<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 September 30, 1999

                                       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 November 1, 1999 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,   SEPTEMBER 30,
ASSETS                                                           1998          1999
                                                              ------------   ------------
                                                                              (unaudited)
<S>                                                           <C>            <C>
CURRENT ASSETS:
  Cash and cash equivalents                                    $  20,535      $  19,103
  Short-term investments                                         103,069         68,635
  Other current assets                                               192            119
                                                               ---------      ---------

           Total current assets                                  123,796         87,857
                                                               ---------      ---------

TOTAL                                                          $ 123,796      $  87,857
                                                               =========      =========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Payable to Dura Pharmaceuticals, Inc.                        $   4,597      $   6,552
  Accrued liabilities                                                281            176
                                                               ---------      ---------

           Total current liabilities                               4,878          6,728
                                                               ---------      ---------

SHAREHOLDERS' EQUITY:
  Special common stock, par value $1.00, 1,000 shares
    authorized, issued, and outstanding                                1              1
  Callable common stock, par value $.001, 7,500,000 shares
    authorized; 6,325,000 shares issued and outstanding                6              6
  Additional paid-in capital                                     169,404        170,069
  Accumulated other comprehensive income (loss)                      224           (137)
  Accumulated deficit                                            (50,717)       (88,810)
                                                               ---------      ---------

           Total shareholders' equity                            118,918         81,129
                                                               ---------      ---------

TOTAL                                                          $ 123,796      $  87,857
                                                               =========      =========
</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      NINE MONTHS ENDED          THROUGH
                                                              SEPTEMBER 30,           SEPTEMBER 30,         SEPTEMBER 30,
                                                             1998       1999        1998        1999           1999
                                                         ----------  ----------  ----------  ----------  -------------------
<S>                                                      <C>         <C>         <C>         <C>         <C>
REVENUES:
  Interest income                                        $    1,995  $    1,258  $    6,434  $    4,255  $            12,716
                                                         ----------  ----------  ----------  ----------  -------------------

EXPENSES:
  Research and development                                   13,443      14,891      37,788      41,499               99,338
  General and administrative                                    239         293         781         849                1,981
                                                         ----------  ----------  ----------  ----------  -------------------

           Total expenses                                    13,682      15,184      38,569      42,348              101,319
                                                         ----------  ----------  ----------  ----------  -------------------
OPERATING LOSS BEFORE
 INCOME TAXES                                               (11,687)    (13,926)    (32,135)    (38,093)             (88,603)
PROVISION FOR INCOME TAXES                                       60                     146                              207
                                                         ----------  ----------  ----------  ----------  -------------------

NET LOSS                                                 $  (11,747) $  (13,926) $  (32,281) $  (38,093) $           (88,810)
                                                         ==========  ==========  ==========  ==========  ===================

NET LOSS PER SHARE:
  Basic and diluted                                      $    (1.86) $    (2.20) $    (5.10) $    (6.02) $            (14.04)
                                                         ==========  ==========  ==========  ==========  ===================

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
                                                                               NINE                NINE              (DATE OF
                                                                              MONTHS              MONTHS          INCORPORATION)
                                                                               ENDED              ENDED               THROUGH
                                                                           SEPTEMBER 30,      SEPTEMBER 30,        SEPTEMBER 30,
                                                                                1998               1999                1999
                                                                         ----------------    ---------------    ------------------
<S>                                                                      <C>                 <C>                <C>
NET CASH USED IN OPERATING ACTIVITIES                                    $        (34,340)   $       (35,505)   $          (81,022)
                                                                         ----------------    ---------------    ------------------

INVESTING ACTIVITIES:
  Purchases of short-term investments                                            (115,949)           (29,559)             (203,917)
  Sales of short-term investments                                                  44,281             63,632               135,145
                                                                         ----------------    ---------------    ------------------

           Net cash provided by (used in) investing activities                    (71,668)            34,073               (68,772)
                                                                         ----------------    ---------------    ------------------

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
  Decrease in payable to Dura Pharmaceuticals, Inc. for
    issuance costs                                                                 (1,289)
                                                                         ----------------    ---------------    ------------------
           Net cash provided by (used in) financing activities                     (1,289)                                 168,897
                                                                         ----------------    ---------------    ------------------

NET INCREASE (DECREASE) IN CASH
 AND CASH EQUIVALENTS                                                            (107,297)            (1,432)               19,103

CASH AND CASH EQUIVALENTS AT
 BEGINNING OF PERIOD                                                              139,035             20,535
                                                                         ----------------    ---------------    ------------------

CASH AND CASH EQUIVALENTS AT
 END OF PERIOD                                                           $         31,738    $        19,103    $           19,103
                                                                         ================    ===============    ==================

</TABLE>

See accompanying notes to financial statements.


                                                          4
<PAGE>


                   SPIROS DEVELOPMENT CORPORATION II, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)
                         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 period
September 23, 1997 (date of incorporation) through December 31, 1998 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 in September 1997
to continue the development of Spiros-Registered Trademark-, a dry powder
pulmonary drug delivery system, and to conduct formulation work, clinical
trials and commercialization activities for specified leading drugs used to
treat asthma and chronic obstructive pulmonary disease, also known as COPD,
for use with Spiros. The Company commenced operations on December 22, 1997
when the Company and Dura Pharmaceuticals, Inc. ("Dura") completed a $101
million initial public offering of 6,325,000 units, each unit consisting of
one share of the Company's callable common stock and one warrant to purchase
one-fourth of one share of Dura's common stock. The offering resulted in net
proceeds to the Company of approximately $94 million. Concurrent with the
offering, Dura contributed $75 million to the Company. We expect to pay to
Dura substantially all funds from the offering, the $75 million contribution
and interest earned on these funds for the development and commercialization
of Spiros and the use of Spiros with specified compounds.

3.       REPORTING COMPREHENSIVE INCOME

Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") requires reporting and displaying comprehensive income
(loss) and its components which, for Spiros Corp. II, includes net loss and
unrealized gains and losses on investments. In accordance with SFAS 130, the
accumulated balance of other comprehensive income is disclosed as a separate
component of shareholders' equity.


                                       5
<PAGE>

For the three and nine months ended September 30, 1998 and 1999, and the
period September 23, 1997 (date of incorporation) through September 30, 1999,
comprehensive income (loss) consisted of (in thousands):

<TABLE>
<CAPTION>

                                                        Three                 Nine              September 23, 1997
                                                    Months Ended          Months Ended       (date of incorporation)
                                                    September 30,         September 30,       through September 30,
                                                   1998       1999       1998       1999               1999
                                                   ----       ----       ----       ----               ----
<S>                                             <C>        <C>         <C>        <C>        <C>
Net loss                                        $(11,747)  $(13,926)   $(32,281)  $(38,093)  $              (88,810)
Other comprehensive income (loss):

    Unrealized gain (loss)
        on investments                               447        (82)        355       (361)                    (137)
                                                --------   --------    --------   --------   ----------------------

Comprehensive loss                              $(11,300)  $(14,008)   $(31,926)  $(38,454)  $              (88,947)
                                                ========   ========    ========   ========   ======================
</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 related notes included in Item 1 of this quarterly report, and the
audited financial statements and related notes and Management's Discussion
and Analysis of Financial Condition and Results of Operations for the year
ended December 31, 1998, included in our Annual Report on Form 10-K filed
with the SEC. 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 our actual results to
differ from the results discussed in any forward-looking statements. We
undertake no obligation to release publicly the results of any revisions to
these forward-looking statements to reflect events and circumstances arising
after the date of this quarterly report.

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-Registered Trademark-, a dry powder pulmonary drug delivery system,
and to conduct formulation work, clinical trials and commercialization
activities for specified leading drugs used to treat asthma and chronic
obstructive pulmonary disease, also known as COPD, for use with Spiros. We
commenced operations on December 22, 1997.

On December 22, 1997, we and Dura Pharmaceuticals, Inc. 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


                                       6
<PAGE>

contributed $75 million to us. We expect to pay to Dura substantially all
funds from the offering, 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 compounds under 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 and the callable common stock will trade separately.

In November 1997, Dura submitted on our behalf, a new drug application to the
FDA for albuterol in the Spiros cassette system which we call Albuterol
Spiros-TM-. On November 4, 1998, we announced the receipt of a complete
response letter from the FDA indicating that the new drug application is not
approvable until and unless specified deficiencies are addressed. The FDA
requested that Dura, on our behalf, complete additional clinical trials on
the Spiros system to ensure the system is reliable and to demonstrate that
the system can achieve the same results as the original clinical trials. The
FDA has also requested that several chemistry, manufacturing, and control
issues, as well as certain electromechanical reliability issues be resolved.
As a result of several meetings with the FDA, we and Dura have determined the
requirements to address these issues and support a resubmission of the
Albuterol Spiros new drug application. We are currently addressing chemistry,
manufacturing and control (CMC) issues for Albuterol Spiros. We have also
recently prioritized the development work on our inhaled steroid products,
Beclomethasone Spiros-TM- and Budesonide Spiros-TM-. In October of this year,
we, together with Dura, announced the commencement of pivotal clinical
studies and a dose-targeting study for Beclomethasone Spiros and Budesonide
Spiros, respectively. We cannot predict or assure the successful outcome of
additional clinical trials to support the submission of a new drug
application for any of these products, or if the FDA will ever approve a new
drug application for any of these products.

Dura, as holder of 100% of the outstanding shares of our special common
stock, has an irrevocable option to purchase all, but not less than all, of
the issued and outstanding shares of 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 we provide Dura
with our quarterly financial statements showing cash or cash equivalents of
less than $5 million, although Dura may extend such period through December
31, 2002 by providing additional funding for the continued development of
Spiros, or (c) upon termination of the technology license, development, or
the manufacturing agreements between us and Dura. If this 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.

RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999

We incurred net losses of $11.7 million and $32.3 million for the three and
nine months ended September 30, 1998 and 1999, respectively, as compared to
$13.9 million and $38.1 million for the same periods in 1999, respectively.
For the third quarter of 1998 and 1999, research and development costs
totaled $13.4 million and $14.9 million, respectively, and general and


                                       7
<PAGE>

administrative expenses totaled $239,000 and $293,000, respectively. For the
first nine months of 1998 and 1999, research and development costs totaled
$37.8 million and $41.5 million, respectively, and general and administrative
expenses totaled $781,000 and $849,000, respectively. The research and
development expenses were for Spiros-related activities performed by Dura
under a development agreement. We expect research and development expenses to
increase significantly beginning in the fourth quarter of 1999, as we have
initiated clinical trials for Beclomethasone Spiros and Budesonide Spiros.
Our interest income for the third quarter of 1998 and 1999 totaled $2 million
and $1.3 million, respectively, and for the first nine months of 1998 and
1999 totaled $6.4 million and $4.3 million, respectively. The declines result
from lower balances of cash and short-term investments in 1999 versus 1998.
We expect our interest income to continue to decrease in future periods as
our funds are used to continue the development of the Spiros products.

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 September 30, 1999, we had cash, cash
equivalents, and short-term investments totaling $87.7 million and working
capital totaling $81.1 million. Our existing working capital and expected
interest income may not be sufficient to fund our cash requirements through
at least September 30, 2000. Based on our current development plan and budget
for the Spiros products, we expect to have expended all of our existing cash
during the second half of 2000. Further, we do not believe that our existing
funds will be sufficient to complete the development of any Spiros product.
The use of our existing funds would require Dura to consider whether to
purchase our callable common stock, 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 Spiros Corp. II through the exercise of Dura's
product purchase options, it is not obligated to do so.

YEAR 2000 COMPLIANCE

We rely entirely on Dura for our operating and financial systems. We have
made inquiries of Dura, and Dura has responded that it recognizes the need to
ensure its operations will not be adversely impacted by the inability of
Dura's systems to process data having dates on or after January 1, 2000.
Processing errors due to software failure arising from calculations using the
year 2000 date are a recognized risk. Dura has advised us that during 1998 it
completed the identification of their systems with year 2000 exposure. Dura
further advised us that the company will complete its year 2000 evaluation,
testing and contingency planning in the fourth quarter of 1999. Dura's
identification of their most significant year 2000 exposure does not involve
the research and development work Dura is performing on our behalf. While we
believe that Dura's efforts are adequate to address the year 2000 concerns,
there can be no assurance that the systems of other companies on which Dura's
systems and operations rely will be converted on a timely basis and will not
have a material effect on us. In addition, the potential impact of the year
2000


                                       8
<PAGE>

on others with whom we, through agreements with Dura, do business cannot be
reasonably estimated at this time. The cost of Dura's year 2000 initiatives
will be paid entirely by Dura.

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.

SPIROS-Registered Trademark- 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. Based on our current development plan and budget for the Spiros
projects, we expect to expend all of our existing funds in the second half of
2000. Further, we do not believe that our current available funds will be
adequate to complete the development or regulatory review process for any of
the Spiros products. Until the expiration of Dura's purchase option, we are
significantly restricted from raising additional funds without Dura's
consent. While Dura may, at its sole option, provide funds for further
development of the Spiros products or provide additional cash to us through
the exercise of the albuterol or product purchase options, it is not
obligated to do so. 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 is not exercised, 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.
Failure to do so would have an adverse effect on our business and results of
operations.

DURA MAY NOT EXERCISE ITS OPTIONS. 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.

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,


                                       9
<PAGE>

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 and would have an adverse effect on our
business and results of operations. The review and approval process mandated
by the FDA is very rigorous, requiring extensive preclinical and clinical
testing as well determining manufacturing capability and product performance.
None of the products currently in development may ever be approved by the FDA.

OUR REGULATORY APPLICATION SUBMITTED TO THE FDA FOR ALBUTEROL SPIROS-TM- WILL
NOT BE APPROVED WITHOUT ADDITIONAL CLINICAL TRIALS, WHICH WILL DELAY THE
COMMERCIALIZATION OF ALBUTEROL SPIROS. On November 4, 1998, we and Dura
announced the receipt of a complete response letter from the FDA. The letter
indicated that the new drug application submitted by Dura on our behalf for
Albuterol Spiros will not be approved unless certain deficiencies are
addressed. The FDA requested that additional clinical trials on the Spiros
inhaler be completed to ensure the inhaler is reliable and to replicate
clinical outcomes of the initial trials. The FDA also requested that several
chemistry, manufacturing and control issues, as well as specified
electromechanical reliability issues be resolved. As a result of a series of
meetings with the FDA, we, together with Dura, have determined the
requirements that we believe will address these issues and allow us to
resubmit the new drug application for Albuterol Spiros. We are currently
addressing chemistry, manufacturing and control issues for Albuterol Spiros.
We cannot predict or assure the successful outcome of additional clinical
trials to support the resubmission of a new drug application for this
product, or if the FDA will ever approve a new drug application for this
product.

WE ARE DEPENDENT ON DURA FOR ALL ACTIVITIES IN THE DEVELOPMENT OF SPIROS
PRODUCTS. We do not have manufacturing or marketing capabilities. Dura will
determine unilaterally certain activities to be undertaken under the
development agreement. In all events Dura will have substantial influence
over all activities and procedures, including the timing and priorities 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 utilize 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.


                                       10
<PAGE>

THE PURCHASE OPTION PRICE AGREED UPON WITH DURA MAY NOT BE REPRESENTATIVE OF
THE VALUE OF A SHARE OF CALLABLE COMMON STOCK. Dura's stock purchase option
exercise price was set as of the date of the closing of our 1997 unit
offering. Should Dura elect to exercise this option, the exercise price may
not be representative of the value of our callable common stock at the time
of the exercise of the purchase option.

DURA WILL NEED TO SIGNIFICANTLY EXPAND ITS MANUFACTURING CAPABILITY AND
COMPLY WITH GOVERNMENT REGULATIONS BEFORE IT CAN MANUFACTURE ANY SPIROS
PRODUCTS ON OUR BEHALF. 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. Dura
intends to utilize third parties to produce components of and assemble the
Spiros inhaler. These third parties have only produced limited quantities of
components and assembled limited numbers of inhalers. These third parties
will be required to significantly scale up their activities and to produce
components which meet applicable specifications on a timely and consistent
basis. If these 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.

THE PHARMACEUTICAL INDUSTRY IS EXTREMELY COMPETITIVE. Many companies,
including large pharmaceutical firms with financial and marketing resources
and development capabilities substantially greater than us, 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 business and
results of operations. 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


                                       11
<PAGE>

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 being developed by us. It is
possible that Dura's rights with respect to such competitive products could
reduce Dura's incentive to exercise the albuterol option, the product option
or the purchase option.

DURA HAS THE  ABILITY TO LIMIT  SPECIFIED  ACTIVITIES.  Until the expiration
of the purchase option, Dura must approve specified activities, including:
-        issuing our securities
-        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
         shareholders
-        merging or consolidating with any other corporation, and
-        adopting, amending or repealing our Bylaws.

Accordingly, Dura could preclude our shareholders 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 product
option or the 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
certain of our products are based. Litigation, which is costly, may be
necessary to enforce our patent and license rights or to determine the scope
and validity of proprietary rights of third parties. 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.

We are aware of foreign patents granted to third parties in the United
Kingdom that claim proprietary rights in areas that may overlap with aspects
of Spiros technology. In the event that we


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decide to market any Spiros product in the United Kingdom and further
conclude that such activity would infringe upon these third party patents, we
may need to either design around these patents, obtain licenses to these
patents, or avoid marketing products in the United Kingdom and other areas in
Europe in which these patents have been issued.

OUR STOCK PRICE IS VOLATILE. The market prices for securities of emerging
companies, including ours, have historically been highly volatile. Future
announcements concerning us or our competitors may have a significant impact
on the market price of our Units. Such announcements might include:
-        financial results,
-        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.

WE MAY NOT ADEQUATELY ADDRESS YEAR 2000 ISSUES WHICH COULD HAVE AN ADVERSE
EFFECT ON OUR BUSINESS. We rely on Dura for our operating and financial
systems. The systems of Dura and the other companies on which Dura's systems
and operations rely may not be converted on a timely basis. Any failure on
the part of Dura or these other companies would have a material effect on us.
For a more complete discussion of our year 2000 issues, please see "Year 2000
Compliance" above.

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 non-interest 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, Spiros Development Corporation II, Inc. and Dura
Pharmaceuticals, Inc. completed the offering of 6,325,000 units. Each unit
consists of one share of our callable


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common stock and one warrant to purchase one-fourth of one share of Dura
common stock. The offering was registered under 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
September 30, 1999, we had used $81 million of our cash, cash equivalents and
short-term investments for our operating activities and had $81.1 million of
working capital.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

            Exhibit No.       Description
            -----------       -----------
            27                Financial Data Schedule

(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: November 12, 1999                      /s/ Erle T. Mast
-------------------------                   -----------------------------
                                            (Erle T. Mast)
                                            Vice President, and
                                              Chief Financial Officer
                                            (Principal Financial Officer)


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