dura or Spiros Corp. II 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 at such time as Spiros Corp. II has cash or cash equivalents
of less than $5 million, which is projected by Spiros Corp. II to occur on or
about February 28, 2001. Upon receipt of notice from Spiros Corp. II, Dura
may elect to provide additional funding for the development of the Spiros
Products.

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. Spiros Corp.
II may not assign its rights or delegate its obligations under the
Development Agreement.

MANUFACTURING AND MARKETING AGREEMENT

Dura and Spiros Corp. II entered into the Manufacturing and Marketing
Agreement under which Spiros Corp. II granted to Dura an exclusive, worldwide
license to manufacture and market the Spiros Products. Dura will pay Spiros
Corp. II on a quarterly basis a royalty of 7% of the Net Sales of each Spiros
Product beginning upon receipt of FDA approval to market such product;
provided, however, that prior to the expiration of the Albuterol Option, no
royalty payment will be made with respect to Net Sales of the Albuterol
Product.

Under the Manufacturing and Marketing Agreement, Dura will agree 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 will agree 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 will be defined as the gross amount invoiced for sales
of the Spiros Products by Dura or its sublicensees, if any, to third parties
less (i) discounts actually allowed, (ii) credits for claims, allowances,
retroactive price reductions or returned Spiros Products, (iii) prepaid
freight charges incurred in transporting Spiros Products to customers, (iv)
sales taxes and other governmental charges actually paid in connection with
the sales (but excluding what is commonly known as income taxes) and (v) any
royalty obligations under a certain royalty agreement under which Dura is
obligated to pay royalties 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 the Albuterol Option or
the Product Option, the Manufacturing and Marketing Agreement will terminate
with respect to the Albuterol Product or the Option Product, as the case may
be, but will otherwise continue in full force and effect.

SERVICES AGREEMENT

Spiros Corp. II entered into the Services Agreement with Dura under which
Dura will provide certain management and administrative services to Spiros
Corp. II at the rate of $100,000 per calendar quarter for services to be
performed internally by Dura and for services performed by third parties for
Dura on Spiros Corp. II's behalf. In addition, Spiros Corp. II will reimburse
Dura for all costs and expenses incurred by Dura in connection with the
Offering. The Services Agreement terminates on the earlier of (i) the
exercise of the Purchase Option or (ii) 12 months after expiration of the
Purchase Option.

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<PAGE>

SPECIAL COMMON STOCK

There are currently issued 1,000 shares of Spiros Corp. II special common
stock (the "Special Shares"), all of which are held by Dura. The Special
Shares do not confer on the holders thereof the right to vote at any meeting
of Spiros Corp. II stockholders except as required by law or referred to in
the next paragraph and except that holders of a majority of Special Shares
are entitled to elect two directors. Nor do these shares have the right to
any profits of Spiros Corp. II. In the event of the winding up of Spiros
Corp. II, the Spiros Corp. II Common Stock shall have a priority over the
Special Shares with respect to return of capital, and the Special Shares
shall not otherwise be entitled to participate in any way in the profits or
assets of Spiros Corp. II. Spiros Corp. II does not presently intend to issue
any additional Special Shares.

Until the expiration of the Purchase Option, no resolution or act of the
Company 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 Shares: (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.

Thus Dura, as the holder of a majority of the outstanding Special Shares,
could preclude the holders of a majority of the shares of Spiros Corp. II
Common Stock and the Board of Directors of Spiros Corp. II from taking any of
the foregoing actions during such period. Dura, as holder of all of the
outstanding Special Shares, 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 Shares, including the rights discussed in this
section. In addition, there can be no assurance that any transferee of the
Special Shares will have the same financial resources or development,
manufacturing or marketing capabilities as Dura, which may have a material
adverse effect on the likelihood of the exercise of the Albuterol Option, the
Product Option or the Purchase Option. In addition, any resolution to wind up
the affairs of or liquidate Spiros Corp. II will confer upon the holders of
the Special Shares a right to vote and such Special Shares will carry a
number of votes equal to the total number of votes carried by the Spiros
Corp. II Common Stock at the time outstanding.

SALES AND MARKETING

Spiros Corp. II will rely entirely on Dura under the Manufacturing and
Marketing Agreement for its sales and marketing efforts. Under the
Manufacturing and Marketing Agreement, Dura will submit an annual marketing
plan to be approved by Spiros Corp. II.

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 DPIs 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 DPI, is the leading DPI in worldwide sales. In June 1997, the
FDA approved the first Turbuhaler product, the Pulmicort Turbuhaler, for
marketing in the U.S., which Astra launched in early 1998. Recently the FDA
also approved two multiple dose DPIs developed by Glaxo.

                                      15
<PAGE>

Many of these companies, including large pharmaceutical firms with financial
and marketing resources and development capabilities substantially greater
than those of Spiros Corp. II, are engaged in developing, marketing and
selling products that compete with the proposed products of Spiros Corp. II.
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 Spiros Corp. II's current or future
products. The industry is characterized by rapid technological change, and
competitors may develop their products more rapidly than Spiros Corp. II.
Competitors may also be able to complete the regulatory process sooner, and
therefore, may begin to market their products in advance of Spiros Corp. II's
products. The Company believes 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 Spiros Corp. II of its belief that its available facilities
are sufficient to satisfy its obligations for performance 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 Spiros Corp. II.
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 Spiros Corp. II pursuant to the Technology License Agreement.
Until the expiration or termination of the Purchase Option, Dura is required
to file patent applications, at Spiros Corp. II's expense, with respect to
inventions included in the program technology. Dura will be the owner and
Spiros Corp. II will be the exclusive licensee for use with the Spiros
Products of any patents included in the program technology. Spiros Corp. II's
success will therefore depend in part upon the ability of Dura or Spiros
Corp. II, as the case may be, to obtain strong patent protection both in the
United States and other countries.

Spiros Corp. II considers the protection of discoveries in connection with its
development activities important to its businesses. Spiros Corp. II intends
to seek patent protection in the U.S. and selected foreign countries where
deemed appropriate. There can be no assurance that issued patents or
subsequent patents, if issued, will adequately protect Spiros Corp. II or
that such patents will provide protection against infringement claims by
competitors. Dura has also filed certain foreign patent applications relating
to Spiros technology. There can be no assurance that additional patents, U.S.
or foreign, will be obtained covering the Spiros Products or that, if issued
or licensed, the patents covering such products will provide substantial
protection or be of commercial benefit. Federal court decisions establishing
legal standards for determining the validity and scope of patents in the
field are in transition. There can be no assurance that the historical legal
standards surrounding questions of validity and scope will continue to be
applied or that current defenses as to issued patents in the field will offer
protection in the future.

Spiros Corp. II also relies upon trade secrets, unpatented proprietary
know-how and continuing technological innovation to develop its competitive
position. There can be no assurance, however, that others may not acquire or
independently develop similar technology or, if patents are not issued with
respect to products arising from research, that Spiros Corp. II will be able
to maintain information pertinent to such research as proprietary technology
or trade secrets.

GOVERNMENT REGULATION

The manufacturing and marketing of Spiros Products are subject to regulation
by Federal and state government authorities, including the FDA, the
Environmental Protection Agency and the Occupational Safety and Health

                                      16
<PAGE>

Administration, in the U.S. and other countries. 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 behalf of
Spiros Corp. II, is required to conduct each of the following steps and
possibly others: (i) preclinical testing (laboratory and possibly animal
tests), (ii) the submission to the FDA of an IND application, which must
become effective before human clinical trials may commence, (iii) adequate
and well-controlled human clinical trials to establish safety and efficacy,
(iv) the submission of an NDA to the FDA for marketing approval, and (v) FDA
approval of the NDA prior to any commercial sale or shipment. The NDA 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 NDA 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
("cGMPs") for both drugs and devices. To supply products for use in the U.S.,
foreign manufacturing establishments must comply with cGMP 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 ("IRB") 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 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 behalf of Spiros Corp. II,
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.

                                      17
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Although the FDA has considerable discretion to decide what requirements must
be met prior to approval, the Company believes, based upon the FDA's
historical practice with respect to drug inhalers, that the FDA is likely to
regulate each combination of Spiros with a compound as a discrete
pharmaceutical or drug product requiring separate approval as a new drug. The
Company believes that the approval process for each drug/delivery combination
now under development may be shorter than the full NDA process described
above because the safety and efficacy of the compounds have already been
established in currently marketed formulations and delivery mechanisms.

Since completion of the pivotal trials, a number of modifications have been
made to the Spiros system, some of which address problems encountered with
the mechanical features of the Spiros delivery system during the pivotal
trials. These changes are intended to improve the reliability, performance,
manufacturability, and customer acceptance of the mechanical features of the
Spiros delivery system. The Company expects that it will be required to
complete testing and validation pursuant to cGMP requirements of the Spiros
system as modified for commercial distribution, which could be costly and
time-consuming. There can be no assurance that the FDA will not require the
Company to undertake further laboratory testing, field testing and/or
clinical studies in order to insure the safety and effectiveness of the
albuterol product intended to be commercialized by the Company and to insure
that it can be reliably manufactured. If a proposed change is deemed to be a
major modification by the FDA, the Company could be required to repeat one or
more of the clinical studies. Moreover, because of the time necessary to
validate the changes to the Spiros system, there can be no assurance that
Dura will be prepared for any FDA preapproval inspection of Dura's Spiros
manufacturing facilities in a timely manner. If the Company is required to
undertake additional laboratory testing and/or clinical studies or to
postpone the preapproval inspection, or if the Company fails to complete the
open label study in a timely manner, the Company could receive a
non-approvable letter and, in any event, there could be a substantial delay
in completion of the approval process.

In April 1996, the export provisions of the Federal Food, Drug, and Cosmetic
Act were relaxed to permit 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, the
Company 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 the Company will be able to meet and fulfill the
statutory requirements in a particular country.

RESEARCH AND DEVELOPMENT EXPENSES

Spiros Corp. II incurred research and development expenses of approximately
$7,040,000 for the period from September 23, 1997 (date of incorporation)
through December 31, 1997.

HUMAN RESOURCES

The Company has 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

DEVELOPMENT RISKS ASSOCIATED WITH SPIROS. Spiros will require significant
additional development. There can be no assurance that development of Spiros
will be completed successfully, that Spiros will not encounter problems in
clinical trials that will cause the delay or suspension of such trials, that
current or future testing will show Spiros to be safe or efficacious or that
Spiros will receive regulatory approval. In addition, regulatory approvals
will have to be obtained for each drug to be delivered through the use of
Spiros prior to commercialization. Moreover, even if Spiros does receive
regulatory approval, there can be no assurance that Spiros will be
commercially successful, have all of the patent and other protections
necessary to prevent competitors from producing similar products and not
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 a material adverse effect on the Company.

                                      18
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GOVERNMENT REGULATION; NO ASSURANCE OF FDA APPROVAL. Development, testing,
manufacturing and marketing of pharmaceutical products including drug
delivery systems are subject to extensive regulation by numerous governmental
authorities in the U.S. and other countries. The process of obtaining FDA
approval of pharmaceutical products and drug delivery systems is costly and
time consuming. Any new pharmaceutical product must undergo rigorous
preclinical and clinical testing and an extensive regulatory approval process
mandated by the FDA. Such regulatory review includes the determination of
manufacturing capability and product performance. Marketing of drug delivery
systems also requires FDA approval, which can be costly and time consuming to
obtain. A separate regulatory approval will need to be obtained for each
Spiros drug delivery system.

Dura, on the Company's behalf, has submitted an abbreviated NDA called a
505(b)(2) application for the use of albuterol with the Spiros system. Dura,
on the Company's behalf, expects to submit an abbreviated NDA for the use of
other drugs with the Spiros system. No assurances can be given that all of
Dura's drugs identified for development with Spiros will be suitable for, or
approved under, abbreviated application procedures. Certain abbreviated
application procedures have been the subject of petitions filed by brand name
manufacturers which seek changes in the FDA's approval process for such
abbreviated applications. These requested changes include, among other
things, disallowance of the use by an applicant of an abbreviated application
with data considered proprietary by the original manufacturer that was
submitted to the FDA as part of an original NDA. The Company or Dura is
unable to predict at this time whether the FDA will make any changes to its
abbreviated application procedures as a result of such petitions or the
effect that such changes or challenges may have on Dura.

There can be no assurance that the pharmaceutical products currently in
development by the Company will be approved by the FDA. In addition, there
can be no assurance that all necessary approvals will be granted for future
products or that FDA review or actions will not involve delays caused by the
FDA's request for additional information or testing that could adversely
affect the time to market and sale of the products. For future products of
the Company, failure to comply with applicable regulatory requirements can,
among other things, result in the suspension of regulatory approval, as well
as possible civil and criminal sanctions.

NO MANUFACTURING OR MARKETING CAPABILITY. Spiros Corp. II has no
manufacturing or marketing capability. Spiros Corp. II is 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
under the Manufacturing and Marketing Agreement 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 the needs of
Spiros Corp. II. In addition, Dura or its contract manufacturers, as the case
may be, may require additional FDA approval prior to 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. In addition,
Spiros Corp. II has no experience in sales, marketing or distribution. Under
the Manufacturing and Marketing Agreement, Dura has been granted exclusive
worldwide marketing rights to the Spiros Products. There can be no assurance
that Dura's sales and marketing force will be able to establish commercially
successful sales and distribution capabilities for the Spiros Products.

ABSENCE OF OPERATING HISTORY; NO ASSURANCE OF PROFITABILITY; LACK OF
DIVIDENDS. Spiros Corp. II was recently formed and has no operating history
upon which investors may base an evaluation of its likely financial
performance. Spiros Corp. II anticipates that substantially all of its
available funds may be expended prior to the earliest receipt of any
significant revenues by Spiros Corp. II, resulting in significant losses.
Further, even if the Spiros Products are developed in accordance with the
Development Agreement and marketed pursuant to the Manufacturing and
Marketing Agreement, there can be no assurance that they can be marketed
profitably. Even if such Spiros Products are commercialized profitably, the
initial losses incurred by Spiros Corp. II may never be recovered. Spiros
Corp. II is prevented from paying dividends on the Spiros Corp. II Common
Stock without the approval of Dura, and accordingly, does not expect to pay
any dividends.

COMPETITION. Many companies, including large pharmaceutical firms with
financial and marketing resources and development capabilities substantially
greater than those of Spiros Corp. II, are engaged in developing, marketing
and selling products that compete with those planned to be offered. The
selling prices of such products typically decline as competition increases.
Furthermore, other products now in use or under development by others may be
more effective than the Company's future products. The industry is
characterized by rapid technological change, and competitors may

                                      19
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develop their products more rapidly than the Company. Competitors may also be
able to complete the regulatory process sooner, and therefore, may begin to
market their products in advance of the Company's products. The Company
believes that competition among pulmonary drug delivery systems aimed at the
asthma and COPD markets will be based on, among other things, product
efficacy, safety, reliability, availability and price.

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 DPIs 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 DPI, is the leading DPI in worldwide sales. In June 1997, the
FDA approved the first Turbuhaler product, the Pulmicort Turbuhaler, for
marketing in the U.S., which Astra launched in early 1998. Recently the FDA
also approved two multiple dose DPIs developed by Glaxo.

COMMON MANAGEMENT. The Technology Agreement, the Development Agreement, the
Manufacturing and Marketing Agreement and the Albuterol and Product Option
Agreement (collectively, the "Major Agreements") were approved by Dura, as
controlling shareholder of Spiros Corp. II, at the time the Major Agreements
were executed, which, in such capacity, may have influenced the Board of
Directors of Spiros Corp. II to enter into such agreements. Two of the
members of the Board of Directors of Spiros Corp. II are persons who are
directors and/or officers of Dura and each of the three officers of the
Company are officers of Dura.

LACK OF ARM'S-LENGTH NEGOTIATION. The Development Agreement and the
Manufacturing and Marketing Agreement were not negotiated on an arm's-length
basis and Dura and Spiros Corp. II did not retain separate counsel in
connection therewith. In particular, the Board of Directors of Spiros Corp.
II may have been influenced by Dura, as the then controlling shareholder of
Spiros Corp. II, in entering into the Development Agreement and the
Manufacturing and Marketing Agreement. Dura is the contractor under the
Development Agreement and will perform or participate in all development and
other activities thereunder. Additionally, Dura will be primarily responsible
for the marketing and manufacture of Spiros Products under the Manufacturing
and Marketing Agreement. Spiros Corp. II will be responsible for and will pay
the development costs that are incurred by Dura under the Development
Agreement and the marketing and manufacturing costs incurred by Dura under
the Manufacturing and Marketing Agreement. Dura will determine unilaterally
certain activities to be undertaken under the Development Agreement and in
all events Dura will have substantial influence over all activities and
procedures (including the timing and priorities thereof) to be undertaken
under the Development Agreement and the Manufacturing and Marketing
Agreement. Dura has no obligation to complete any development or other
activity after all funds of Spiros Corp. II have been expended. Dura's own
projects and other third party projects may compete for time and resources
with projects undertaken pursuant to the Development Agreement and the
Manufacturing and Marketing Agreement and the resources that Dura expends
under such agreements may therefore be limited.

THE ALBUTEROL OPTION AND THE PRODUCT OPTION. If Dura exercises the Albuterol
Option for the albuterol product or the Product Option for any other Spiros
product, it will have sole discretion to control the commercialization of
such product, including discretion to allocate its marketing resources among
that product and other Dura products.

THE PURCHASE OPTION EXERCISE PRICE. The Purchase Option exercise price was
determined by Spiros Corp. II and Dura giving consideration to the Spiros
products, the agreements between Spiros Corp. II and Dura, such other factors
as Spiros Corp. II and Dura deemed appropriate and other advice given by the
underwriters of the Offering. Therefore, such price was not determined on an
arm's-length basis.

NO ASSURANCE OF SUCCESSFUL DEVELOPMENT OF THE SPIROS PRODUCTS. Spiros Corp.
II has agreed with Dura that Dura will conduct work on the Spiros Products in
accordance with the Development Agreement for the purpose of research,
clinical development, product development, including regulatory approval, and
commercialization of the Spiros Products. Dura's historical performance has
no relationship to Spiros Corp. II's potential product development and is not
indicative of the future performance of Spiros Corp. II. While certain
research and development on the Spiros Products being transferred to Spiros
Corp. II by Dura has been conducted, additional clinical studies and product
development are still to be undertaken. There can be no assurance that Spiros
Corp. II or Dura will be able to complete the development, gain regulatory
approval and successfully commercialize any of the Spiros Products or that
the Spiros

                                      20
<PAGE>

Products can be introduced in a timely manner. The successful development of
any of the Spiros Products will require demonstration through human clinical
studies that such Spiros Products are both safe and efficacious.

NO ASSURANCE OF EXERCISE OF DURA'S OPTIONS. Dura is not obligated to exercise
the 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 the Purchase Option, the
Albuterol Option or the Product Option, Spiros Corp. II will be required to
find alternative ways to commercially market or exploit the Spiros Products
and there can be no assurance that Spiros Corp. II will be able to do so. If,
in the event Dura fails to exercise the Purchase Option, the Albuterol Option
and the Product Option and Spiros Corp. II determines to market the Spiros
Products itself, Spiros Corp. II will require substantial additional funds.
There can be no assurance that such funds will be available on attractive
terms, if at all. Similarly, if Spiros Corp. II determines to license the
Spiros Products to third parties, such arrangements, if available, may be on
terms less favorable to Spiros Corp. II than the terms of Spiros Corp. II's
arrangements with Dura.

NO ASSURANCE OF SUFFICIENT FUNDS. Although Spiros Corp. II believes that its
current funding will be sufficient to enable it to advance three Spiros
Products through the FDA approval stage, there can be no assurance that this
will be the case. Until the expiration of the Purchase Option, Spiros Corp.
II is significantly restricted from raising additional funds without Dura's
consent and there can be no assurance that Spiros Corp. II will have
sufficient funds to successfully develop any Spiros Products. While Dura may,
at its sole option, provide funds for further development of the Spiros
Products, it is not obligated to do so. If the Purchase Option is not
exercised, Spiros Corp. II would have to raise substantial funding while
hiring, or otherwise obtaining access to, research and management personnel.

NO ASSURANCE THAT THE PURCHASE OPTION WILL BE REPRESENTATIVE OF THE VALUE OF
SPIROS CORP. II. The Purchase Option exercise price was set forth in the
Spiros Corp. II Amended and Restated Certificate of Incorporation as of the
date of the closing of the Offering and therefore may not be representative
of the value of the Spiros Corp. II common stock at the time of the exercise
of the Purchase Option.

DEPENDENCE ON DURA. Substantially all of the Company's available funds will
be paid to Dura under the Development Agreement. Payments 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, on behalf of Spiros Corp. II, up to the maximum
amount of the funds available to Spiros Corp. II, which include substantially
all of the available funds. In addition, Dura will be primarily responsible
for the marketing and manufacturing of the Spiros Products, if any are
commercialized prior to the expiration of the Purchase Option. Spiros Corp.
II is not expected to have its own research, development, clinical,
licensing, administration, manufacturing or marketing employees or facilities
and thus will be entirely dependent on Dura in these areas. Subject to their
respective obligations under the Development Agreement and consistent with
commercially reasonable practices, Dura will have sole discretion to
determine the allocation of its research, development, clinical, licensing,
administration, manufacturing and marketing employees and facilities.
Although Dura believes that its personnel and facilities currently are or, in
the future, will be adequate for the performance of its duties under the
Development Agreement and the Manufacturing and Marketing Agreement, Dura's
proprietary and collaborative development, licensing, manufacturing and
marketing projects may compete for time and resources with projects
undertaken by Spiros Corp. II pursuant to the Development Agreement and the
Manufacturing and Marketing Agreement, thereby delaying development,
manufacture and marketing of the Spiros Products. Any material adverse change
in the business or financial condition of Dura would have a material adverse
effect upon Spiros Corp. II.

POTENTIAL COMPETITION FROM DURA. 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 in connection with the Core
Technology to Spiros Corp. II, 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, in some circumstances, lead to
the development, in-licensing or acquisition of products that compete with
the Spiros Products being developed by Spiros Corp II. 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.

                                      21
<PAGE>

ABILITY OF SPECIAL SHAREHOLDER TO LIMIT CERTAIN SPIROS CORP. II ACTIVITIES.
Pursuant to the Company's Amended and Restated Certificate of Incorporation,
until the expiration of the Purchase Option, no resolution or act of the
Company to authorize or permit any of the following will be effective without
the prior written approval of Dura as the holder of all of the outstanding
Special Shares: (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. Accordingly, Dura could preclude the holders of a
majority of the outstanding Spiros Corp. II Common Stock and the Board of
Directors of Spiros Corp. II from taking any of the foregoing actions during
such period. Dura, as holder of all of the outstanding Special Shares, 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 Shares,
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 shares will have the same
financial resources or development, manufacturing or marketing capabilities
as Dura, which may have a material adverse effect on the likelihood of the
exercise of the Albuterol Option, the Product Option or the Purchase Option.

POTENTIAL LOSS OF TECHNOLOGY BY SPIROS CORP. II. Under the Development
Agreement, Spiros Corp. II is obligated to make payments to Dura equal in the
aggregate to substantially all of its available funds. If Spiros Corp. II
does not use its available funds as provided in the Development Agreement or
otherwise breaches any of its material obligations under the Major
Agreements, Dura may have the right to terminate the Technology Agreement,
the Development Agreement and the Manufacturing and Marketing Agreement, and
thereby reacquire rights to all technology licensed to Spiros Corp. II
thereunder, including improvements made to such technology using funds
provided by Spiros Corp. II. In the event of such a termination by Dura, it
is unlikely that Dura would exercise the Albuterol Option, the Product Option
or the Purchase Option.

ACCELERATION OF PURCHASE OPTION. If Spiros Corp. II terminates all Major
Agreements due to a material breach of any of the Major Agreements by Dura,
the Purchase Option automatically accelerates. The Purchase Option also
terminates in the event of certain voluntary or involuntary bankruptcy events
affecting Dura or an uncured material breach by Dura under any of its
material loan agreements. There can be no assurance that, at that time, the
development of the Spiros Products will have progressed to a point where Dura
will have sufficient information to determine whether to exercise the
Purchase Option. As a result, Dura may determine not to exercise the Purchase
Option. There can be no assurance that, upon termination of the Development
Agreement by Spiros Corp. II as described above, alternative arrangements for
the development of some or all of the Spiros Products could be made or that
such development of the Spiros Products by Spiros Corp. II would be
successful.

THIRD-PARTY REIMBURSEMENT; PRICING PRESSURES. The Company's commercial
success will depend in part on the availability of adequate reimbursement
from third-party health care payers, such as government and private health
insurers and managed care organizations. Third-party payers are increasingly
challenging the pricing of medical products and services. There can be no
assurance that reimbursement will be available to enable the Company to
achieve market acceptance of its products, if approved, or to maintain price
levels sufficient to realize an appropriate return on the Company's
investment in development. The market for the Company's products, if
approved, may be limited by actions of third-party payers. For example, many
managed health care organizations are now controlling the pharmaceuticals
that are on their formulary lists. The resulting competition among
pharmaceutical companies to place their products on these formulary lists has
created a trend of downward pricing pressure in the industry. In addition,
many managed care organizations are pursuing various ways to reduce
pharmaceutical costs and are considering formulary contracts primarily with
those pharmaceutical companies that can offer a full line of products for a
given therapy sector or disease state. There can be no assurance that the

                                      22
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Company's products, if approved, will be included on the formulary lists of
managed care organizations or that downward pricing pressure in the industry
generally will not negatively impact the Company's operations.

LIMITED MANUFACTURING EXPERIENCE. Dura's principal manufacturing facility is
intended to be used to formulate, mill, blend and manufacture drugs to be
used with Spiros, pending regulatory approval. Equipment purchases and
validation are currently scheduled through 1998. Dura's manufacturing
facility must be registered with and licensed by various regulatory
authorities and must comply with current cGMP requirements prescribed by the
FDA and the State of California. Dura will need to significantly scale up its
current manufacturing operations and comply with cGMPs and other regulations
prescribed by various regulatory agencies in the U.S. and other countries to
achieve the prescribed quality and required levels of production of such
products to obtain marketing approval. Any failure or significant delay in
the validation of or obtaining a satisfactory regulatory inspection of the
new facility or failure to successfully scale up could have a material
adverse effect on the ability of Dura to manufacture products in connection
with Spiros. Dura intends to utilize third parties to produce components of
and assemble the Spiros aerosol generator. Such third parties have only
produced limited quantities of components and assembled generators and will
be required to significantly scale up their activities. There can be no
assurance that such third parties will be successful in completing these
activities in a timely manner or can meet cGMP requirements. Any failure or
delay in the scale up of aerosol generator manufacturing would have a
material adverse effect on the ability of Dura to manufacture Spiros Products.

UNCERTAINTY REGARDING PATENTS AND PROPRIETARY TECHNOLOGY; UNPREDICTABILITY OF
PATENT PROTECTION. The Company's success will depend, in part, on its ability
to obtain patents, protect trade secrets and other proprietary information
and operate without infringing upon the proprietary rights of others both in
the U.S. and abroad. There can be no assurance that patent applications for a
Spiros product will be approved, that Spiros Corp. II will develop any Spiros
product to the point that it is patentable, that any issued patents for a
Spiros product will provide Spiros Corp. II with adequate protection or will
not be challenged by others, or that the patents of others will not impair
the ability of Spiros Corp. II to do business. Furthermore, there can be no
assurance that others will not independently develop similar products,
duplicate any unpatented Spiros products or design around any patented Spiros
products in development or marketed by Spiros Corp. II.

The Company will rely on secrecy to protect technology where patent
protection is not believed to be appropriate or obtainable. There can be no
assurance that any confidentiality agreement entered into by Dura with third
parties will not be breached, that Spiros Corp. II will have adequate
remedies for any breach, that others will not independently develop
substantially equivalent proprietary information or that third parties will
not otherwise gain access to proprietary information concerning the Spiros
products or program technology.

The Company may be required to obtain licenses to patents or other
proprietary rights of others. No assurance can be given that any licenses
required under any such patents or proprietary rights would be made available
on terms acceptable to the Company, if at all . If the Company does not
obtain such licenses, it could encounter delays in Spiros product market
introductions or could find that the development, manufacture or sale of the
Spiros products requiring such licenses could be foreclosed. Moreover, the
Company could incur substantial costs and diversion of management time in
defending itself in any suits brought against it claiming infringement of the
patent rights of others or in asserting the Company's patent rights.

The Company is 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 the Company determines to market
any Spiros product in the United Kingdom and further determines that such
activity would infringe upon such third party patents, the Company 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. There can be no assurance that
patents or patent applications do not exist or will not exist in the future
that may materially affect the Company's ability to make, use or sell any
current or future products.

ATTRACTION AND RETENTION OF KEY PERSONNEL. The Company will be highly
dependent on the principal members of Dura's scientific and management staff,
the loss of whose services might impede the achievement of development
objectives. Recruiting and retaining management and operational personnel and
qualified scientific personnel to perform research and development work for
the Company will also be critical to the Company's success. Although the

                                      23
<PAGE>

Company believes Dura will be successful in attracting and retaining skilled
and experienced management, operational and scientific personnel, there can
be no assurance that Dura will be able to attract and retain such personnel
on acceptable terms given the competition among numerous pharmaceutical
companies, universities and research institutions for such personnel.

VOLATILITY OF THE COMPANY'S STOCK PRICE. The market prices for securities of
emerging companies have historically been highly volatile. Future
announcements concerning the Company, Dura or their competitors may have a
significant impact on the market price of the Spiros Corp. II Units. Such
announcements might include financial results, the results of testing,
technological innovations, new commercial products, changes to government
regulations, government decisions on commercialization of products,
developments concerning proprietary rights, litigation or public concern as
to safety of Spiros Corp. II's and Dura's products.

YEAR 2000 COMPLIANCE CONSIDERATIONS. Spiros Corp. II relies on Dura for its
operating and financial systems pursuant to the various agreements described.
The Company has 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 ("Year 2000"). Processing errors due to software failure
arising from calculations using the Year 2000 date are a recognized risk.
Dura has indicated that it is currently addressing the risk, with respect to
the availability and integrity of its financial systems and the reliability
of its operating systems, and is in the process of communicating with
suppliers, customers, financial institutions and others with whom it conducts
business to assess whether they are Year 2000 compliant. While the Company
believes that Dura's planning 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 the Company. In addition, the
potential impact of the Year 2000 on others with whom the Company, through
agreements with Dura, does 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

The Company's corporate offices are located in San Diego, California. The
Company does not own any facilities.

ITEM 3.   LEGAL PROCEEDINGS

None.

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

None.

                                    PART II

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

(a)     Market Information and Holders

On December 22, 1997, the Company and Dura completed the Offering of
6,325,000 Units. The Units commenced public trading on December 18, 1997.
High and low sales prices of Units for the period ended December 31, 1997 as
quoted on the Nasdaq Stock Market were $17 3/4 and $16 1/2, respectively. The
Units are quoted on the Nasdaq Stock Market under the symbol "SDCOZ" and are
quoted in the WALL STREET JOURNAL and other newspapers. The Units will trade
only as Units through December 31, 1999 or such earlier date as the Purchase
Option is exercised (the "Separation Date"). Prior to the Separation Date,
application will be made to quote the Common Stock on the Nasdaq Stock Market
or another quotation system or securities exchange. There can be no assurance
that the

                                      24
<PAGE>

Common Stock will be eligible for quotation on the Nasdaq Stock Market or any
other quotation system or securities exchange. The Special Shares are not
publicly traded.

As of December 31, 1997, there was one holder of record and 2,500 beneficial
holders of record of Units and one holder of Special Shares.

(b)     Dividends

Spiros Corp. II has not paid any dividends on its Common Stock and does not
expect to do so in the foreseeable future.  Holders of Spiros Corp. II 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 Shares are not entitled to receive dividends.

(c)     Recent Sales of Unregistered Securities

In September 1997, the Company sold to Dura 1,000 Special Shares for
aggregate proceeds of $1,000. The issuance of the Special Shares was not
registered pursuant to the Securities Act of 1933 as amended (the "Act") and
the Special Shares were issued in connection with the Company's formation.
The Special Shares were exempt from registration pursuant to Section 4(2) of
the Act.

(d)     Use of Proceeds from Registered Securities

On December 22, 1997, the Company and Dura completed the Offering of
6,325,000 Units, 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. Securities were first offered on December 17, 1997, and
the Offering closed on December 22, 1997. Merrill Lynch & Co. and Donaldson,
Lufkin & Jenrette Securities Corporation acted as managing underwriters of
the offering. The Units were sold to the public at an offering price of
$16.00 per Unit, with aggregate proceeds of $101.2 million. The Company
received all proceeds from the Offering, which totaled $94 million, net of
estimated offering expenses and underwriters' discounts of $7.2 million.
Offering expenses include $161,000 paid to Dura as reimbursement for direct
costs incurred by Dura in connection with the Offering. As of December 31,
1997, all net proceeds from the Offering were invested in cash, cash
equivalents and short term investments.

ITEM 6.   SELECTED FINANCIAL DATA

The following data has been derived from the audited financial statements of
the Company. 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 the Company's Financial Statements and notes thereto
in Item 8.

<TABLE>
<CAPTION>
                                                         Period from
                                                      September 23, 1997
                                                  (Date of Incorporation) to
                                                       DECEMBER 31, 1997
                                                       -----------------
            <S>                                         <C>
             Total revenues                                 $    222,000
             Net loss                                       $ (6,924,000)
             Net loss per share: basic and diluted          $      (1.09)
             Total assets                                   $170,506,000
             Total liabilities                              $  8,425,000

</TABLE>

No cash dividends were paid from September 23, 1997 (date of incorporation)
through December 31, 1997.

                                      25

<PAGE>

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

GENERAL

Spiros Development Corporation II, Inc. ("Spiros Corp. II" or 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 (the
"Units"), each Unit consisting of one share of Callable Common Stock ("Common
Stock") of the 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 the Company of approximately $94 million. Concurrently, Dura
contributed $75 million to the 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.

Dura, as holder of 100% of the outstanding shares of the Company's Special
Common Stock, 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 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 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 Company 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, the Company and Dura entered into a technology license
agreement whereby Dura granted to the Company 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. The
Company 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
all of the Company's current activities are conducted by Dura under these
agreements, the Company does not maintain any research staff nor occupy any
research facilities.

RESULTS OF OPERATIONS

The Company commenced operations in December 1997 and incurred a net loss of
$6,924,000 for the period September 23, 1997 (date of incorporation) through
December 31, 1997. Research and development costs for this period totaled
$7,040,000 and general and administrative expenses totaled $106,000. Research
and development expenses were for Spiros related activities performed by Dura
from October 10, 1997 through December 31, 1997. The Company's interest
income for the period totaled $222,000.

                                      26
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's 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, 1997, the Company had cash, cash
equivalents, and short-term investments totaling $170.5 million and working
capital totaling $162.1 million. The Company believes that its working
capital and expected cash flows from its cash and short-term investments will
be sufficient to fund its cash requirements through at least December 31,
1998.

Spiros Corp. II relies on Dura for its operating and financial systems
pursuant to the various agreements described. The Company has made inquiries
of Dura and Dura has addressed 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 ("Year 2000").
Processing errors due to software failure arising from calculations using the
Year 2000 date are a recognized risk. Dura has indicated that it is currently
addressing the risk, with respect to the availability and integrity of its
financial systems and the reliability of its operating systems, and is in the
process of communicating with suppliers, customers, financial institutions
and others with whom it conducts business to assess whether they are Year
2000 compliant. While the Company believes that Dura's planning 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
the Company. In addition, the potential impact of the Year 2000 on others
with whom the Company, through agreements with Dura, does 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.

None.

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.
                                   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 9,
1998, 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 9, 1998, 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 9, 1998, is
incorporated herein by reference.

                                      27
<PAGE>

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 9,
1998, 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 9, 1998, 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 Business Relationships and
Related Transactions," appearing in the Proxy Statement to be filed on or
about April 9, 1998, 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


(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
<C>  <C>       <S>
(1)   3.1      Amended and Restated Certificate of Incorporation.

(1)   3.2      Amended and Restated Bylaws.

      4.1      Purchase option held by Dura Pharmaceuticals, Inc. to
               purchase all of the outstanding Callable Common Stock of the
               Company (included in Exhibit 3.1).
</TABLE>

                                 28
<PAGE>

<TABLE>
<CAPTION>
<C>   <C>      <S>
      4.2      Specimen Unit Certificate.

      4.3      Specimen Certificate of Callable Common Stock.

      4.4      Stock Certificate of Special Common Stock.

      10.1     Technology License Agreement dated December 22, 1997 between
               the Company, Dura Pharmaceuticals, Inc., Dura Delivery
               Systems, Inc. and Spiros Development Corporation.

      10.2     Development Agreement dated December 22, 1997 between the
               Company and Dura Pharmaceuticals, Inc.

      10.3     Albuterol and Product Option Agreement dated December 22, 1997
               between the Company and Dura Pharmaceuticals, Inc.

      10.4     Manufacturing and Marketing Agreement dated December 22,
               1997 between the Company and Dura Pharmaceuticals, Inc.

      10.5     Services Agreement dated December 22, 1997 between the
               Company and Dura Pharmaceuticals, Inc.

      10.6 +   1997 Stock Option Plan.

      10.7 +   Form of Notice of Grant of Stock Option.

      10.8 +   Form of Stock Option Agreement.

(1)   10.9 +   Form of Indemnification Agreement between the Company and each of
               its directors.

(1)   10.10 +  Form of Indemnification Agreement between the Company and each of
               its officers.

      24.1     Power of Attorney (See Signature page).

      27.1     Financial Data Schedule.

</TABLE>

      (1)      Incorporated by reference to the Company's Registration Statement
               on Forms S-1/S-3 (No. 333-37673/37673-01), filed on October 10,
               1997, as amended.
      +        Management contract or compensation plan or arrangement.

(b) REPORTS ON FORM 8-K.

None.

SUPPLEMENTAL INFORMATION

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

                                      29
<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  27,  1998         SPIROS DEVELOPMENT CORPORATION II, INC.


                                 By:   /S/ DAVID S. KABAKOFF
                                    --------------------------------------------
                                 David S. Kabakoff
                                 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.

<TABLE>
<CAPTION>

SIGNATURE                                      TITLE                          DATE
---------                                      -----                          ----
<S>                       <C>                                            <C>

/s/ DAVID S. KABAKOFF                Chairman, President and             MARCH 27, 1998
------------------------             Chief Executive Officer
(David S. Kabakoff)               (Principal Executive Officer)


/s/ ERLE T. MAST                        Vice President and               MARCH 27, 1998
------------------------            Chief Financial Officer
(Erle T. Mast)            (Principal Financial and Accounting Officer)


/s/ CAM L. GARNER                          Director                      MARCH 27, 1998
------------------------
(Cam L. Garner)

/s/ SOL LIZERBRAM                          Director                      MARCH 27, 1998
------------------------
(Sol Lizerbram)

 /s/ ALAIN B. SCHREIBER                    Director                      MARCH 27, 1998
------------------------
(Alain B. Schreiber)

/s/ ROBERT S. WHITEHEAD                    Director                      MARCH 27, 1998
------------------------
(Robert S. Whitehead)

</TABLE>

                                      30

<PAGE>

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

     EXHIBIT
       NO.     DESCRIPTION
<C>   <C>      <S>
(1)    3.1     Amended and Restated Certificate of Incorporation.

(1)    3.2     Amended and Restated By-laws.

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

       4.2     Specimen Unit Certificate.

       4.3     Specimen Certificate of Callable Common Stock.

       4.4     Stock Certificate of Special Common Stock.

       10.1    Technology License Agreement dated December 22, 1997 between
               the Company, Dura Pharmaceuticals, Inc., Dura Delivery
               Systems, Inc. and Spiros Development Corporation.

       10.2    Development Agreement dated December 22, 1997 between the
               Company and Dura Pharmaceuticals, Inc.

       10.3    Albuterol and Product Option Agreement dated December 22, 1997
               between the Company and Dura Pharmaceuticals, Inc.

       10.4    Manufacturing and Marketing Agreement dated December 22,
               1997 between the Company and Dura Pharmaceuticals, Inc.

       10.5    Services Agreement dated December 22, 1997 between the
               Company and Dura Pharmaceuticals, Inc.

       10.6 +  1997 Stock Option Plan.

       10.7 +  Form of Notice of Grant of Stock Option.

       10.8 +  Form of Stock Option Agreement.

(1)    10.9 +  Form of Indemnification Agreement between the Company and each of
               its directors.

(1)    10.10+  Form of Indemnification Agreement between the Company and each of
               its officers.

       24.1    Power of Attorney (See Signature page).

       27.1    Financial Data Schedule.
</TABLE>
       (1)     Incorporated by reference to the Company's Registration Statement
               on Forms S-1/S-3 (No. 333-37673/37673-01), filed on October 10,
               1997, as amended.
       +       Management contract or compensation plan or arrangement.

                                      31
<PAGE>

                     SPIROS DEVELOPMENT CORPORATION II, INC.

                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>

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

Balance Sheet as of December 31, 1997                                  F-2

Statement of Operations for the Period
  September 23, 1997 (Date of Incorporation) through
  December 31, 1997                                                    F-3

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

Statement of Cash Flows for the Period September 23, 1997
  (Date of Incorporation) through December 31, 1997                    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 sheet of Spiros Development
Corporation II, Inc. (a development stage enterprise) (the "Company") as of
December 31, 1997, and the related statements of operations, shareholders'
equity and cash flows for the period September 23, 1997 (date of
incorporation) through December 31, 1997. 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 audit.

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

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


/s/ Deloitte & Touche LLP

San Diego, California
February 12, 1998

<PAGE>

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

<TABLE>
<CAPTION>

BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
-------------------------------------------------------------------------------
<S>                                                           <C>

ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                     $139,035
  Short-term investments                                          31,471
                                                                --------
           Total current assets                                  170,506
                                                                --------
TOTAL                                                           $170,506
                                                                --------
                                                                --------
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Payable to Dura Pharmaceuticals, Inc.                          $ 8,399
  Accrued liabilities                                                 26
                                                                --------
           Total current liabilities                               8,425
                                                                --------
COMMITMENTS AND CONTINGENCIES (Note 4)

SHAREHOLDERS' EQUITY:
  Special common stock, par value $1.00, 1,000 shares
    authorized, issued and outstanding                                 1
  Callable common stock, par value $.001, 7,500,000 shares
    authorized; 6,325,000 shares issued and outstanding                6
  Additional paid-in capital                                     168,977
  Unrealized gain on investments                                      21
  Accumulated deficit                                             (6,924)
                                                                --------
           Total shareholders' equity                            162,081
                                                                --------
TOTAL                                                           $170,506
                                                                --------
                                                                --------
</TABLE>

See accompanying notes to financial statements.

                                     F-2



<PAGE>

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

<TABLE>
<CAPTION>

STATEMENT OF OPERATIONS
FOR THE PERIOD SEPTEMBER 23, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1997
(in thousands, except per share amount)
-------------------------------------------------------------------------------
<S>                                                                <C>

REVENUES:
  Interest income                                                   $   222
                                                                    -------
EXPENSES:
  Research and development                                            7,040
  General and administrative                                            106
                                                                    -------
           Total                                                      7,146
                                                                    -------
NET LOSS                                                            $(6,924)
                                                                    -------
                                                                    -------
NET LOSS PER SHARE:
  Basic and diluted                                                 $ (1.09)
                                                                    -------
                                                                    -------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
  Basic and diluted                                                   6,325

</TABLE>

See accompanying notes to financial statements.

                                     F-3

<PAGE>

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

<TABLE>
<CAPTION>

STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD SEPTEMBER 23, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1997
(in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
                                       Special               Callable
                                    Common Stock           Common Stock        Additional     Unrealized
                                --------------------   --------------------     Paid-in         Gain on     Accumulated
                                 Shares      Amount     Shares      Amount      Capital       Investments     Deficit       Total
                                --------    --------   --------    --------    ----------     -----------   -----------   ---------
<S>                             <C>         <C>        <C>         <C>         <C>            <C>           <C>           <C>

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

Unrealized gain on investments                                                                   $  21                          21

Net loss                                                                                                      $(6,924)      (6,924)
                                   ----       ----      -----        ----       --------         -----        -------     --------
BALANCE, DECEMBER 31, 1997            1       $  1      6,325        $  6       $168,977         $  21        $(6,924)    $162,081
                                   ----       ----      -----        ----       --------         -----        -------     --------
                                   ----       ----      -----        ----       --------         -----        -------     --------
</TABLE>

See accompanying notes to financial statements.

                                      F-4
<PAGE>


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

<TABLE>
<CAPTION>

STATEMENT OF CASH FLOWS
FOR THE PERIOD SEPTEMBER 23, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1997
(in thousands)
---------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>

OPERATING ACTIVITIES:
  Net loss                                                                                  $  (6,924)
  Adjustments to reconcile net loss to net cash provided by operating activities:
    Compensation expense for stock options granted                                                 16
    Changes in assets and liabilities:
      Payable to Dura Pharmaceuticals, Inc.                                                     7,110
      Accrued liabilities                                                                          26
                                                                                             --------
           Net cash provided by operating activities                                              228
                                                                                             --------
INVESTING ACTIVITIES:
  Purchases of short-term investments                                                         (31,450)
                                                                                             --------
FINANCING ACTIVITIES:
  Net proceeds from issuance of special common and callable common stock                       93,968
  Contribution from Dura Pharmaceuticals, Inc. for purchase option                             75,000
  Increase in payable to Dura Pharmaceuticals, Inc. for issuance costs                          1,289
                                                                                             --------
           Net cash provided by financing activities                                          170,257
                                                                                             --------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                                     139,035

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                   --
                                                                                             --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                   $139,035
                                                                                             --------
                                                                                             --------
</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. The accompanying financial
statements reflect the activities of the Company for the period September 23,
1997 (date of incorporation) through December 31, 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 4).

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 a separate component of 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.

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.

                                     F-6
<PAGE>

NET LOSS PER SHARE - The Company incurred a net loss for the period ended
December 31, 1997 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.   SHORT-TERM INVESTMENTS

The following is a summary of the Company's short-term investments as of
December 31, 1997 (in thousands):

<TABLE>
<CAPTION>

                                                    Unrealized        Fair
                                          Cost        Gains           Value
                                         ------     ----------       -------
<S>                                    <C>          <C>              <C>

Corporate debt securities               $31,450         $21          $31,471

</TABLE>

The amortized cost and fair value of short-term investments as of December
31, 1997, by contractual maturity, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                         Fair
                                    Cost                 Value
                                   ------               -------
<S>                              <C>                  <C>

Due in one year or less           $23,788               $23,803
Due after one year through
  two years                         7,662               7,668
                                  -------             -------
                                  $31,450             $31,471
                                  -------             -------
                                  -------             -------
</TABLE>


4.   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 Compounds (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. 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.

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. The Albuterol Option is currently
exercisable and expires 360 days after receipt of U.S. Food and Drug
Administration (the "FDA") approval to market. 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.

                                     F-7
<PAGE>

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.

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 will provide certain
management and administrative services to the Company at the rate of $100,000
per calendar quarter. In addition, the Company will reimburse Dura for all
costs and expenses incurred by Dura in connection with the Offering, net of
amounts reimbursed by the underwriters. Included in payables to Dura as of
December 31, 1997 is $1,289,000 for such Offering expenses. 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.

5.   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 1,000 shares of Special Shares, of which 1,000 shares were
issued and outstanding as of December 31, 1997.

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 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 4).
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

                                     F-8
<PAGE>

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.

6.   STOCK COMPENSATION PLAN

The Company has adopted the 1997 Stock Option Plan (the "Plan") to provide
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. 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 5) 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.

In December 1997, the Company granted 548,000 options with an exercise price
of $14 per share, all of which were outstanding as of December 31, 1997. The
options expire in December 2007 and none were exercisable as of December 31,
1997.

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 period ended December 31, 1997, 341,000 options were granted to
non-employees for which the Company recorded compensation expense of $16,000.
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 period ended December 31, 1997 would
have been increased by $10,000. The estimated weighted average fair value at
grant date of options granted during the period ended December 31, 1997 was
$4.58. The fair value was estimated using the Black-Scholes option-pricing
model with the following assumptions:

<TABLE>

       <S>                                       <C>

        Expected dividend yield                    None
        Expected stock price volatility            30%
        Risk-free interest rate                    5.7%
        Expected life of options                   4 years

</TABLE>

7.   INCOME TAXES

As of December 31, 1997, the Company has a deferred tax asset totaling
approximately $2.4 million which relates primarily to federal net operating
loss carryforwards of approximately $6.9 million expiring in 2012. Because
the Company performs research and development and the prospect of generating
future earnings is uncertain, the deferred tax asset has been fully reserved.

                                     F-9