<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, 1998
                                          
                                         OR

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


           For the transition period from ________ to ________.
                                          
                         COMMISSION FILE NUMBER: 000-23501
                                          
                      SPIROS DEVELOPMENT CORPORATION II, INC.
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

     7475 LUSK BLVD., SAN DIEGO, CALIFORNIA                 92121
    (Address of principal executive offices)             (zip code)
                                          
                                          
         Registrant's telephone number, including area code (619) 457-2553


     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 October 30, 1998 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 AMOUNTS


<TABLE>
<CAPTION>

                                                                    DECEMBER 31,  SEPTEMBER 30,
                                                                       1997           1998
                                                                    ------------  -------------
                                                                                  (UNAUDITED)
<S>                                                                 <C>           <C>
                             ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                             $139,035       $ 31,738
  Short-term investments                                                  31,471        103,494
  Prepaid and other current assets                                                          216
                                                                    ------------  -------------
           Total current assets                                          170,506        135,448
                                                                    ------------  -------------
TOTAL                                                                   $170,506       $135,448
                                                                    ------------  -------------
                                                                    ------------  -------------
              LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Payable to Dura Pharmaceuticals, Inc.                                 $  8,399       $  4,949
  Accrued liabilities                                                         26            226
                                                                    ------------  -------------
           Total current liabilities                                       8,425          5,175
                                                                    ------------  -------------

SHAREHOLDERS' EQUITY:
  Special common stock, par value $1.00, 1,000 shares
    authorized, issued, and outstanding                                        1              1
  Callable common stock, par value $.001, 7,500,000 shares
    authorized; 6,325,000 shares issued and outstanding                        6              6
  Additional paid-in capital                                             168,977        169,095
  Accumulated other comprehensive income                                      21            376
  Accumulated deficit                                                     (6,924)       (39,205)
                                                                    ------------  -------------
           Total shareholders' equity                                    162,081        130,273
                                                                    ------------  -------------
TOTAL                                                                   $170,506       $135,448
                                                                    ------------  -------------
                                                                    ------------  -------------
</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
                                                                   THREE MONTHS    NINE MONTHS          (DATE OF    
                                                                       ENDED          ENDED          INCORPORATION) 
                                                                   SEPTEMBER 30,  SEPTEMBER 30,         THROUGH     
                                                                       1998           1998        SEPTEMBER 30, 1998
                                                                   -------------  -------------   ------------------
<S>                                                                <C>            <C>             <C>               
REVENUES:
  Interest income                                                       $  1,995       $  6,434             $  6,656
                                                                   -------------  -------------   ------------------
EXPENSES:
  Research and development                                                13,443         37,788               44,828
  General and administrative                                                 239            781                  887 
                                                                   -------------  -------------   ------------------
           Total expenses                                                 13,682         38,569               45,715 
                                                                   -------------  -------------   ------------------

OPERATING LOSS BEFORE INCOME TAXES                                       (11,687)       (32,135)             (39,059)
PROVISION FOR INCOME TAXES                                                    60            146                  146 
                                                                   -------------  -------------   ------------------
NET LOSS                                                                $(11,747)      $(32,281)            $(39,205)
                                                                   -------------  -------------   ------------------
                                                                   -------------  -------------   ------------------
NET LOSS PER SHARE:
  Basic and diluted                                                     $  (1.86)      $  (5.10)            $  (6.20)
                                                                   -------------  -------------   ------------------
                                                                   -------------  -------------   ------------------
WEIGHTED AVERAGE NUMBER OF
  COMMON SHARES:
    Basic and diluted                                                      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 MONTHS          (DATE OF      
                                                                        ENDED           INCORPORATION)  
                                                                    SEPTEMBER 30,          THROUGH      
                                                                        1998         SEPTEMBER 30, 1998 
                                                                   --------------    ------------------
<S>                                                                <C>               <C>
NET CASH USED IN OPERATING ACTIVITIES                                  $  (34,340)            $ (34,112)
                                                                   --------------    ------------------
INVESTING ACTIVITIES:
  Purchases of short-term investments                                    (115,949)             (147,399)
  Sales and maturities of short-term investments                           44,281                44,281
                                                                   --------------    ------------------
           Net cash used in investing activities                          (71,668)             (103,118)
                                                                   --------------    ------------------
FINANCING ACTIVITIES:
  Net proceeds from issuance of special common and callable
    common stock                                                                                 93,968
  Contribution from Dura Pharmaceuticals, Inc. for purchase option                               75,000
  Decrease in payable to Dura Pharmaceuticals, Inc. for
    issuance costs                                                         (1,289)
                                                                   --------------    ------------------
           Net cash provided by (used in) financing activities             (1,289)              168,968
                                                                   --------------    ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     (107,297)               31,738
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                          139,035
                                                                   --------------    ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                              $  31,738             $  31,738
                                                                   --------------    ------------------
                                                                   --------------    ------------------

</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, 1997 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 
period 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-Registered 
Trademark-, a dry powder pulmonary drug delivery system, and conducting 
formulation work, clinical trials and commercialization for certain specified 
leading asthma and chronic obstructive pulmonary disease ("COPD") drugs for 
use with Spiros.  The Company commenced operations on December 22, 1997, 
completing 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 Pharmaceuticals, Inc. 
("Dura") common stock.  The offering resulted in net proceeds to the Company 
of approximately $94 million. Concurrently,  Dura contributed $75 million 
to the Company.  Substantially all funds from the Offering, the $75 million 
contribution and interest earned thereon, are expected to be paid to Dura for 
the development and commercialization of certain drugs for use with Spiros 
pursuant to various agreements with Dura.

                                         5
<PAGE>

3.   NEW ACCOUNTING STANDARD

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

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

<TABLE>
<CAPTION>

                                                              
                                                              SEPTEMBER 23, 1997
                                 THREE MONTHS    NINE MONTHS       (DATE OF     
                                     ENDED          ENDED       INCORPORATION)  
                                 SEPTEMBER 30,  SEPTEMBER 30,       THROUGH     
                                     1998           1998      SEPTEMBER 30, 1998
                                -------------  -------------  ------------------
<S>                             <C>            <C>            <C>
Net Loss                             $(11,747)      $(32,281)      $(39,205)

Other Comprehensive Income:
  Unrealized Income 
    on Investments                        447            355            376
                                -------------  -------------  -------------
Comprehensive Loss                   $(11,300)      $(31,926)      $(38,829)
                                -------------  -------------  -------------
                                -------------  -------------  -------------
</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 period 
September 23, 1997 (date of incorporation) through December 31, 1997 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 the Company's business. See "Risks and 
Uncertainties" for a discussion of factors known to the Company that could 
cause reported financial information not to be necessarily indicative of 
future results. The Company undertakes no obligation to 

                                         6
<PAGE>


release publicly the results of any revisions to these forward-looking 
statements to reflect events and circumstances arising after the date hereof.

GENERAL

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

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

Dura has an irrevocable option (the "Purchase Option") to purchase all, but 
not less than all, of the issued and outstanding shares of the Company's 
Common Stock at predetermined prices.  Dura may exercise the Purchase Option 
at any time through the earlier of (a) December 31, 2002, (b) the 90th day 
after the date the Company provides Dura with quarterly financial statements 
of the Company showing cash or cash equivalents of less than $5 million, 
although Dura may extend such period by providing additional funding for the 
continued development of Spiros, but in no event beyond December 31, 2002, or 
(c) upon termination of the technology license, development, or the 
manufacturing agreements between the Company and Dura.  If the Purchase 
Option is exercised, the per share price will be $24.01 before January 1, 
2000, 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.

On November 4, 1998, Spiros Corp. II and Dura announced the receipt of a 
complete response letter from the U.S.  Food and Drug Administration ("FDA") 
indicating that the new drug application ("NDA") submitted by Dura on behalf 
of Spiros Corp. II for the use of albuterol with the Spiros system 
("Albuterol Spiros -TM-") is not approvable until and unless certain 
deficiencies are addressed. The FDA has requested additional clinical trials 
on the to-be-marketed Spiros inhaler in order to ensure inhaler reliability 
and replicate clinical outcomes of the initial trials. The FDA has also 
requested the resolution of a number of chemistry, manufacturing, and control 
issues. The letter also raised certain issues regarding electromechanical 
reliability. During the clinical trials, Dura made improvements to the Spiros 
inhaler which it believes have addressed these issues. Representatives from 
Dura, the 

                                         7
<PAGE>

Company, and the FDA are scheduled to meet to develop a mutually agreed upon 
plan to resolve these issues.

RESULTS OF OPERATIONS

The Company incurred a net loss of $11,747,000, $32,281,000, and $39,205,000 for
the three months ended September 30, 1998, nine months ended September 30, 1998,
and for the period September 23, 1997 (date of incorporation) through September
30, 1998, respectively. For the three months and nine months ended September 30,
1998, research and development costs totaled $13,443,000 and $37,788,000,
respectively, and general and administrative expenses totaled $239,000 and
$781,000, respectively. The research and development expenses were for Spiros
related activities performed by Dura pursuant to a development agreement. The
Company's interest income for the three months and nine months ended September
30, 1998 totaled $1,995,000 and $6,434,000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company's initial capitalization totaled approximately $169 million,
consisting of net proceeds from the Offering of approximately $94 million and a
$75 million contribution from Dura. At September 30, 1998, the Company had cash,
cash equivalents, and short-term investments totaling $135.2 million. The
Company believes that its working capital and expected cash flows from its cash
and short-term investments will be sufficient to fund its cash requirements
through at least the next twelve months.

Spiros Corp. II relies on Dura for its operating and financial systems. The 
Company has made inquiries of Dura and  Dura  has stated that it recognizes 
the need to ensure its operations will not be adversely impacted by the 
inability of Dura's systems to process data having dates on or after January 
1, 2000 ("Year 2000").  Processing errors due to software failure arising 
from calculations using the Year 2000 date are a recognized risk.  Spiros 
Corp. II is relying entirely on Dura to address the Year 2000 compliance 
issues. Dura has indicated that it is currently addressing the risk, with 
respect to the availability and integrity of its financial systems and the 
reliability of its operating systems, and is in the process of communicating 
with suppliers, customers, financial institutions and others with whom it 
conducts business to assess whether they are Year 2000 compliant.  While the 
Company believes that Dura's planning efforts are adequate to address the 
Year 2000 concerns, there can be no assurance that the systems of other 
companies on which Dura's systems and operations rely will be converted on a 
timely basis and will not have a material effect on the Company.  In 
addition, the potential impact of the Year 2000 on others with whom the 
Company, through agreements with Dura, does business cannot be reasonably 
estimated at this time. The cost of Dura's Year 2000 initiatives will be paid 
entirely by Dura.

                                         8
<PAGE>

RISKS AND UNCERTAINTIES

FORWARD-LOOKING STATEMENTS. The Company cautions 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.

DEVELOPMENT RISKS ASSOCIATED WITH SPIROS.  Spiros will require significant 
additional development efforts. There can be no assurance that development of 
Spiros will be completed successfully, that Spiros will not encounter 
problems in clinical trials that will cause the delay or suspension of such 
trials, that current or future testing will show any Spiros Product to be 
safe or efficacious, or that any Spiros Product will receive regulatory 
approval in a timely manner, if at all.  In addition, regulatory approvals 
will have to be obtained for each drug to be delivered through the use of 
Spiros prior to commercialization.  Moreover, even if Spiros does receive 
regulatory approval, there can be no assurance that Spiros will be 
commercially successful, have all of the patent and other protections 
necessary to prevent competitors from producing similar products and not 
infringe on patent or other proprietary rights of third parties.  The failure 
of the Spiros Products being developed by the Company to receive timely 
regulatory approval and achieve commercial success would have a material 
adverse effect on the Company.

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

Dura, on the Company's behalf, has submitted an abbreviated NDA called a
505(b)(2) application for the Albuterol Spiros-TM- in November 1997. Dura, on
the Company's behalf, expects to submit an abbreviated NDA for the use of other
drugs with the Spiros system. No assurances can be given that all of the drugs
identified for development with Spiros will be suitable for, or approved under,
abbreviated application procedures.  Certain abbreviated application procedures
have been the subject of petitions filed by brand name manufacturers which seek
changes in the FDA's approval process for such abbreviated applications. These
requested changes include, among other things, disallowance of the use by an
applicant of an abbreviated application with data considered proprietary by the
original manufacturer that was submitted to the FDA as part of an original NDA.
Neither the Company nor Dura is able to predict at this time whether the FDA
will make any changes to its abbreviated application procedures as a result of
such petitions or the effect that such changes or challenges may have on the
Company.

                                         9
<PAGE>

On November 4, 1998, Spiros Corp. II and Dura announced the receipt of a 
complete response letter from the FDA (the "FDA Letter") relating to the 
Albuterol Spiros -TM- NDA filed by Dura on behalf of Spiros Corp. II in 
November 1997. The FDA Letter indicated that the Albuterol  Spiros -TM- NDA 
was not approvable until and unless certain deficiencies are addressed, and 
raised issues including but not limited to chemistry, manufacturing and 
control, and electromechanical properties and reliability of the inhaler. The 
FDA has indicated that an additional clinical trial or trials will be 
necessary to address the issues raised in the FDA Letter. Such trial or 
trials may be costly and time-consuming. There can be no assurance that such 
trial or trials will be successful, and/or that regulatory approval of the 
Albuterol Spiros -TM- product will be obtained. In any event, conduct of such 
additional trials would result in a substantial delay in the marketing 
approval and launch, if any, of the Albuterol Spiros -TM- product.

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

NO DEVELOPMENT, MANUFACTURING OR MARKETING CAPABILITY.  Spiros Corp. II has no
development, manufacturing or marketing capabilities. Spiros Corp. II is
obligated to only utilize Dura's development capability during the term of the
Development Agreement between Dura and the Company and Dura's manufacturing
facilities for manufacturing during the term of the Manufacturing and Marketing
Agreement between Dura and the Company. Dura has the right under the
Manufacturing and Marketing Agreement to use contract manufacturers and
currently plans to rely on third parties to manufacture certain components of
Spiros. There can be no assurance that Dura's facilities or those of its
contract manufacturers will be satisfactory for the needs of Spiros Corp. II. In
addition, Dura or its contract manufacturers, as the case may be, may require
additional FDA approval prior to commencing manufacturing of Spiros Products.
There can be no assurance that the Spiros Products can be manufactured, whether
by Dura or a contract manufacturer, on a commercial scale at a commercially
reasonable cost or on a timely basis. In addition, Spiros Corp. II has no
experience in sales, marketing or distribution. Under the Manufacturing and
Marketing Agreement, Dura has been granted exclusive worldwide marketing rights
to the Spiros Products. There can be no assurance that Dura's sales and
marketing force will be able to establish commercially successful sales and
distribution capabilities for any of the Spiros Products.

DEPENDENCE ON DURA.  Substantially all of the Company's available funds will be
paid to Dura under the Development Agreement. Payments under the Development
Agreement will be made for the full amount of all of Dura's research and
development expenses, general and administrative expenses, capital equipment
costs and all other costs and expenses incurred by Dura in performing the
activities, on behalf of Spiros Corp. II, up to the maximum amount of  funds
available to Spiros Corp. II. In 

                                         10
<PAGE>

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

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

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

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

                                         11
<PAGE>

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

There are at least 10 companies currently involved in the development, 
marketing or sales of dry powder pulmonary drug delivery systems. There are 
two types of dry powder inhalers ("DPIs") currently in commercial use 
worldwide, individual dose and multiple dose.  Individual dose DPIs currently 
marketed in the U.S. include the Rotohaler-TM- (developed and marketed by 
Glaxo Wellcome ("Glaxo")) and the Spinhaler-Registered Trademark- (developed 
and marketed by Fisons Limited).  The Turbuhaler-Registered Trademark- 
(developed and marketed by Astra Pharmaceuticals, Inc. ("Astra")), a multiple 
dose DPI, is the leading DPI in worldwide sales.  In June 1997, the FDA 
approved the first Turbuhaler product, the Pulmicort Turbuhaler, for 
marketing in the U.S., which Astra launched in early 1998.  The FDA also 
approved two multiple dose DPIs developed by Glaxo, the Flovent-Registered 
Trademark-Rotadisk-Registered Trademark- and the Serevent-Registered 
Trademark-Diskus-Registered Trademark-, both launched in early 1998.

NO ASSURANCE OF EXERCISE OF DURA'S OPTIONS.  Dura has the option through 
specified dates to acquire Spiros Corp. II's exclusive rights for the use of 
Spiros with albuterol (the "Albuterol Option") and with a second product 
other than albuterol (the "Product Option") for cash. Dura is not obligated 
to exercise the Purchase Option, the Albuterol Option or the Product Option, 
and it will exercise such options only if, in the opinion of Dura's Board of 
Directors, it is in Dura's best interest to do so. Even if any of the Spiros 
Products are developed and approved, if Dura does not exercise the Purchase 
Option, Spiros Corp. II will be required to find alternative ways to 
commercially market or exploit the Spiros Products and there can be no 
assurance that Spiros Corp. II will be able to do so. If, in the event Dura 
fails to exercise the Purchase Option, and Spiros Corp. II determines to 
market the Spiros Products itself, Spiros Corp. II will require substantial 
additional funds. There can be no assurance that such funds will be available 
on attractive terms, if at all. Similarly, if Spiros Corp. II determines to 
license the Spiros Products to third parties, such arrangements, if 
available, may be on terms less favorable to Spiros Corp. II than the terms 
of Spiros Corp. II's arrangements with Dura.

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

NO ASSURANCE THAT THE PURCHASE OPTION WILL BE REPRESENTATIVE OF THE VALUE OF
SPIROS CORP. II.  The Purchase Option exercise price was determined and set
forth in the Spiros Corp. II Amended and Restated Certificate of Incorporation
as of the date of the closing of the Offering 

                                         12
<PAGE>

and therefore may not be representative of the value of the Spiros Corp. II 
callable common stock at the time of the exercise of the Purchase Option.

POTENTIAL COMPETITION FROM DURA.  Dura is engaged in ongoing licensing and 
development of new products. While Dura has exclusively licensed the rights 
to develop, manufacture and commercialize the Spiros Products in connection 
with the Spiros technology to Spiros Corp. II, Dura is not prohibited from 
developing other products using Spiros, including those that may compete with 
the Spiros Products, or from in-licensing or acquiring products that may 
compete with the Spiros Products. Dura's activities may, in some 
circumstances, lead to the development, in-licensing or acquisition of 
products that compete with the Spiros Products being developed by Spiros Corp 
II. It is possible that Dura's rights with respect to such competitive 
products could reduce Dura's incentive to exercise the Albuterol Option, the 
Product Option or the Purchase Option.

ABILITY OF SPECIAL STOCKHOLDER TO LIMIT CERTAIN SPIROS CORP. II ACTIVITIES. 
Pursuant to the Company's Amended and Restated Certificate of Incorporation, 
until the expiration of the Purchase Option, no resolution or act of the 
Company to authorize or permit any of the following will be effective without 
the prior written approval of Dura as the holder of all of the outstanding 
Special Common Stock (the "Special Shares"): (i) the allotment or issue of 
shares or other securities of the Company or the creation of any right to 
such an allotment or issue; (ii) the reduction of the Company's authorized 
capital stock; (iii) the alteration of or any change to the rights, powers, 
preferences and restrictions of the Special Shares; (iv) outstanding 
borrowings of an aggregate of more than $1 million at any one time; (v) the 
sale or other disposition of or the creation of any lien or liens on the 
whole or a material part of the Company's business or assets; (vi) the 
declaration or payment of dividends or the making of any other distributions 
to the Company's stockholders; (vii) the merger, consolidation or 
reorganization of the Company with or into any other corporation; (viii) the 
sale, liquidation or other disposition of all or substantially all of the 
assets of the Company; (ix) the alteration or amendment of Articles IV or VII 
of the Company's Amended and Restated Certificate of Incorporation; and (x) 
the adoption, amendment or repeal of the Bylaws of the Company.  Accordingly, 
Dura could preclude the holders of a majority of the outstanding Spiros Corp. 
II Common Stock and the Board of Directors of Spiros Corp. II from taking any 
of the foregoing actions during such period. Dura, as holder of all of the 
outstanding Special Shares, may transfer or sell all, but not less than all, 
of such shares.  As a result, an unrelated third party may acquire rights 
associated with the Special Shares, including the rights discussed in this 
section and the right to exercise the Albuterol Option, the Product Option 
and the Purchase Option.  There can be no assurance that any transferee of 
the Special Shares will have the same financial resources or development, 
manufacturing or marketing capabilities as Dura, which may have a material 
adverse effect on the likelihood of the exercise of the Albuterol Option, the 
Product Option or the Purchase Option.

POTENTIAL LOSS OF TECHNOLOGY BY SPIROS CORP. II.  Under the Development 
Agreement, Spiros Corp. II is obligated to make payments to Dura equal in the 
aggregate to substantially all of its available funds.  If Spiros Corp. II 
does not use its available funds as provided in the Development Agreement or 
otherwise breaches any of its material obligations under the Major 

                                         13
<PAGE>

Agreements, Dura has the right to terminate the Technology Agreement, the 
Development Agreement and the Manufacturing and Marketing Agreement, and 
thereby reacquire rights to all technology licensed to Spiros Corp. II 
thereunder, including improvements made to such technology using funds 
provided by Spiros Corp. II. In the event of such a termination by Dura, it 
is unlikely that Dura would exercise the Albuterol Option, the Product Option 
or the Purchase Option.

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

THIRD-PARTY REIMBURSEMENT; PRICING PRESSURES.  The Company's commercial 
success will depend in part on the availability of adequate reimbursement 
from third-party healthcare payors, such as government and private health 
insurers and managed care organizations. Third-party payors are increasingly 
challenging the pricing of medical products and services.  There can be no 
assurance that reimbursement will be available to enable the Company to 
achieve market acceptance of its products, if approved, or to maintain price 
levels sufficient to realize an appropriate return on the Company's 
investment in development.  The market for the Company's products, if 
approved, may be limited by actions of third-party payors.  For example, many 
managed healthcare organizations are now controlling the pharmaceuticals that 
are on their formulary lists.  The resulting competition among pharmaceutical 
companies to place their products on these formulary lists has created a 
trend of downward pricing pressure in the industry.  In addition, many 
managed care organizations are pursuing various ways to reduce pharmaceutical 
costs and are considering formulary contracts primarily with those 
pharmaceutical companies that can offer a full line of products for a given 
therapy sector or disease state.  There can be no assurance that the 
Company's products, if approved, will be included on the formulary lists of 
managed care organizations or that downward pricing pressure in the industry 
generally will not negatively impact the Company's operations.

LIMITED MANUFACTURING EXPERIENCE.  Dura's principal manufacturing facility is 
intended to be used to formulate, mill, blend and manufacture drugs to be 
used with Spiros, pending regulatory approval. Equipment purchases and 
validation are currently scheduled into 1999. Dura's manufacturing facility 
must be registered with and licensed by various regulatory authorities and 
must comply with current Good Manufacturing Practice ("cGMPs") requirements 
prescribed by the FDA and the State of California.  Dura will need to 
significantly scale up its current manufacturing operations and comply with 
cGMPs and other regulations prescribed by 

                                         14
<PAGE>


various regulatory agencies in the U.S. and other countries to achieve the 
prescribed quality and required levels of production of such products to 
obtain marketing approval.  Any failure or significant delay in the 
validation of or obtaining a satisfactory regulatory inspection of the new 
facility, failure to successfully scale up or failure to maintain necessary 
regulatory approvals for such facilities could have a material adverse effect 
on the ability of Dura to manufacture any of the Spiros Products.  Dura 
intends to utilize third parties to produce components of and assemble the 
Spiros aerosol generator. Such third parties have only produced limited 
quantities of components and assembled limited numbers of generators and will 
be required to significantly scale up their activities and to produce 
components on a timely and consistent basis and which meet applicable 
specifications. There can be no assurance that such third parties will be 
successful in attaining acceptable service levels or meeting cGMP 
requirements. Any failure or delay in the scale-up or supply or meeting cGMP 
requirements associated with aerosol generator manufacturing would have a 
material adverse effect on the ability of Dura to manufacture Spiros Products.

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

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

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

The Company is aware of foreign patents granted to third parties in the 
United Kingdom that claim proprietary rights in areas that may overlap with 
certain Spiros technology.  In the event that the Company determines to 
market any Spiros Product in the United Kingdom and further 

                                         15
<PAGE>

determines that such activity would infringe upon such third party patents, 
the Company may need to either design around these patents, obtain licenses 
to such patents, or avoid marketing products in the United Kingdom and other 
areas in Europe in which these patents provide protection.  There can be no 
assurance that patents or patent applications do not exist or will not exist 
in the future that may materially affect the Company's ability to make, use 
or sell any current or future products.

ATTRACTION AND RETENTION OF KEY PERSONNEL.  The Company will be highly 
dependent on the principal members of Dura's scientific and management staff, 
the loss of whose services might impede the achievement of development 
objectives. Recruiting and retaining management and operational personnel and 
qualified scientific personnel to perform research and development work for 
the Company will also be critical to the Company's success.  Although the 
Company believes Dura will be successful in attracting and retaining skilled 
and experienced management, operational and scientific personnel, there can 
be no assurance that Dura will be able to attract and retain such personnel 
on acceptable terms.

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

YEAR 2000 COMPLIANCE CONSIDERATIONS.  Spiros Corp. II relies on Dura for its 
operating and financial systems pursuant to the various agreements described. 
The Company has made inquiries of Dura and  Dura  has stated that it 
recognizes the need to ensure its operations will not be adversely impacted 
by the inability of Dura's systems to process data having dates on or after 
January 1, 2000 ("Year 2000").  Processing errors due to software failure 
arising from calculations using the Year 2000 date are a recognized risk. 
Spiros Corp. II is relying entirely on Dura to address Year 2000 compliance 
issues. Dura has indicated that it is currently addressing the risk, with 
respect to the availability and integrity of its financial systems and the 
reliability of its operating systems, and is in the process of communicating 
with suppliers, customers, financial institutions and others with whom it 
conducts business to assess whether they are Year 2000 compliant.  While the 
Company believes that Dura's planning efforts are adequate to address the 
Year 2000 concerns, there can be no assurance that the systems of other 
companies on which Dura's systems and operations rely will be converted on a 
timely basis and will not have a material effect on the Company.  In 
addition, the potential impact of the Year 2000 on others with whom the 
Company, through agreements with Dura, does business cannot be reasonably 
estimated at this time.  The cost of Dura's Year 2000 initiatives will be 
paid entirely by Dura.

                                         16
<PAGE>

ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.


                            PART II - OTHER INFORMATION

ITEM 2.       CHANGE IN SECURITIES AND USE OF PROCEEDS

Use of Proceeds from Registered Securities

On December 22, 1997, the Company and Dura completed the offering of 
6,325,000 Units, each Unit consisting of one share of Common Stock of the 
Company 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 September 30, 1998, the 
Company has used $34.1 million of its cash, cash equivalents and short-term 
investments for its operating activities and has $162.1 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
 
 (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.

                                         17
<PAGE>


(b) Reports on Form 8-K

          None.









                                         18
<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 13, 1998        /s/ Erle T. Mast
      -----------------       ----------------------------
                              (Erle T. Mast)
                              Vice President, and Chief
                                Financial Officer
                              (Principal Financial Officer)




                                         19
<PAGE>

                                    EXHIBIT INDEX
                                         TO
                                     FORM 10-Q
                      SPIROS DEVELOPMENT CORPORATION II, INC.

     EXHIBIT NO.    DESCRIPTION
     -----------    -----------
 (1) 3.1            Amended and Restated Certificate of Incorporation
 
 (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.