<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

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


                  For the quarterly period ended June 30, 2000

                                       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 (858) 457-2553


         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
                                             ---  ---

         The number of shares of the Registrant's Callable Common Stock and
Special Common Stock outstanding as of July 31, 2000 were 6,325,000 and 1,000,
respectively.


<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                     SPIROS DEVELOPMENT CORPORATION II, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                                 BALANCE SHEETS
                IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                             DECEMBER 31,         JUNE 30,
ASSETS                                                                         1999                 2000
                                                                         ------------------   -----------------
                                                                                                (unaudited)
<S>                                                                      <C>                  <C>
CURRENT ASSETS:
  Cash and cash equivalents                                              $          13,325    $         15,167
  Short-term investments                                                            57,718              24,184
  Other current assets                                                                  96                  75
                                                                         ------------------   -----------------

           Total current assets                                                     71,139              39,426
                                                                         ------------------   -----------------

TOTAL                                                                    $          71,139    $         39,426
                                                                         =================    ================


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Payable to Dura Pharmaceuticals, Inc.                                  $           6,720    $          5,697
  Accrued liabilities                                                                  173                 484
                                                                         ------------------   -----------------

           Total current liabilities                                                 6,893               6,181
                                                                         ------------------   -----------------
STOCKHOLDERS' EQUITY:
  Special common stock, par value $1.00, 1,000 shares
    authorized, issued, and outstanding                                                  1                   1
  Callable common stock, par value $.001, 7,500,000 shares
    authorized; 6,325,000 shares issued and outstanding                                  6                   6
  Additional paid-in capital                                                       170,191             170,517
  Accumulated other comprehensive loss                                                (171)                (66)
  Accumulated deficit                                                             (105,781)           (137,213)
                                                                         ------------------   -----------------

           Total stockholders' equity                                               64,246              33,245
                                                                         ------------------   -----------------

TOTAL                                                                    $          71,139     $        39,426
                                                                         =================    ================

</TABLE>

See accompanying notes to financial statements.


                                       2
<PAGE>


                     SPIROS DEVELOPMENT CORPORATION II, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                            STATEMENTS OF OPERATIONS
                     IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
                                   (UNAUDITED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                                               SEPTEMBER 23, 1997
                                                                                                                   (DATE OF
                                                                                                                 INCORPORATION)
                                             THREE MONTHS ENDED                    SIX MONTHS ENDED                 THROUGH
                                                   JUNE 30,                             JUNE 30,                     JUNE 30,
                                           1999              2000               1999              2000                2000
                                     -----------------  ----------------  -----------------  ----------------  --------------------
<S>                                  <C>                <C>               <C>                <C>               <C>
Expenses (with related party):
  Research and development                  $  13,292         $  16,376          $  26,608         $  31,143            $  148,193
  General and administrative                      279             1,373                556             1,856                 4,182
                                     -----------------  ----------------  -----------------  ----------------  --------------------

Operating Loss                                 13,571            17,749             27,164            32,999               152,375
                                     -----------------  ----------------  -----------------  ----------------  --------------------

Interest Income                                 1,410               692              2,997             1,567                15,369
                                     -----------------  ----------------  -----------------  ----------------  --------------------


Loss before income taxes                      (12,161)          (17,057)           (24,167)          (31,432)             (137,006)
Provision for income taxes                                                                                                     207
                                     -----------------  ----------------  -----------------  ----------------  --------------------

Net Loss                                    $(12,161)        $ (17,057)         $ (24,167)         $ (31,432)           $ (137,213)
                                     =================  ================  =================  ================  ====================

Net Loss per Share:
  Basic and diluted                         $  (1.92)        $   (2.70)         $   (3.82)         $  (4.97)            $   (21.69)
                                     =================  ================  =================  ================  ====================

Weighted Average Number of
 Common Shares:
  Basic and diluted                            6,325             6,325              6,325             6,325                  6,325
                                     =================  ================  =================  ================  ====================

</TABLE>

See accompanying notes to financial statements.


                                       3
<PAGE>


                  SPIROS DEVELOPMENT CORPORATION II, INC.
                      (A DEVELOPMENT STAGE ENTERPRISE)
                          STATEMENTS OF CASH FLOWS
                                IN THOUSANDS
                                (UNAUDITED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                                              SEPTEMBER 23, 1997
                                                                           SIX               SIX                   (DATE OF
                                                                          MONTHS           MONTHS               INCORPORATION)
                                                                          ENDED             ENDED                  THROUGH
                                                                         JUNE 30,         JUNE 30,                 JUNE 30,
                                                                           1999             2000                     2000
                                                                      ---------------  ----------------      ---------------------
<S>                                                                   <C>              <C>                   <C>
NET CASH USED IN OPERATING ACTIVITIES                                 $     (23,369)   $      (31,797)       $      (129,480)
                                                                      ---------------  ----------------      ---------------------

INVESTING ACTIVITIES:
  Purchases of short-term investments                                       (20,431)                                (203,917)
  Sales of short-term investments                                            49,652            33,639                179,667
                                                                      ---------------  ----------------      ---------------------

           Net cash provided by (used in) investing activities               29,221            33,639                (24,250)
                                                                      ---------------  ----------------      ---------------------

FINANCING ACTIVITIES:
  Net proceeds from issuance of special common and callable
    common stock                                                                                                      93,897
  Contribution from Dura Pharmaceuticals, Inc. for
    purchase option                                                                                                   75,000
                                                                      ---------------  ----------------      ---------------------

           Net cash provided by financing activities                                                                 168,897
                                                                      ---------------  ----------------      ---------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                     5,852             1,842                 15,167

CASH AND CASH EQUIVALENTS AT
 BEGINNING OF PERIOD                                                         20,535            13,325
                                                                      ---------------  ----------------      ---------------------

CASH AND CASH EQUIVALENTS AT
 END OF PERIOD                                                        $      26,387    $       15,167        $        15,167
                                                                      ===============  ================      =====================

</TABLE>

See accompanying notes to financial statements.


<PAGE>


                     SPIROS DEVELOPMENT CORPORATION II, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.       BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared by Spiros
Development Corporation II, Inc. ("Spiros Corp. II" or the "Company") in
accordance with the instructions to Form 10-Q. The financial statements reflect
all adjustments, consisting of only normal recurring accruals, which are, in the
opinion of management, necessary for a fair statement of the results of the
periods presented. For more complete financial information, these financial
statements and notes thereto should be read in conjunction with the audited
financial statements and notes thereto for the periods ended December 31, 1999
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission. The results of operations for the interim periods are
not necessarily indicative of results to be expected for any other interim
periods or for the year as a whole.

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.

2.       ORGANIZATION

Spiros Corp. II was incorporated in the state of Delaware on September 23, 1997
for the purpose of continuing the development of Spiros(R), 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 drugs for use with Spiros. The Company commenced
operations on December 22, 1997.

On December 22, 1997, the Company and Dura Pharmaceuticals, Inc. ("Dura")
completed an initial public offering (the "Offering") of 6,325,000 Units, each
Unit consisting of one share of callable common stock of the Company and one
warrant to purchase one-fourth of one share of Dura common stock at a price per
share of $54.84. 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 with Dura. Through December 31, 1999, each share
of the Company's callable common stock traded publicly as a unit with the
warrant to purchase one-fourth of one share of Dura's common stock. As of
January 1, 2000, the warrant began trading as a separate security.


                                       5
<PAGE>


3.       DEFINITIVE MERGER AGREEMENT WITH DURA PHARMACEUTICALS, INC.

In March 2000 the Company entered into a merger agreement with Dura. Under the
agreement, each holder of our callable common stock will receive $13.25 in cash
and a warrant to purchase a fractional share of Dura's common stock for each
share of callable common stock held. The warrant will be immediately exercisable
at $17.94 per share, which represents a 25% premium over the average closing
price of Dura's common stock for the ten trading days prior to the date of the
merger agreement, and will expire five years from the date the merger is
completed. The exact fraction of a share of Dura's common stock purchasable
under the warrant will be determined based on the average closing price of
Dura's common stock for the ten trading days prior to the vote of the Company's
stockholders on the merger and will result in a calculated value, using the
Black-Scholes option pricing model, for each warrant between $3.22 and $1.81.
Closing of the transaction is subject to the Company's stockholder approval. The
Company and Dura have received voting agreements in favor of the merger from
holders of approximately 22% of our outstanding callable common stock. A special
committee of independent members of the Company's board, formed in December 1999
to evaluate our strategic alternatives, has approved the merger agreement and is
recommending that our stockholders approve the merger. The Company has delivered
a proxy statement describing the terms of the merger agreement in greater detail
to our stockholders. A special meeting of the Company's stockholders will be
held on August 31, 2000 to vote on the proposed merger.

On July 24, 2000, Dura announced the implementation of a refocused strategy. As
part of this strategy, Dura will, upon the successful completion of the proposed
merger, discontinue the development of all motorized Spiros cassette programs,
including drugs being developed by the Company. Dura intends to focus its
development efforts on next generation, motorless Spiros systems which are
designed to be smaller, lighter, and significantly less costly to manufacture.
With this change in strategy, all future development by Dura of the drugs it is
acquiring from the Company will be for use in the motorless Spiros systems.

The Company's current development plan and budget for 2000 may result in the
Company expending all cash during the second half of the year. The development
plan and budget for the second half of 2000 are subject to change in the event
the merger with Dura is not completed.

4.       REPORTING COMPREHENSIVE LOSS

Comprehensive loss includes net loss and unrealized gains and losses on
investments. The accumulated balance of other comprehensive loss is disclosed as
a separate component of stockholders' equity. For the three and six months ended
June 30, 1999 and 2000, and the period September 23, 1997 (date of
incorporation) through June 30, 2000, comprehensive loss consisted of (in
thousands):


                                       6
<PAGE>


<TABLE>
<CAPTION>

                                            Three                         Six              September 23, 1997
                                         Months Ended                Months Ended       (date of incorporation)
                                            June 30,                    June 30,            through June 30,
                                      1999           2000          1999          2000             2000
                                      ----           ----          ----          ----             ----
<S>                                 <C>            <C>           <C>           <C>           <C>
Net loss                            $(12,161)      $(17,057)     $(24,167)     $(31,432)     $ (137,213)
Other comprehensive income (loss):

    Unrealized gain (loss)
        on investments                  (216)            55          (279)          105             (66)
                                    --------       --------      --------      --------      ----------
Comprehensive loss                  $(12,377)      $(17,002)     $(24,446)     $(31,327)     $ (137,279)
                                    ========       ========      ========      ========      ==========

</TABLE>

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

This information should be read in conjunction with the financial statements and
the notes thereto included in Item 1 of this Quarterly Report and the audited
financial statements and notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations for the year ended December 31,
1999 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission. This report on Form 10-Q may contain certain
forward-looking statements concerning our business. See "Risks and
Uncertainties" for a discussion of factors known to us that could cause reported
financial information not to be indicative of future results. We undertake no
obligation to release publicly the results of any revisions to these
forward-looking statements to reflect events and circumstances arising after the
date hereof.

GENERAL

Spiros Development Corporation II, Inc. was incorporated in the state of
Delaware on September 23, 1997 for the purpose of continuing the development of
Spiros(R), 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 drugs for use with
Spiros(R). We commenced operations on December 22, 1997.

On December 22, 1997, we and Dura completed an initial public offering of
6,325,000 units, each unit consisting of one share of our callable common stock
and one warrant to purchase one-fourth of one share of Dura common stock at a
price of $54.84 per share. The offering resulted in net proceeds to us of
approximately $94 million. Concurrently, Dura contributed $75 million to us. We
expect to pay to Dura substantially all funds from the offering and the $75
million contribution from Dura and interest earned on these funds for the
development and commercialization of Spiros and the use of Spiros with specified
drugs under our various agreements with Dura.


                                       7
<PAGE>


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

In March 2000 we entered into a merger agreement with Dura. Under the agreement,
each holder of our callable common stock will receive $13.25 in cash and a
warrant to purchase a fractional share of Dura's common stock for each share of
callable common stock held. The warrant will be immediately exercisable at
$17.94 per share, which represents a 25% premium over the average closing price
of Dura's common stock for the ten trading days prior to the date of the merger
agreement, and will expire five years from the date the merger is completed. The
exact fraction of a share of Dura's common stock purchasable under the warrant
will be determined based on the average closing price of Dura's common stock for
the ten trading days prior to the vote of our stockholders on the merger and
will result in a calculated value, using the Black-Scholes option pricing model,
for each warrant between $3.22 and $1.81. Closing of the transaction is subject
to our stockholders approval. We and Dura have received voting agreements in
favor of the merger from holders of approximately 22% of our outstanding
callable common stock. A special committee of independent members of the
Company's board, formed in December 1999 to evaluate our strategic alternatives,
has approved the merger agreement and is recommending that our stockholders
approve the merger. We have delivered a proxy statement describing the terms of
the merger agreement in greater detail to our stockholders. A special meeting of
our stockholders will be held on August 31, 2000 to vote on the proposed merger.

On July 24, 2000, Dura announced the implementation of a refocused strategy. As
part of this strategy, Dura will, upon the successful completion of the proposed
merger, discontinue the development of all motorized Spiros cassette programs,
including drugs being developed by us. Dura intends to focus its development
efforts on next generation, motorless Spiros systems which are designed to be
smaller, lighter, and significantly less costly to manufacture. With this change
in strategy, all future development by Dura of the drugs it is acquiring from us
will be for use in the motorless Spiros systems.

Our current development plan and budget for 2000 may result in us expending all
cash during the second half of the year. The development plan and budget for the
second half of 2000 are subject to change in the event the merger with Dura is
not completed.

In the event the merger is not completed, Dura, as holder of 100% of the
outstanding shares of our special common stock, still has an irrevocable option
to purchase all, but not less than all, of the issued and outstanding shares of
our callable common stock at predetermined prices. Dura may exercise the
purchase option at any time through the earlier of:


                                       8
<PAGE>


-        December 31, 2002;
-        the 90th day after the date we provide Dura with our quarterly
         financial statements showing cash or cash equivalents of less than $5
         million, although Dura may extend such period by providing additional
         funding for the continued development of Spiros, but in no event beyond
         December 31, 2002; or
-        upon termination of the technology license, development, or the
         manufacturing agreements with Dura.

The purchase option exercise price per share is $27.96 through September 30,
2000, and increases 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.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1999 AND 2000

We incurred net losses of $12.2 million and $17.1 million for the three months
ended June 30, 1999 and 2000, respectively. Research and development costs
totaled $13.3 million and $16.4 million for the second quarter of 1999 and 2000,
respectively, and general and administrative expenses totaled $279,000 and $1.4
million, respectively, for the same periods. The research and development
expenses were for Spiros-related activities performed by Dura under agreements
with us. The increase in general and administrative expenses was primarily
attributable to legal, accounting, and financial advisory costs incurred in
connection with the proposed merger with Dura. Interest income for the second
quarter of 1999 and 2000 totaled $1.4 million and $692,000, respectively. The
decline results from lower balances of cash and short-term investments during
the second quarter of 2000 versus the second quarter of 1999. We expect our
interest income to continue to decrease in future periods as our funds are used
in the development of Spiros products.

SIX MONTHS ENDED JUNE 30, 1999 AND 2000

We incurred net losses of $24.2 million and $31.4 million for the six months
ended June 30, 1999 and 2000, respectively. Research and development costs
totaled $26.6 million and $31.1 million for the first six months of 1999 and
2000, respectively, and general and administrative expenses totaled $556,000 and
$1.9 million, respectively, for the same periods. The research and development
expenses were for Spiros-related activities performed by Dura under agreements
with us. The increase in general and administrative expenses was primarily
attributable to legal, accounting, and financial advisory costs incurred in
connection with the proposed merger with Dura. Interest income for the first six
months of 1999 and 2000 totaled $3 million and $1.6 million, respectively. The
decline results from lower balances of cash and short-term investments during
the first six months of 2000 versus the first six months of 1999. We expect our
interest income to continue to decrease in future periods as our funds are used
in the development of the Spiros products.


                                       9
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

Our initial capitalization totaled $169 million, consisting of net proceeds from
our initial public offering of approximately $94 million and a $75 million
contribution from Dura. At June 30, 2000, we had cash, cash equivalents, and
short-term investments totaling $39.4 million and working capital totaling $33.2
million, a decrease of $31.7 million and $31 million, respectively, from
December 31, 1999. Based on our current development plan and budget for the
Spiros products, we expect to expend all of our existing cash during the second
half of 2000. Further, we do not believe that our existing cash will be
sufficient to complete the development of any Spiros product. In the event the
merger with Dura is not consummated, the use of our existing funds will require
Dura to consider whether to exercise its option to purchase our callable common
stock under the contractual terms, which it may not be prepared to do at that
time. Until the expiration of Dura's option, we are restricted from raising
additional funds without Dura's consent. While Dura may, at its sole option,
provide funds for further development of the Spiros products or infuse
additional capital into us through the exercise of Dura's product purchase
options, it is not obligated to do so. In addition, on July 24, 2000, Dura
announced its refocused growth strategy including an immediate reduction in
overall development spending. Upon the successful completion of the proposed
merger, Dura will discontinue the development of all motorized Spiros cassette
programs, including Beclomethasone Spiros(TM) and Budesonide Spiros(TM). If Dura
fails to provide additional funding, we will explore the other strategic
alternatives available to us, including liquidation, sale to a third party, or
licensing of the technology. There can be no assurance that any of these
alternatives will be successful.

As noted above, in March 2000, we entered into a definitive merger agreement
with Dura for the acquisition by Dura of all the outstanding shares of our
callable common stock. Under the merger agreement, Dura will purchase each share
of callable common stock for $13.25 in cash plus one five-year warrant to
purchase a fractional share of Dura common stock at $17.94 per share.
Closing of the acquisition is subject to approval by our stockholders.

RISKS AND UNCERTAINTIES

FORWARD-LOOKING STATEMENTS. We caution readers that the statements in this
quarterly report that are not descriptions of historical facts may be
forward-looking statements that are subject to risks and uncertainties. Actual
results could differ from those currently anticipated due to a number of
factors, including those identified below.

WE FACE RISKS ASSOCIATED WITH THE PENDING MERGER WITH DURA.

THE FRACTIONAL SHARES OF DURA COMMON STOCK UNDERLYING EACH WARRANT WILL VARY AS
DURA'S STOCK PRICE CHANGES AND OUR STOCKHOLDERS MAY NOT BE SURE HOW MANY SHARES
WILL BE ISSUABLE UNDER EACH WARRANT UNTIL AFTER THEY HAVE CAST THEIR VOTE.

Under the merger agreement, each share of our callable common stock will be
converted into the right to receive $13.25 in cash and a warrant to purchase a
fractional share of Dura common


                                       10
<PAGE>


stock. The fraction of a share of Dura common stock issuable under the warrant
will be determined based on the average closing price of Dura common stock for
the 10 trading days prior to the special meeting and will result in a calculated
value, using the Black-Scholes option pricing model, for each warrant of between
$3.22 and $1.81. As of July 31, 2000, the fraction of a share purchasable under
each warrant would be 0.2652 with a Black-Scholes calculated value of $3.22.
There can be no assurance, however, that the fraction issuable will be the same
at the closing date or that the market price of the warrant will equal the
Black-Scholes calculated value of the warrant. The price of Dura common stock at
the date of the special meeting may vary from the price on the date of this
document and on the date of the closing of the merger and that variance could
affect the value of the warrant. The trading price of Dura's common stock may
vary because of:

         -        changes in Dura's or our business, operations or prospects;
         -        market assessments of the likelihood that the merger will be
                  completed;
         -        the timing of the completion of the merger;
         -        the prospects of post-merger operations;
         -        regulatory considerations; and
         -        general market and economic conditions and other factors.

FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT OUR STOCK PRICE AND
FUTURE BUSINESS AND OPERATIONS.

If the merger is not completed for any reason, we may be subject to a number of
material risks, including the following:

         -        our existing working capital and expected interest income may
                  not be sufficient to fund our cash requirements through the
                  end of 2000;
         -        raising additional cash to fund our ongoing activities is
                  likely to be very difficult in light of the contractual
                  arrangements between us and Dura;
         -        the price of our callable common stock may decline to the
                  extent that the current market price of our callable common
                  stock reflects a market assumption that the merger will be
                  completed; and
         -        various costs of the merger, such as legal and accounting fees
                  and the expenses and fairness opinion fees of our financial
                  advisor, must be paid even if the merger is not completed.

Further, if the merger is terminated and our board of directors determines to
seek another merger or business combination, we may not be able to find a
partner willing to pay an equivalent or more attractive price than the price to
be paid in the merger. These risks are magnified by Dura's announcement on July
24, 2000 of its intent to terminate the motorized cassette programs following
completion of the proposed merger.


                                       11
<PAGE>


WE FACE RISKS ASSOCIATED WITH OUR OPERATIONS.

SPIROS TECHNOLOGY REQUIRES SIGNIFICANT ADDITIONAL DEVELOPMENT, WHICH IS COSTLY,
TIME-CONSUMING AND MAY NEVER BE COMMERCIALLY SUCCESSFUL.

Spiros, our proprietary dry powder pulmonary drug delivery system, will require
significant additional development efforts as well as clinical testing. This
work is very costly and time consuming. Even after spending significant amounts
of money and time, the development and commercialization, if any, of any Spiros
product may not be successful.

WE MAY NOT HAVE SUFFICIENT FUNDS TO COMPLETE THE DEVELOPMENT OF ANY SPIROS
PRODUCT.

If the merger with Dura is not completed, we do not believe that our current
available funds will be adequate to complete the development or regulatory
review process for any of the Spiros products. Until the expiration of Dura's
purchase option, we are significantly restricted from raising additional funds
without Dura's consent. While Dura may, at its sole option, provide funds for
further development of the Spiros products or provide additional cash to us
through the exercise of the albuterol or product purchase options, it is not
obligated to do so. In addition, on July 24, 2000, Dura announced its refocused
growth strategy including an immediate reduction in overall development
spending. Upon the successful completion of the proposed merger, Dura will
discontinue the development of all motorized Spiros cassette programs, including
Beclomethasone Spiros(TM) and Budesonide Spiros(TM). Dura may not have adequate
information available to it when our funds are depleted to make a decision on
the exercise of the albuterol or product option. If the purchase option or
either the albuterol or product options is not exercised by Dura, and the merger
agreement is not completed, we would have to raise substantial funding while
hiring, or otherwise obtaining access to, research and management personnel to
perform the work now performed by Dura. We may not be successful in doing any of
these tasks.

DURA MAY NOT EXERCISE ITS OPTIONS.

In the event the merger with Dura is not completed, Dura is not obligated to
exercise its stock purchase option, the albuterol purchase option or the second
product purchase option, and it will exercise these options only if Dura's board
of directors determines that it is in Dura's best interest to do so. Even if the
Spiros products are developed and approved, if Dura does not exercise any of its
options, we will be required to find alternative ways to commercially market or
exploit the Spiros products. We may not be able to do so. If we attempt to
develop or market the Spiros products ourselves, we will require substantial
additional funds. We may not be able to raise funds when needed. Similarly, if
we elect to license the Spiros products to third parties, such arrangements, if
available, may be on terms less favorable to us than the terms of our
arrangements with Dura.


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<PAGE>


BEFORE WE CAN MARKET ANY SPIROS PRODUCT, WE WILL HAVE TO OBTAIN REQUIRED
GOVERNMENTAL APPROVALS, WHICH IS NOT ASSURED.

The development, testing, manufacturing and marketing of pharmaceutical products
are subject to extensive regulation by governmental authorities, including the
FDA. The FDA must approve each Spiros product before that product can be
manufactured or marketed for commercial sale. Failure to obtain such approvals
could result in Dura not exercising its purchase option for our callable common
stock. The review and approval process mandated by the FDA is very rigorous,
requiring extensive preclinical and clinical testing as well as determining
manufacturing capability and product performance. None of the products currently
in development may ever be approved by the FDA.

WE ARE DEPENDENT ON DURA FOR ALL ACTIVITIES IN THE DEVELOPMENT OF SPIROS
PRODUCTS.

We do not have manufacturing or marketing capabilities. We and Dura will
determine specified activities to be undertaken under the development agreement.
In all events Dura will have substantial influence over all activities and
procedures, including the timing and priorities of these activities and
procedures, to be undertaken under our agreements with Dura. Dura has no
obligation to complete any development or other activity after all of our funds
have been spent. Dura's own projects and other third party projects may compete
for time and resources with our projects. The resources that Dura uses for our
projects may therefore be limited.

Under our agreements with Dura, we are obligated to use only Dura's facilities
for manufacturing in the U.S. during the term of the manufacturing and marketing
agreement. Dura has the right to use contract manufacturers and currently plans
to rely on third parties to manufacture certain components of Spiros. Dura's
facilities or those of its contract manufacturers may not be adequate for our
needs. In addition, Dura or its contract manufacturers may require additional
FDA approvals prior to commencing manufacturing of Spiros products. The Spiros
products may not be manufacturable, whether by Dura or a contract manufacturer,
on a commercial scale, for commercially reasonable cost or on a timely basis. We
have no experience in sales, marketing or distribution. Under the manufacturing
and marketing agreement, Dura has exclusive worldwide marketing rights to the
Spiros products. Dura's sales and marketing force may not be able to establish
commercially successful sales and distribution capabilities for the Spiros
products.

DURA WILL NEED TO SIGNIFICANTLY EXPAND ITS MANUFACTURING CAPABILITY AND COMPLY
WITH GOVERNMENT REGULATIONS BEFORE IT CAN MANUFACTURE ANY SPIROS PRODUCTS ON OUR
BEHALF.

If Dura or other third parties are not successful in attaining acceptable
manufacturing quality levels or meeting regulatory requirements, our ability to
commercialize the Spiros products will be adversely affected. Dura will need to
significantly expand its current manufacturing operations and comply with
regulations prescribed by various regulatory agencies to achieve the quality and
required levels of production of our products to obtain marketing approval. In
addition, Dura's manufacturing facility must be registered with and licensed by
various regulatory authorities and must comply with current good manufacturing
practice requirements prescribed by the FDA and the State of California. Any
third parties used in manufacturing Spiros will be required to


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<PAGE>


significantly scale up their activities and to produce components which meet
applicable specifications on a timely and consistent basis.

THE PHARMACEUTICAL INDUSTRY IS EXTREMELY COMPETITIVE.

Many companies, including large pharmaceutical firms with financial and
marketing resources and development capabilities substantially greater than
ours, are engaged in developing, marketing and selling products that compete
with those that we plan to offer. Our failure to effectively respond to the
competitive pressures of our industry would have an adverse effect on our
ability to effectively sell our products. The selling prices of such products
typically decline as competition increases. Further, other products now in use
or under development by others may be more effective than our current or future
products. The industry is characterized by rapid technological change, and
competitors may develop their products more rapidly than us. Competitors may
also be able to complete the regulatory process sooner, and therefore, may begin
to market their products in advance of our products.

WE DO NOT HAVE A LONG OPERATING HISTORY AND WE MAY NEVER ACHIEVE PROFITABILITY
OR PAY DIVIDENDS.

We have a limited operating history upon which investors may base an evaluation
of our likely financial performance. We anticipate that substantially all of our
available funds will be expended prior to the receipt of any significant
revenues, resulting in significant losses. Further, even if the Spiros products
are developed or marketed under the agreements with Dura, they may not be able
to be marketed profitably. Even if such Spiros products are commercialized
profitably, we may never recover our initial losses. We are prevented from
paying dividends on our common stock without the approval of Dura, and
accordingly, do not expect to pay any dividends.

POTENTIAL COMPETITION FROM DURA MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS.

Dura is engaged in ongoing licensing and development of new products. While Dura
has exclusively licensed to us the rights to develop, manufacture and
commercialize the specified Spiros products, Dura is not prohibited from
developing other products using Spiros, including those products that may
compete with our Spiros products, or from in-licensing or acquiring products
that may compete with the Spiros products. Dura's activities may lead to the
development, in-licensing or acquisition of products that compete with our
Spiros products. It is possible that Dura's rights with respect to such
competitive products could reduce Dura's incentive to exercise the albuterol
option, the other product option or the stock purchase option.

DURA HAS THE ABILITY TO LIMIT SPECIFIED ACTIVITIES.

Until the expiration of the purchase option, Dura must approve specified
activities, including:

         -        information regarding our proposed merger with Dura;
         -        issuing our securities;


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<PAGE>


         -        borrowing an aggregate of more than $1 million at any one
                  time;
         -        selling a material part of our business or assets;
         -        declaring or paying dividends or making any other
                  distributions to our stockholders;
         -        merging or consolidating with any other corporation; and
         -        adopting, amending or repealing our bylaws.

Accordingly, Dura could preclude our stockholders and board of directors from
taking any of these actions prior to the expiration of the purchase option.
Dura, as holder of all of our outstanding special common stock, may transfer or
sell all, but not less than all, of its shares. As a result, an unrelated third
party may acquire rights associated with the special common stock, including the
rights discussed in this section and the right to exercise the albuterol option,
the product option and the purchase option. An acquiror of the special common
stock may not have the same financial resources or development, manufacturing or
marketing capabilities as Dura, which may reduce the likelihood of the exercise
of the albuterol option, the other product option or the stock purchase option.

OUR ABILITY TO OBTAIN PATENTS AND PROTECT OUR PROPRIETARY RIGHTS IS UNCERTAIN
AND COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.

Our ability to obtain patents on current or future products or technologies,
defend our patents, maintain trade secrets and operate without infringing upon
the proprietary rights of others both in the U.S. and abroad is uncertain.
Patents may never issue. Even if issued or licensed to us, patents may not be
enforceable, provide substantial protection from competition or be of commercial
benefit to us. Even if all these are true, we may not possess the financial
resources necessary to enforce or defend any patent rights we hold or obtain.
Our commercial success will also depend upon avoiding the infringement of
patents issued to competitors and upon maintaining the technology licenses upon
which specified Dura products are based. Litigation, which is costly, may be
necessary to enforce our patent and license rights or to determine the scope and
validity of proprietary rights of third parties. If any of our products or
technologies are found to infringe upon patents or other rights owned by third
parties, we could be required to obtain a license to continue to manufacture or
market such products or technologies. Licenses to such patent rights may not be
available to us on commercially reasonable terms, if at all. If we do not obtain
such licenses, we could encounter delays in marketing affected products or
technologies or we could find that the development, manufacture or sale of
products requiring such licenses is not possible.

OUR STOCK PRICE IS VOLATILE.

The market prices for securities of emerging companies, including ours, have
historically been highly volatile. Future announcements concerning our
competitors or us may have a significant impact on the market price of our
callable common stock.
Such announcements might include:

         -        financial results;


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<PAGE>


         -        the results of clinical testing or other developments with our
                  competitors' products;
         -        regulatory developments;
         -        technological innovations;
         -        new commercial products;
         -        changes to government regulations;
         -        regulatory decisions on commercialization of products;
         -        developments concerning proprietary rights;
         -        litigation or public concern as to safety of our products; or
         -        our failure to achieve securities analysts' expectations
                  concerning our earnings per share.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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


                           PART II - OTHER INFORMATION

ITEM 2.   CHANGE IN SECURITIES AND USE OF PROCEEDS

Use of Proceeds from Registered Securities

On December 22, 1997, we and Dura completed an initial public offering of
6,325,000 units. Each unit consisted of one share of our callable common stock
and one warrant to purchase one-fourth of one share of Dura common stock,
pursuant to a registration statement on Form S-1/S-3 (No. 333-37673/37673-01).
The registration statement was declared effective on December 16, 1997. The net
proceeds from the offering were invested in cash, cash equivalents and
short-term investments. As of June 30, 2000, we have used $129.5 million of our
cash, cash equivalents and short-term investments, all of which has been paid to
Dura for our operating activities and we have $33.2 million of working capital.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

            EXHIBIT NO.       DESCRIPTION

(1)         3.1               Amended and Restated Certificate of Incorporation


                                       16
<PAGE>


(1)         3.2               Amended and Restated Bylaws

            27                Financial Data Schedule


            (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.

(b)      Reports on Form 8-K

None


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<PAGE>


                                   SIGNATURES


         PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.

                                   SPIROS DEVELOPMENT CORPORATION II, INC.


Date: August 11, 2000                        /s/ Erle T. Mast
---------------------                       -------------------
                                            (Erle T. Mast)
                                            Vice President, and
                                            Chief Financial Officer
                                            (Principal Financial Officer)


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