DURA PHARMACEUTICALS INC/CA, 424B4, 1996-05-23

DURA PHARMACEUTICALS INC/CA
424B4, 1996-05-23
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1
This filing is made pursuant
to Rule 424(b)(4) under
the Securities Act of
1933 in connection with
Registration No. 333-4210
and Registration No. 333-4333.

PROSPECTUS

2,350,000 SHARES

LOGO

COMMON STOCK
------------------------

All of the shares of common stock, no par value ("Common Stock"), offered
hereby are being issued and sold by Dura Pharmaceuticals, Inc. (the "Company").
The Common Stock is traded on the Nasdaq National Market under the symbol
"DURA." On May 22, 1996, the last sale price of the Common Stock as reported on
the Nasdaq National Market was $59 3/8 per share. See "Price Range of Common
Stock."

SEE "RISK FACTORS" ON PAGES 7 TO 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS

PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
Per Share......................... $58.75 $2.93 $55.82
- -------------------------------------------------------------------------------------------------
Total(3).......................... $138,062,500 $6,885,500 $131,177,000
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933. See "Underwriting."

(2) Before deducting expenses of the offering estimated at $350,000 payable by
the Company.

(3) The Company has granted the Underwriters an option exercisable within 30
days to purchase up to an aggregate of 352,500 shares of Common Stock to
cover over-allotments, if any. If such option is exercised, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$158,771,875, $7,918,325 and $150,853,550, respectively. See "Underwriting."

------------------------

The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about May 29, 1996.

------------------------

MERRILL LYNCH & CO.
HAMBRECHT & QUIST
OPPENHEIMER & CO., INC.
------------------------

The date of this Prospectus is May 22, 1996.

<PAGE> 2

<TABLE>
<S> <C><C>
A total of 22 prescription drugs, targeted primarily at respiratory
ailments including asthma, allergies, coughs/colds, hay fever,
sinusitis, bronchitis and reversible bronchospasm associated with chronic
obstructive pulmonary disease (COPD), comprise Dura's product portfolio.
Sixteen of these products are owned and promoted by Dura, four are
marketed under licensing agreements with Eli Lilly and Company and Uni-Dur(R) Co-promotion Initiated
Sterling Winthrop, and two are co- promoted. in March 1996
</TABLE>

<PAGE> 3

AVAILABLE INFORMATION

The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected at the
Commission's Public Reference Section, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the Commission's regional offices at 7
World Trade Center, 13th Floor, New York, New York 10048; and at Northwest
Atrium Center, 500 West Madison Street, Room 1400, Chicago, Illinois 60661-2511.
Copies of such material can also be obtained at prescribed rates at the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Common Stock of the Company is traded on the Nasdaq National Market.

INFORMATION INCORPORATED BY REFERENCE

The following documents filed by the Company with the Commission are hereby
incorporated by reference in this Prospectus: (1) the Annual Report of the
Company on Form 10-K for the fiscal year ended December 31, 1995, as amended;
(2) the Quarterly Report of the Company on Form 10-Q for the quarter ended March
31, 1996; (3) the Proxy Statement of the Company dated April 29, 1996 in
connection with the Annual Meeting of Shareholders to be held on May 29, 1996;
(4) the Current Report of the Company on Form 8-K filed on January 9, 1996, as
amended; and (5) the description of the Company's Common Stock contained in its
Registration Statement on Form 8-A filed on January 21, 1992.

All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
of such reports and documents. Any statement incorporated herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.

The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the foregoing documents incorporated herein by reference (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into any such document). Requests for such documents
should be submitted in writing to Mitchell R. Woodbury, Vice President and
General Counsel, at Dura Pharmaceuticals, Inc., 5880 Pacific Center Boulevard,
San Diego, California 92121 or by telephone at (619) 457-2553.
------------------------

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON NASDAQ IN ACCORDANCE WITH RULE 10b-6a UNDER THE SECURITIES
EXCHANGE ACT OF 1934. SEE "UNDERWRITING."

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<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
incorporated by reference and appearing elsewhere in this Prospectus, including
the information under "Risk Factors." Except as otherwise noted, all information
in this Prospectus assumes no exercise of the Underwriters' over-allotment
option. This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed under "Risk Factors," as well as those
discussed elsewhere in this Prospectus.

THE COMPANY

Dura Pharmaceuticals, Inc. ("Dura" or the "Company") is a specialty
respiratory pharmaceutical and pulmonary drug delivery company. The Company is
engaged in marketing prescription products to physicians who treat patients
suffering from asthma, hay fever, chronic obstructive pulmonary disease
("COPD"), the common cold and related respiratory ailments (the "U.S.
Respiratory Market"). Dura has strategically focused on the U.S. Respiratory
Market because of its size (approximately $4.8 billion in sales in 1995) and
growth opportunities. Additionally, the fragmented nature of the market and the
identifiable base of physician prescribers allow the Company to achieve
significant market penetration with a specialized sales force. The Company
currently markets two patented and 20 off-patent prescription products. The
Company also has a separate mail service pharmacy which dispenses respiratory
pharmaceuticals, Health Script Pharmacy Services, Inc. ("Health Script").

Dura employs a dual marketing strategy utilizing its focused field sales
force of approximately 130 people and a dedicated managed care sales and
marketing group that covers managed care organizations and retail pharmacy
chains. Dura's field sales force targets a physician base which includes
approximately 55,000 U.S. allergists, ear, nose and throat physicians ("ENTs"),
pulmonologists and a selected subset of pediatricians and generalist physicians,
who collectively write approximately 70% of respiratory pharmaceutical
prescriptions. Dura believes that its field sales force calls on approximately
one-half of the target physician base. The Company's managed care sales and
marketing group concentrates on sales to large regional and national managed
care organizations. The Company expects to continue expanding both the field
sales force and the managed care sales and marketing group as warranted by
market opportunities. During 1995, in addition to building its existing business
of dispensing respiratory pharmaceuticals through home healthcare providers,
Health Script launched a new program under the name "HomeRx" in which the Dura
field sales force provides information concerning the services of Health Script
to Dura's targeted physician base.

This marketing strategy has allowed Dura to leverage its distribution
capabilities by acquiring the rights to market additional prescription
pharmaceutical products through acquisition, in-license or co-promotion
arrangements. Most recently, in April 1996 the Company commenced a co-promotion
of Uni-Dur, an asthma product launched in late 1995, with the Key
Pharmaceuticals Division of Schering-Plough Corporation ("Schering-Plough").

The Company is developing or has contracted for the development of four
currently-marketed respiratory prescription pharmaceuticals. Three of these
products are being developed by Elan Corporation plc ("Elan") as part of its
collaborative relationship with the Company and utilize Elan's drug delivery
expertise and proprietary technologies. The fourth product is being developed
internally. In March 1996, the Company launched its internally-developed Rondec
Chewable cough/cold product for the pediatric market.

Another key component of Dura's strategy is to develop the Spiros pulmonary
drug delivery system ("Spiros"), formerly known as the Dryhaler. Spiros is being
designed to aerosolize pharmaceuticals in dry powder formulations for delivery
to the lungs while providing certain advantages over other currently-used
methods of pulmonary drug delivery. The Company has a three-level development
program for Spiros which entails (i) developing, on behalf of Spiros Development
Corporation ("Spiros Corp."), certain drug applications for use in Spiros,
including in the near-term albuterol, beclomethasone and ipratropium, three of
the most frequently-prescribed pharmaceutical agents to treat respiratory
conditions, and, in the longer term, certain proteins and peptides, (ii)
licensing Spiros primarily to pharmaceutical companies, including Mitsubishi
Chemical Corporation ("Mitsubishi") and Fujisawa Pharmaceutical Co., Ltd.
("Fujisawa"), for use with certain of their proprietary respiratory products,
and (iii) developing Spiros, in collaboration with third parties including Elan
and Houghten Pharmaceuticals, Inc. ("Houghten"), for the systemic delivery of
compounds through the lungs for respiratory and non-respiratory indications as
an alternative to current

4
<PAGE> 5

invasive delivery techniques. In February 1996, the Company entered into a
collaborative agreement with Houghten to develop inhalation formulations of new
compounds discovered and developed by Houghten.

In April 1996, Dura completed dosing of subjects in a clinical trial in the
United States on behalf of Spiros Corp. focusing on dose selection using a
formulation of powdered albuterol with Spiros under an Investigational New Drug
("IND") application filed with the United States Food and Drug Administration
("FDA"). Results from this clinical trial are currently being analyzed. This
study, along with a combination of other short-term and long-term trials, is
intended to serve as the basis for the filing of a New Drug Application ("NDA")
in 1997 seeking FDA approval, on behalf of Spiros Corp., to market albuterol in
the Spiros cassette system. The Company is also preparing an IND application for
U.S. studies on beclomethasone in the Spiros blisterdisk system which will be
filed on behalf of Spiros Corp. In addition, Dura, on behalf of Spiros Corp., is
currently performing powder formulation work with the peptide drug salmon
calcitonin to demonstrate its ability to develop an appropriate macromolecule
aerosol powder formulation, and to demonstrate systemic delivery using Spiros
technology.

In December 1995, the Company acquired all of the outstanding stock of Dura
Delivery Systems, Inc. ("DDSI"), a separate company formed in 1993 to develop
certain compounds for use with Spiros. At the same time Spiros Corp. completed a
$28.0 million private placement. The net proceeds of this private placement and
a $13.0 million cash contribution from Dura will be used by Spiros Corp. to
continue a significant portion of the development program for Spiros, including
funding of ongoing and future clinical trials of albuterol in a cassette version
of Spiros, and formulation, preclinical development and clinical trials of
albuterol, beclomethasone and ipratropium in a blisterdisk version of Spiros.
The Company has the right to purchase all of the currently outstanding shares of
callable common stock of Spiros Corp. through December 31, 1999 at predetermined
prices (the "Purchase Option").

The Company was incorporated under the laws of California in 1981. The
Company's principal executive offices are located at 5880 Pacific Center
Boulevard, San Diego, California 92121. Its telephone number is (619) 457-2553.

RISK FACTORS

In addition to the other information contained in this Prospectus, the
discussion of risk factors on pages 7 through 12 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
of investing in the Common Stock include the following factors: "Reduction in
Gross Margins;" "Third Party Reimbursement; Pricing Pressures;" "Dependence on
Acquisition of Rights to Pharmaceutical Products;" "Development Risks Associated
With Spiros;" "Seasonality and Fluctuating Quarterly Results;" "Competition;"
"Dependence on Third Parties; Limited Manufacturing Experience;" "Managing
Growth of Business;" "Uncertainty of Profitability; Need for Additional Funds;"
"Potential Exercise of Purchase Options for Spiros Corp. Callable Common Stock
and Albuterol Product; Dilution;" "Government Regulation; No Assurance of FDA
Approval;" "Patents and Proprietary Rights;" "Product Liability and Recall;"
"Attraction and Retention of Key Personnel;" "Volatility of the Company Stock
Price; Absence of Dividends;" "Shares Eligible for Future Sale;" "Change in
Control;" and "Forward Looking Statements."

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered hereby................. 2,350,000 shares
Common Stock to be outstanding after this
offering.................................. 18,115,327 shares(1)
Use of Proceeds............................. To acquire, in-license, co-promote, develop
and commercialize pharmaceuticals or to
acquire companies developing and/or
marketing such pharmaceuticals; to fund
product development programs, including
Spiros; and for working capital and
facilities expansion. See "Use of Proceeds."
Nasdaq National Market Symbol............... DURA
</TABLE>

- ---------------
(1) Excludes (a) 1,388,311 shares of Common Stock issuable upon the exercise of
options outstanding at March 31, 1996 under the Company's stock option plan,
(b) 2,345 shares of Common Stock available for future grants under such plan
and (c) 2,951,289 shares of Common Stock issuable upon exercise of warrants
outstanding at March 31, 1996. See "Capitalization" and "Description of
Capital Stock." The Company's shareholders will vote at the 1996 annual
meeting, currently scheduled to be held on May 29, 1996, on a proposal to
increase the authorized number of shares available for grant under the
Company's stock option plan by 750,000.

5
<PAGE> 6

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:(1)
Sales.......................... $ 5,546 $ 9,561 $15,816 $22,199 $ 39,308 $ 6,879 $14,055
Contract revenues(2)........... -- -- 2,297 10,481 12,194 2,558 4,532
Total revenues(2)......... 5,546 9,561 18,113 32,680 51,502 9,437 18,587
Operating income (loss)(3)..... (3,302) (7,016) (8,240) 1,456 (37,252) 393 3,712
Net income (loss)(3)........... (4,392) (6,769) (8,173) 1,936 (35,778) 857 4,057
Net income (loss)
per share(3)(4).............. (0.92) (0.93) (1.09) 0.19 (3.05) 0.07 0.23
Weighted average number of
common and common equivalent
shares(4).................... 4,753 7,253 7,494 9,930 11,720 12,743 17,850
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
DECEMBER 31, AS
1995 ACTUAL ADJUSTED(5)
------------ -------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 67,820 $ 61,980 $ 192,807
Working capital............................................. 59,717 58,706 189,533
Total assets................................................ 143,997 146,973 277,800
Long-term obligations (excluding current portion of
long-term obligations).................................... 15,427 15,445 15,445
Shareholders' equity........................................ 109,097 114,132 244,959
</TABLE>

- ---------------
(1) Summary Consolidated Financial Information includes Health Script subsequent
to its acquisition on March 22, 1995, DDSI subsequent to its acquisition on
December 29, 1995 and the Rondec product line subsequent to its acquisition
on June 30, 1995. See Notes 10 and 11 of the Notes to Consolidated Financial
Statements.

(2) The DDSI reimbursements included in the financial statements for the years
ended December 31, 1993, 1994 and 1995 and the three months ended March 31,
1995 have been reclassified to contract revenues to conform to the
presentation for Spiros Corp. for the three months ended March 31, 1996. See
Note 2 of the Notes to Consolidated Financial Statements.

(3) In 1993 and 1995, the Company incurred charges for purchase options and
acquired in-process technology totaling $2.3 million and $43.8 million,
respectively. If these charges were excluded, Dura would have reported a net
loss of $5.9 million, or $0.78 per share, for 1993 and net income of $8.0
million, or $0.55 per share, in 1995. See Notes 10 and 11 of the Notes to
Consolidated Financial Statements.

(4) Net income (loss) per share is unchanged on a fully diluted basis for all
periods presented. For additional information relating to net income (loss)
per share and common equivalent shares, see Note 2 of the Notes to
Consolidated Financial Statements.

(5) Adjusted to give effect to the sale of 2,350,000 shares of Common Stock by
the Company hereunder and the receipt of the net proceeds therefrom at a
public offering price of $58.75 per share. See "Use of Proceeds."

6
<PAGE> 7

RISK FACTORS

An investment in the Common Stock offered hereby involves a high degree of
risk. In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
before purchasing the Common Stock offered hereby.

Reduction in Gross Margins. There is no proprietary protection for most of
the products sold by the Company and substitutes for such products are sold by
other pharmaceutical companies. The Company expects average selling prices for
many of its products to decline over time due to competitive and reimbursement
pressures. While the Company will seek to mitigate the effect of this decline in
average selling prices, there can be no assurance that the Company will be
successful in these efforts. See "Business -- Competition."

Third Party Reimbursement; Pricing Pressures. The Company's commercial
success will depend in part on the availability of adequate reimbursement from
third party health care 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 or to maintain price levels sufficient to realize an
appropriate return on the Company's investment in product acquisition,
in-licensing and development. The market for the Company's products may be
limited by actions of third party payors. For example, many managed health care
organizations are now controlling the pharmaceuticals that are on their
formulary lists. The resulting competition among pharmaceutical companies to
place their products on these formulary lists has created a trend of downward
pricing pressure in the industry. In addition, many managed care organizations
are pursuing various ways to reduce pharmaceutical costs and are considering
formulary contracts primarily with those pharmaceutical companies that can offer
a full line of products for a given therapy sector or disease state. There can
be no assurance that the Company's products 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. Further,
a number of legislative and regulatory proposals aimed at changing the health
care system have been proposed. While the Company cannot predict whether any
such proposals will be adopted or the effect such proposals may have on its
business, the pending nature of such proposals, as well as the adoption of any
proposal, is likely to exacerbate the industry-wide pricing pressures and could
have a material adverse effect on the Company. See "Business -- Government
Regulation."

Dependence on Acquisition of Rights to Pharmaceutical Products. The
Company's strategy for growth is dependent, in part, upon acquiring,
in-licensing and co-promoting pharmaceuticals targeted primarily at allergists,
ENTs, pulmonologists and a selected subset of pediatricians and generalist
physicians. Other companies, including those with substantially greater
resources, are competing with the Company for the rights to such products. There
can be no assurance that the Company will be able to acquire, in-license or co-
promote additional pharmaceuticals on acceptable terms, if at all. The failure
of the Company to acquire, in-license, co-promote, develop or market
commercially successful pharmaceuticals would have a material adverse effect on
the Company. Furthermore, there can be no assurance that the Company, once it
has obtained rights to a pharmaceutical product and committed to payment terms,
will be able to generate sales sufficient to create a profit or otherwise avoid
a loss. See "Business -- Strategy" and "Business -- Strategic Alliances."

Development Risks Associated With Spiros. Spiros will require significant
additional development. In addition, regulatory approvals for each drug to be
delivered through the use of Spiros will have to be obtained prior to
commercialization. There can be no assurance that development of Spiros will be
completed successfully, that Spiros will not encounter problems in clinical
trials that will cause the delay or suspension of such trials, that current or
future testing will show Spiros to be safe or efficacious or that Spiros will
receive regulatory approval. Moreover, even if Spiros does receive regulatory
approval, there can be no assurance that Spiros will be commercially successful,
have all of the patent and other protections necessary to prevent competitors
from producing similar products and not infringe on patent or other proprietary
rights of third parties. The failure of Spiros to receive timely regulatory
approval and achieve commercial success would have

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<PAGE> 8

a material adverse effect on the Company. See "Business -- Spiros" and
"Business -- Relationship with Spiros Corp."

Seasonality and Fluctuating Quarterly Results. Historically, as a result
of the winter cold and flu season, industry-wide demand for respiratory products
has been stronger in the first and fourth quarters than during the second and
third quarters of the year. In addition, variations in the timing and severity
of the winter cold and flu season have influenced the Company's results of
operations in the past. Recent product acquisitions by the Company are likely to
increase the impact of seasonality on the Company's results of operations.
However, the growth and productivity of its sales force and the introduction by
the Company of new products have tended to mitigate the impact of seasonality on
the Company's results of operations. No assurances can be given that future
sales growth, if any, will continue to mitigate the impact of seasonality.

Competition. Many companies, including large pharmaceutical firms with
financial and marketing resources and development capabilities substantially
greater than those of Dura, are engaged in developing, marketing and selling
products that compete with those offered by the Company. 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
Dura's current or future products. The industry is characterized by rapid
technological changes, and competitors may develop their products more rapidly
than Dura. Competitors may also be able to complete the regulatory process
sooner, and therefore, may begin to market their products in advance of Dura's
products. Dura believes that competition among both prescription pharmaceuticals
and pulmonary delivery systems aimed at the asthma and allergy, cough and cold
markets will be based on, among other things, product efficacy, safety,
reliability, availability and price.

Dura directly competes with at least 25 other companies in the U.S. which
are currently engaged in development, marketing and sales of respiratory
pharmaceuticals. Additionally, there are at least 10 companies currently
involved in 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. In the U.S., only individual dose DPIs are
marketed, including the Rotohaler (developed and marketed by Glaxo Wellcome,
Inc. ("Glaxo")) and the Spinhaler (developed and marketed by Fisons Limited
("Fisons")). The Turbuhaler (developed and marketed by Astra Pharmaceuticals
("Astra")), a multiple dose DPI and the leading DPI in worldwide sales, is
considered the current industry standard, although it is not yet marketed in the
U.S. See "Business -- Competition."

Dependence on Third Parties; Limited Manufacturing Experience. The
Company's strategy for development and commercialization of certain of its
products is dependent upon entering into various arrangements with corporate
partners, licensors and others and upon the subsequent success of these
partners, licensors and others in performing their obligations. The Company has
limited experience manufacturing products for commercial purposes and currently
does not have the capability to manufacture its pharmaceutical products and
therefore is dependent on contract manufacturers for the production of such
products for development and commercial purposes. The manufacture of the
Company's products is subject to current Good Manufacturing Practice ("cGMP")
regulations prescribed by the FDA. In the event that the Company is unable to
obtain or retain third party manufacturing it may not be able to commercialize
its products as planned. There can be no assurance that the Company will be able
to continue to obtain adequate supplies of such products in a timely fashion at
acceptable quality and prices. Also, there can be no assurance that the Company
will be able to enter into agreements for the manufacture of future products
with manufacturers whose facilities and procedures must comply with cGMP and
other regulatory requirements. The Company's current dependence upon others for
the manufacture of its products may adversely affect the future profit margin,
if any, on the sale of those products and the Company's ability to develop and
deliver products on a timely and competitive basis.

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<PAGE> 9

FDA. Any failure or significant delay in the validation of or obtaining a
satisfactory regulatory inspection of the new facility could have a material
adverse effect on the Company's ability to manufacture products in connection
with Spiros. See "Business -- Manufacturing" and "Business -- Government
Regulation."

Managing Growth of Business. The Company has recently experienced
significant growth as total revenues increased 80% in fiscal 1994, 58% in fiscal
1995 and 97% in the first quarter of 1996 as compared to prior periods. During
fiscal 1995, the Company executed three agreements relating to the acquisition,
in-licensing and co-promotion of products and acquired Health Script. In March
1996, the Company commenced a co-promotion. Due to the Company's emphasis on
acquiring and in-licensing respiratory pharmaceutical products, the Company
anticipates that the integration of the recently-acquired or any additional
businesses or products will require significant management attention. The
Company's ability to achieve and maintain profitability is based on management's
ability to manage its changing business effectively. See "-- Attraction and
Retention of Key Personnel" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Uncertainty of Profitability; Need for Additional Funds. The Company has
experienced significant operating losses in the past and at March 31, 1996, the
Company's accumulated deficit was approximately $99.3 million. Although the
Company achieved profitability on an annual basis in fiscal 1994 and 1995 (prior
to the charge of approximately $43.8 million in the fourth quarter of 1995 in
connection with the exercise of its option to purchase all of the outstanding
stock of DDSI and its cash contribution to Spiros Corp.), there can be no
assurance that revenue growth or profitability will continue on a quarterly or
annual basis in the future. The acquisition and in-licensing of products, the
expansion of the Company's sales force in response to acquisition and
in-licensing of products, the maintenance of the Company's existing sales force,
the upgrade and expansion of its facilities, continued pricing pressure and the
potential exercise of the Purchase Option or the Albuterol Purchase Option (as
defined below), as well as funds that Dura, at its option, may provide for
Spiros development, both internally and through Spiros Corp., will require the
commitment of substantial capital resources and may also result in significant
losses. Depending upon, among other things, the acquisition and in-licensing
opportunities available to it, the Company may need to raise additional funds
for these purposes. The Company may seek such additional funding through public
and private financings, including equity financings. Adequate funds for these
purposes, whether through financial markets or from other sources, may not be
available when needed or on terms acceptable to the Company. Insufficient funds
may require the Company to delay, scale back or prevent some or all of its
product acquisition and in-licensing programs, the upgrade and expansion of its
facilities, the potential exercise of the Purchase Option and/or the Albuterol
Purchase Option and further development of Spiros. The Company anticipates that
its existing capital resources, together with cash expected to be generated from
operations and bank borrowings, should be sufficient to finance its current
operations and working capital requirements through at least May 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Potential Exercise of Purchase Options for Spiros Corp. Callable Common
Stock and Albuterol Product; Dilution. The Company has a contractual
relationship with Spiros Corp. relating to the development of Spiros, pursuant
to which certain rights to Spiros were transferred by the Company and DDSI to
Spiros Corp. Dura has a Purchase Option with respect to all of the currently
outstanding shares of callable common stock of Spiros Corp. If Dura exercises
the Purchase Option, it will be required to make a substantial cash payment or
to issue shares of Common Stock, or both. A payment in cash would reduce Dura's
capital resources. A payment in shares of Common Stock would result in a
decrease in the percentage ownership of Dura's shareholders at that time. The
exercise of the Purchase Option will likely require Dura to record a significant
charge to earnings and may adversely impact future operating results. If Dura
does not exercise the Purchase Option prior to its expiration, the Company's
rights in and to Spiros with respect to certain compounds will be terminated.
Dura also has the option to provide funding for Spiros development in certain
circumstances. Dura believes that the current funds of Spiros Corp. will be
sufficient to fund product development by Spiros Corp. through at least the
first half of 1998. Development of Spiros Corp. products may require significant
additional funds.

9
<PAGE> 10

As part of the Company's contractual relationship with Spiros Corp., the
Company received an option to purchase certain rights to an albuterol product in
a cassette version of Spiros (the "Albuterol Purchase Option"). If the Company
exercises the Albuterol Purchase Option, it will be required to make a
substantial cash payment which could have a significant adverse effect on its
capital resources. The Company may not have sufficient capital resources to
exercise the Albuterol Purchase Option which may result in the Company's loss of
valuable rights. In addition, continuation of development and commercialization
of an albuterol product in a cassette version of Spiros may require substantial
additional expenditures by Dura. As of the date of this Prospectus, Dura has no
plans to provide additional funding to Spiros Corp. and has not made any
determination as to the likelihood of its exercise of the Purchase Option or the
Albuterol Purchase Option. See "Business -- Relationship with Spiros Corp."

Government Regulation; No Assurance of FDA Approval. Development, testing,
manufacturing and marketing of the Company's products 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 must
undergo rigorous preclinical and clinical testing and an extensive regulatory
approval process mandated by the FDA. Marketing of drug delivery systems also
requires FDA approval, which can be costly and time consuming to obtain. The
Company will need to obtain regulatory approval for each drug to be delivered
through the use of Spiros. There can be no assurance that the pharmaceutical
products currently in development, or those products acquired or in-licensed by
the Company, will be approved by the FDA. In addition, there can be no assurance
that all necessary clearances will be granted to the Company or its licensors
for future products or that FDA review or actions will not involve delays
adversely affecting the marketing and sale of the Company's products. For both
currently marketed and future 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. In
addition, changes in regulations could have a material adverse effect on the
Company.

The FDA is continuing an evaluation of the effectiveness of all drug
products containing ingredients marketed prior to 1962 (the year of enactment of
the "Drug Amendments of 1962" to the Federal Food, Drug and Cosmetic Act) as
part of its Drug Efficacy Study Implementation ("DESI") program and will
determine which drugs are considered "new drugs" requiring approval through a
New Drug Application ("NDA") for marketing. A policy guide issued by the FDA
indicates that the FDA will implement procedures to determine whether the new
drug provisions are applicable to existing products. If a final determination is
made that a particular drug requires an approved NDA, such approval will be
required for marketing to continue. If such a determination is made, the FDA
might impose various requirements; for example, it might require that the
current product be the subject of an approved NDA, that the product be
reformulated and an NDA approval be obtained, that the product must be sold on
an over-the-counter basis rather than as a prescription drug or that the product
must be removed from the market. There can be no assurance as to which of these
courses the FDA will require, if any, with respect to most of the Company's
pharmaceutical products or whether the Company will be able to obtain any
approvals that the FDA may deem necessary. If any of these actions are taken by
the FDA, such actions could have a material adverse effect on the Company's
business. In addition, the Company's Tornalate Metered Dose Inhaler uses
chlorofluorocarbon ("CFC") propellants. If CFCs are banned for use in the
Tornalate Metered Dose Inhaler, then the Company will not be able to market that
product for sale, which could have a material adverse effect on the Company.
Health Script is subject to regulation by state regulatory authorities,
principally state boards of pharmacy. In addition, Health Script is subject to
regulation by other state and federal agencies with respect to reimbursement for
prescription drug benefits provided to individuals covered primarily by
publicly-funded programs. See "Business -- Government Regulation."

Patents and Proprietary Rights. The Company's success will depend in part
on its ability to obtain patents on current or future products or formulations,
defend its patents, maintain trade secrets and operate without infringing upon
the proprietary rights of others, both in the U.S. and abroad. However, only two
of the pharmaceuticals currently marketed by the Company are protected by
patents. The Company also has licenses or license rights to certain other U.S.
and foreign patent and patent applications. There can be no assurance

10
<PAGE> 11

that patents, U.S. or foreign, will be obtained, or that, if issued or licensed
to the Company, they will be enforceable or will provide substantial protection
from competition or be of commercial benefit to the Company or that the Company
will possess the financial resources necessary to enforce or defend any of its
patent rights. The commercial success of the Company will also depend upon
avoiding the infringement of patents issued to competitors and upon maintaining
the technology licenses upon which certain of the Company's current products
are, or any future products under development might be, based. Litigation, which
could result in substantial cost to the Company, may be necessary to enforce the
Company's patent and license rights or to determine the scope and validity of
the proprietary rights of third parties. If any of the Company's products are
found to infringe upon patents or other rights owned by third parties, the
Company could be required to obtain a license to continue to manufacture or
market such products. There can be no assurance that licenses to such patent
rights would be made available to the Company on commercially reasonable terms,
if at all. If the Company does not obtain such licenses, it could encounter
delays in marketing affected products while it attempts to design around such
patents or it could find that the development, manufacture or sale of products
requiring such licenses are not possible. The Company currently has certain
licenses from third parties and in the future may require additional licenses
from other parties to develop, manufacture and market commercially viable
products effectively. There can be no assurance that such licenses will be
obtainable on commercially reasonable terms, if at all, or that the patents
underlying such licenses will be valid and enforceable. See "Business -- Patents
and Proprietary Rights."

Product Liability and Recall. The Company faces an inherent business risk
of exposure to product liability claims in the event that the use of its
technologies or products is alleged to have resulted in adverse effects. Such
risks will exist even with respect to those products that receive regulatory
approval for commercial sale. While the Company has taken, and will continue to
take, what it believes are appropriate precautions, there can be no assurance
that it will avoid significant product liability exposure. The Company currently
has product liability insurance; however, there can be no assurance that the
level or breadth of any insurance coverage will be sufficient to fully cover
potential claims. There can be no assurance that adequate insurance coverage
will be available in the future at acceptable costs, if at all, or that a
product liability claim or recall would not materially and adversely affect the
business or financial condition of the Company.

Attraction and Retention of Key Personnel. The Company is highly dependent
on the principal members of its management staff, the loss of whose services
might impede the achievement of development objectives. Although the Company
believes that it is adequately staffed in key positions and that it will be
successful in retaining skilled and experienced management, operational and
scientific personnel, there can be no assurance that the Company will be able to
attract and retain such personnel on acceptable terms. The loss of the services
of key scientific, technical and management personnel could have a material
adverse effect on the Company, especially in light of the Company's recent
significant growth. The Company does not maintain key-person life insurance on
any of its employees. See "Business -- Human Resources" and "Management."

Volatility of the Company Stock Price; Absence of Dividends. The market
prices for securities of emerging companies, including the Company, have
historically been highly volatile. Future announcements concerning the Company
or its competitors may have a significant impact on the market price of the
Company's Common Stock. Such announcements might include financial results, the
results of testing, technological innovations, new commercial products, changes
to government regulations, government decisions on commercialization of
products, developments concerning proprietary rights, litigation or public
concern as to safety of the Company's products. No dividends have been paid on
the Company's Common Stock to date and the Company does not anticipate paying
cash dividends in the foreseeable future. See "Price Range of Common Stock" and
"Dividend Policy."

Shares Eligible for Future Sale. Sales of a substantial number of shares
of the Company's Common Stock in the public market following this offering could
adversely affect the market price of the Common Stock. Upon completion of this
offering, there will be approximately 18.1 million shares of Common Stock
outstanding. Of those shares, approximately 17.35 million, including the 2.35
million shares offered hereby, but excluding shares subject to contractual
restrictions discussed below, will be immediately eligible for resale in the
public market without restriction. The holders of approximately 525,000 of the
shares of Common Stock which will be outstanding after this offering (and
approximately 800,000 shares of Common Stock issuable upon exercise of
outstanding options and warrants) have agreed not to sell any shares of Common

11
<PAGE> 12

Stock without the prior written consent of the representatives of the
Underwriters for a period of 90 days after the date of the pricing agreement to
be executed by the Company and the representatives of the Underwriters. See
"Underwriting."

Change in Control. Certain provisions of the Company's charter documents
(including cumulative voting provisions for electing directors, provisions
providing for two classes of directors serving staggered two-year terms and
provisions permitting the Company to issue preferred stock in the future) and
terms relating to the acceleration of the exercisability of certain warrants and
options relating to the purchase of such securities by the Company in the event
of a change in control may have the effect of delaying, deferring or preventing
a change in control of the Company, thereby possibly depriving shareholders of
receiving a premium for their shares of the Company's Common Stock. See
"Description of Capital Stock -- California Law and Certain Charter Provisions."

Forward Looking Statements. Prospective investors are cautioned that the
statements in this Prospectus that are not descriptions of historical facts may
be forward looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those identified under "Risk Factors" and elsewhere
in this Prospectus or documents incorporated by reference herein.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,350,000 shares of
Common Stock offered by the Company are estimated to be $130,827,000
($150,503,550 if the Underwriters' over-allotment option is exercised in full).
These proceeds, together with the Company's existing cash, cash equivalents,
short-term investments and cash generated from operations, will be used for
general corporate purposes, including: (i) to acquire, in-license, co-promote,
develop and commercialize pharmaceuticals targeted at Dura's physician base or
to acquire companies developing and/or marketing such pharmaceuticals; (ii) to
fund product development programs, including Spiros products; and (iii) for
working capital and facilities expansion. At present, the Company is actively
pursuing the acquisition of rights to several products and/or companies which
may require the use of substantial capital resources; however, there are no
present agreements or commitments with respect to any such acquisition.

The cost, timing and amount of funds required for all specific uses by the
Company cannot be precisely determined by the Company at this time and is at
management's discretion. The rate of the Company's progress in acquiring and
in-licensing new products or acquiring companies developing and/or marketing
such products, the timing and nature of regulatory action and the availability
of alternative methods of financing, including agreements with other companies
relating to the development, manufacture and marketing of products, will also
determine the allocation and timing of the Company's use of the proceeds from
this offering.

Pending applications of the proceeds as described above, the Company plans
to invest the net proceeds of the offering in high-grade, short-term,
interest-bearing investments.

12
<PAGE> 13

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is traded on the over-the-counter market and
prices are quoted on the Nasdaq National Market under the symbol "DURA." The
following table sets forth the intraday high and low prices for the Common Stock
for the periods indicated, as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
1st Quarter............................................. $10 $6 1/4
2nd Quarter............................................. 11 7 1/2
3rd Quarter............................................. 13 1/4 10 1/4
4th Quarter............................................. 14 1/2 10 1/2
YEAR ENDED DECEMBER 31, 1995:
1st Quarter............................................. $15 $11 1/2
2nd Quarter............................................. 19 3/4 13
3rd Quarter............................................. 35 18 1/4
4th Quarter............................................. 35 1/2 26 1/2
YEAR ENDING DECEMBER 31, 1996:
1st Quarter............................................. $54 1/2 $32 3/4
2nd Quarter (through May 22, 1996)...................... 61 47
</TABLE>

On May 22, 1996, the last reported sale price of the Company's Common Stock
on the Nasdaq National Market was $59 3/8 per share. As of March 31, 1996, there
were approximately 310 holders of record of the Common Stock.

DIVIDEND POLICY

The Company has never paid any cash dividends on its Common Stock. In
accordance with certain bank loan agreements, the Company is restricted from
paying cash dividends without prior bank approval. The Company currently
anticipates that it will retain all available funds for use in its business and
does not expect to pay any cash dividends in the foreseeable future.

13
<PAGE> 14

CAPITALIZATION

The following table sets forth the actual capitalization of the Company at
March 31, 1996, and as adjusted to reflect the sale of 2,350,000 shares of
Common Stock offered hereby at a public offering price of $58.75 per share and
the receipt of net proceeds of such sale. See "Use of Proceeds."

<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments.............. $ 61,980 $192,807
======== ========
Current portion of long-term obligations....................... $ 6,311 $ 6,311
======== ========
Long-term obligations (excluding current portion of long-term
obligations)(1).............................................. $ 15,445 $15,445
-------- --------
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized;
no shares issued or outstanding........................... -- --
Common Stock, no par value; 25,000,000 shares authorized;
15,765,327 shares outstanding (actual); 18,115,327 shares
outstanding (as adjusted)(2)(3)........................... 217,354 348,181
Accumulated deficit.......................................... (99,263) (99,263 )
Unrealized loss on investments............................... (38) (38 )
Warrant subscriptions receivable............................. (3,921) (3,921 )
-------- --------
Total shareholders' equity................................ 114,132 244,959
-------- --------
Total capitalization...................................... $129,577 $260,404
======== ========
</TABLE>

- ---------------
(1) For additional information relating to long-term obligations, see Note 6 of
the Notes to Consolidated Financial Statements.

(2) Excludes (a) 1,388,311 shares of Common Stock issuable upon the exercise of
options outstanding at March 31, 1996 under the Company's stock option plan,
(b) 2,345 shares of Common Stock available for future grants under such plan
and (c) 2,951,289 shares of Common Stock issuable upon exercise of warrants
outstanding at March 31, 1996. See "Description of Capital Stock." The
Company's shareholders will vote at the 1996 annual meeting to be held on
May 29, 1996 on a proposal to increase the authorized number of shares
available for grant under the Company's stock option plan by 750,000 shares.

(3) The Company's shareholders will vote at the 1996 annual meeting to be held
on May 29, 1996 on a proposal to increase the number of shares of Common
Stock the Company is authorized to issue from 25,000,000 to 100,000,000
shares.

14
<PAGE> 15

SELECTED CONSOLIDATED FINANCIAL DATA

The statement of operations data set forth below for each of the three
years in the period ended December 31, 1995, and the balance sheet data at
December 31, 1994 and 1995, are derived from, and are qualified by reference to,
the audited financial statements incorporated by reference in this Prospectus
and Registration Statement and included elsewhere in this Prospectus and should
be read in conjunction with those financial statements and notes thereto. The
statement of operations data for the fiscal years ended December 31, 1991 and
1992, and the balance sheet data at December 31, 1991, 1992 and 1993, are
derived from audited financial statements not included herein. The management of
the Company believes that the unaudited information at March 31, 1996, and for
the three-month periods ended March 31, 1995 and 1996, contains all adjustments,
consisting of only normal recurring accruals, necessary for a fair presentation
of the financial position at such date and the results of operations for such
periods. Operating results for the three-month period ended March 31, 1996, are
not necessarily indicative of results to be expected for the fiscal year ending
December 31, 1996 or any other interim period. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Company's financial
statements and related notes incorporated by reference in this Prospectus and
Registration Statement and included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:(1)
Revenues:
Sales............................................ $ 5,546 $ 9,561 $15,816 $22,199 $ 39,308 $6,879 $14,055
Contract(2)...................................... -- -- 2,297 10,481 12,194 2,558 4,532
----- ----- ----- ----- ----- ----- -----
Total revenues(2).................................. 5,546 9,561 18,113 32,680 51,502 9,437 18,587
----- ----- ----- ----- ----- ----- -----
Operating costs and expenses:
Cost of sales.................................... 1,588 2,700 3,782 3,894 10,618 1,388 3,623
Clinical, development and regulatory............. 469 1,354 2,819 9,354 8,408 2,091 3,399
Selling, general and administrative.............. 5,856 12,267 17,294 17,871 25,580 5,539 7,740
Goodwill amortization and writedowns............. 935 256 143 105 375 26 113
Other charges(3)................................. -- -- 2,315 -- 43,773 -- --
----- ----- ----- ----- ----- ----- -----
Operating income (loss)............................ (3,302) (7,016) (8,240) 1,456 (37,252) 393 3,712
Other income (expense)............................. (1,090) 247 67 514 1,880 524 615
----- ----- ----- ----- ----- ----- -----
Pre-tax income (loss).............................. (4,392) (6,769) (8,173) 1,970 (35,372) 917 4,327
Provision for income taxes(4)...................... -- -- -- 34 406 60 270
----- ----- ----- ----- ----- ----- -----
Net income (loss)(3)............................... $(4,392) $(6,769) $(8,173) $ 1,936 $(35,778) $ 857 $ 4,057
===== ===== ===== ===== ===== ===== =====
Net income (loss) per share(3)(5).................. $ (0.92) $ (0.93) $ (1.09) $ 0.19 $ (3.05) $ 0.07 $ 0.23
===== ===== ===== ===== ===== ===== =====
Weighted average number of common and common
equivalent shares(5)............................. 4,753 7,253 7,494 9,930 11,720 12,743 17,850
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------ MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.......... $ 2,082 $13,459 $ 6,541 $36,026 $ 67,820 $ 61,980
Working capital............................................ 1,972 12,992 6,830 36,506 59,717 58,706
Total assets............................................... 5,325 26,339 20,048 56,072 143,997 146,973
Long-term obligations (excluding current portion of
long-term obligations)................................... 9,169 4,635 4,719 2,780 15,427 15,445
Shareholders' equity (deficit)(6).......................... (5,191) 18,310 12,571 48,537 109,097 114,132
</TABLE>

- ---------------
(1) Selected financial data includes Health Script subsequent to its acquisition
on March 22, 1995, DDSI subsequent to its acquisition on December 29, 1995
and the Rondec product line subsequent to its acquisition on June 30, 1995.
See Notes 10 and 11 of the Notes to Consolidated Financial Statements.

(3) The 1993 charge of $2.3 million represents the charge for the option to
acquire all of the outstanding stock of DDSI. The 1995 charge of $43.8
million represents the $30.8 million charge for acquired in-process
technology associated with the DDSI acquisition and the $13.0 million charge
for the contribution to Spiros Corp. If these charges were excluded, Dura
would have reported a net loss of $5.9 million, or $0.78 per share, for 1993
and net income of $8.0 million, or $0.55 per share, in 1995. See Notes 10
and 11 of the Notes to Consolidated Financial Statements.

(4) For information relating to provision for income taxes, see Note 9 of the
Notes to Consolidated Financial Statements.

(5) Net income (loss) per share is unchanged on a fully diluted basis for all
periods presented. For additional information relating to net income (loss)
per share and common equivalent shares, see Note 2 of the Notes to
Consolidated Financial Statements.

(6) No cash dividends were declared or paid during the periods presented.

15
<PAGE> 16

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following comments should be read in conjunction with the Consolidated
Financial Statements and Notes contained therein. See "Risk Factors" for trends
and uncertainties known to the Company that could cause reported financial
information not to be necessarily indicative of the future.

RECENT DEVELOPMENTS

During the three months ended March 31, 1996, the Company generated record
quarterly revenues and net income. These results were due in large part to the
agreements the Company entered into in 1995 that resulted in the acquisition of
the Rondec product line and Health Script, the in-licensing of two tuberculosis
pharmaceuticals and the co-promotion of Crolom. The Company continues to focus
its efforts on marketing its products, acquiring additional products rights for
marketing prescription pharmaceuticals to high prescribing respiratory
physicians and developing Spiros.

In March 1996, the Company signed an agreement with Schering Corporation
for the U.S. co-promotion of Uni-Dur, a once-a-day theophylline. Uni-Dur is
indicated for the relief and/or prevention of symptoms of asthma and reversible
bronchospasm associated with chronic bronchitis and emphysema. Under the
agreement, the Company's national sales organization will promote Uni-Dur to the
respiratory physician group it currently calls on and the Company will receive
royalty and incentive payments. Uni-Dur was launched by Schering-Plough in
September 1995 and the Company's national sales organization commenced promotion
of Uni-Dur on April 1, 1996.

In February 1996, Dura entered into an agreement with Houghten to provide,
for a four-year period, contract services for Houghten's drug development
programs using Dura's development capabilities and proprietary formulation and
delivery technology. Dura will receive contract revenues from Houghten for
services provided and rights to collaborate with Houghten on the development of
new compounds. Concurrently, Dura made a $5.0 million equity investment in
Houghten, which was subsequently converted into 775,193 shares of Houghten
Common Stock.

In December 1995, the Company acquired all of the outstanding shares of
DDSI. In connection with the acquisition, callable warrants for 1.7 million
shares of Dura Common Stock were canceled. The purchase price of approximately
$33.5 million was paid by the issuance of 1,142,554 shares of Dura Common Stock.
The acquisition has been treated as a purchase for accounting purposes and,
accordingly, the consolidated financial statements include the results of DDSI
from December 29, 1995. The excess of the purchase price over the fair value of
the net assets acquired from DDSI of approximately $30.8 million was allocated
to in-process Spiros technology and expensed by Dura as a non-cash charge in
December 1995. The acquired in-process Spiros technology will require further
development, completion of clinical trials and regulatory approvals before it
can be commercialized. In December 1995, the Company licensed the Spiros
technology for use with certain compounds to Spiros Corp. The Company, on behalf
of Spiros Corp., is currently managing clinical trials using the Spiros cassette
system with a dry powder formulation of albuterol and will manage additional
future trials. These clinical trials are currently intended to serve as the
basis for the filing of an NDA in 1997 seeking FDA marketing approval for
albuterol in the Spiros cassette system.

In December 1995, Spiros Corp. completed a $28.0 million private placement.
The net proceeds of this private placement and a $13.0 million cash contribution
from Dura will be used by Spiros Corp. to develop Spiros and Spiros applications
for certain currently marketed asthma drugs and selected proteins and peptides
under agreements between the Company and Spiros Corp. In exchange for the cash
contribution from Dura and the issuance of warrants to Spiros Corp.'s
shareholders to purchase an aggregate of 1,120,001 shares of Dura Common Stock,
Dura has the right through December 31, 1999, to purchase all of the currently
outstanding shares of Spiros Corp. callable common stock at predetermined
prices. In addition, Dura has the option, through specified dates, to acquire
Spiros Corp.'s exclusive rights for use of Spiros with albuterol in the cassette
version. A one-time purchase option expense of $13.0 million, representing the
cash contributed to Spiros Corp., was recorded in December 1995. The Company
also recorded a warrant subscription receivable

16
<PAGE> 17

and a corresponding increase in Common Stock for the fair market value of the
warrants issued. See "Business -- Relationship with Spiros Corp."

The Company has reclassified as contract revenues the reimbursements from
DDSI included in the 1993, 1994 and 1995 statements of operations to conform to
the presentation used for Spiros Corp. Prior to Dura's acquisition of DDSI on
December 29, 1995, Dura recorded costs made on behalf of DDSI as they were
incurred and simultaneously accrued reimbursement from DDSI by crediting the
related costs. Dura is recording contract revenues from Spiros Corp. equal to
the amounts due from Spiros Corp. for development and management services less a
pro rata amount allocated to the warrant subscription receivable. The
information presented in the results of operations below reflects this
reclassification.

RESULTS OF OPERATIONS

Three months ended March 31, 1996 as compared to the three months ended
March 31, 1995

Total revenues for the first quarter of 1996 were $18.6 million, an
increase of $9.2 million, or 97%, over the first quarter of 1995. Net income for
the first quarter of 1996 was $4.1 million, or $0.23 per share, compared to
$857,000, or $0.07 per share, in the first quarter of 1995.

Pharmaceutical sales in the first quarter of 1996 increased by $7.2
million, or 104%, as compared to the first quarter of 1995. The increase was due
in large part to the $5.8 million in sales generated in the first quarter of
1996 by Health Script and the products acquired in the second quarter of 1995.
The remaining increase was generated by the pre-existing product line for which
sales increased $1.4 million, or 20%, in the first quarter of 1996 over the
first quarter of 1995 due primarily to the increased productivity of the field
sales force.

Gross profit (pharmaceutical sales less cost of sales) for the first
quarter of 1996 increased by $4.9 million, or 90%, as compared to the first
quarter of 1995. Gross profit as a percentage of sales decreased to 74% in the
first quarter of 1996 from 80% in the first quarter of 1995 due to the lower
margins generated on sales by Health Script.

Contract revenues in the first quarter of 1996 increased by $2.0 million,
or 77%, as compared to the first quarter of 1995. The Company, under agreements
with several companies, conducts feasibility testing and development work on
various compounds for use with Spiros. In addition, the Company receives
royalties primarily from the co-promotion of pharmaceutical products. Contract
revenues from Spiros related development and feasibility agreements were $4.1
million, including $3.7 million from Spiros Corp., in the first quarter of 1996
and $2.1 million, including $2.0 million from DDSI, in the first quarter of
1995. Contract revenues from royalties were $390,000 in the first quarter of
1996 and $65,000 in the first quarter of 1995. In addition, in the first quarter
of 1995 the Company recorded contract revenue of $400,000 resulting from an
agreement with Drug Royalty Corporation USA Inc. ("DRC") under which the Company
received funding through December 1995 to expand its sales force.

Clinical, development and regulatory expenses for the first quarter of 1996
increased by $1.3 million, or 63%, as compared to the first quarter of 1995. The
increase reflects expenses incurred by the Company under feasibility and
development agreements covering the use of various compounds with Spiros.

Selling, general and administrative expenses increased by $2.2 million, or
40%, in the first quarter of 1996 as compared to the first quarter of 1995 and
decreased as a percentage of revenues to 42% in the first quarter of 1996 from
59% in the first quarter of 1995. The dollar increase results primarily from the
operating costs of Health Script, acquired on March 22, 1995, and increased
sales and contracting levels. The decrease as a percentage of revenues reflects
the growth of pharmaceutical sales due to product acquisitions, the growth of
contract revenues and the increased productivity of the sales force.

Interest income for the first quarter of 1996 increased by $385,000 as
compared to the first quarter of 1995 due to the cash generated from the August
1995 stock offering. Interest expense increased by $294,000 in the first quarter
of 1996 as compared to the first quarter of 1995 as a result of obligations
incurred in connection with 1995 product acquisitions.

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<PAGE> 18

The Company recorded income tax provisions of $270,000 and $60,000, for the
quarters ended March 31, 1996 and 1995, respectively. The provisions reflect the
expected combined Federal and state tax rate of 40% offset by the benefit from
utilization of net operating loss carryforwards, which are generally limited to
90% of taxable income.

Year ended December 31, 1995 ("1995") as compared to the year ended
December 31, 1994 ("1994")

Total revenues in 1995 increased $18.8 million, or 58%, over 1994. However,
the Company incurred a net loss in 1995 of $35.8 million, or $3.05 per share,
due to charges totaling $43.8 million related to the Company's Spiros
development program. The charges consisted of a $30.8 million non-cash charge
for in-process technology acquired in connection with Dura's acquisition of DDSI
and a $13.0 million purchase option charge resulting from the cash contribution
to Spiros Corp. If the charges were excluded, the Company would have reported
net income in 1995 of $8.0 million or $0.55 per share.

Pharmaceutical sales in 1995 increased by $17.1 million, or 77%, over 1994
due primarily to the $15.3 million in sales generated by Health Script, 1995
product acquisitions and internally-developed products that were launched in the
second half of 1994. The remaining increase was generated by the pre-existing
product line for which sales growth was impacted by the relatively weak
cough/cold season experienced across the country in the first quarter of 1995.

Gross profit for 1995 increased by $10.4 million, or 57%, as compared to
1994. Gross profit as a percentage of sales decreased to 73% in 1995 from 82% in
1994 due primarily to the lower margins generated on sales by Health Script in
addition to the impact of contract pricing to managed care organizations.

Contract revenues in 1995 increased by $1.7 million as compared to 1994. In
1995 and 1994, the Company recorded contract revenues of $1.6 million and
$400,000, respectively, relating to an agreement with DRC under which the
Company received funding through December 1995 to expand its sales force. In
addition, the Company conducts development work under contracts with several
companies and receives royalties. The development contracts relate to the
testing and development of various compounds for use with Spiros and generated
revenues in 1995 and 1994 of $9.5 million and $9.9 million, respectively,
including $8.0 million and $9.2 million, respectively, from DDSI. The Company
also recorded royalties under the co-promotion arrangement for Crolom of
$813,000 in 1995.

Clinical, development and regulatory expenses in 1995 decreased by
$946,000, or 10%, from 1994. Under an agreement with DDSI, the Company managed
the development of DDSI products and incurred direct development expenses on
behalf of DDSI in 1995 and 1994 of $6.4 million and $8.3 million, respectively,
for which it received contract revenues. The decrease in DDSI development
expenses resulted primarily from the shift from use of outside contractors to
Dura employed personnel and resources and was partially offset by increased
expenses associated with work being performed under other development and
feasibility agreements for which the Company recorded contract revenues of $1.0
million in 1995, and costs associated with the internal development of
respiratory pharmaceutical products.

Selling, general and administrative expenses in 1995 increased by $7.7
million over 1994 and decreased as a percentage of revenues from 55% in 1994 to
50% in 1995. The dollar increase resulted primarily from the operating costs of
Health Script, acquired in March 1995, and increased sales and contracting
levels. The decrease as a percentage of revenues reflected the growth of
pharmaceutical sales due to product acquisitions, the growth of contract
revenues and an increase in the productivity of the sales force.

Other income-net in 1995 increased by $1.4 million as compared to 1994. The
increase resulted primarily from interest income on cash balances generated by
the November 1994 and August 1995 stock offerings which was partially offset by
interest expense resulting from obligations incurred in connection with 1995
acquisitions.

The Company recorded income tax provisions of $406,000 and $34,000 in 1995
and 1994, respectively. The provisions reflect the expected combined Federal and
state tax rate of 40% offset by the benefit from utilization of net operating
loss carryforwards, which are generally limited to 90% of taxable income.

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<PAGE> 19

Year ended December 31, 1994 ("1994") as compared to the year ended
December 31, 1993 ("1993")

Total revenues in 1994 increased $14.6 million, or 80%, over 1993. Net
income for 1994 was $1.9 million, or $0.19 per share, compared to a net loss of
$8.2 million, or $1.09 per share, in 1993.

Pharmaceutical sales in 1994 increased by $7.5 million, or 51%, as compared
to 1993 due primarily to increased productivity of the sales force resulting in
better penetration of existing sales territories. In addition, the introduction
in August 1994 of an internally-developed pharmaceutical product produced sales
during 1994 totaling $943,000. Sales for 1993 included $1.1 million from device
products; the assets of the Company's device division were sold in August 1993.

Gross profit in 1994 increased by $6.3 million, or 52%, as compared to
1993. Gross margin increased to 82% in 1994 as compared to 76% for 1993. The
improvements in gross profit and gross margin reflected the increase in
pharmaceutical sales in absolute dollars and the elimination of device division
sales, which historically generated lower gross margins than did pharmaceutical
sales. If device sales and cost of sales were excluded from the results of
operations for 1993, gross margins for 1993 would have been 80%.

Contract revenues in 1994 consisted of $9.9 million (including $9.2 million
from DDSI) under development contracts relating to testing and development of
various compounds with Spiros, $400,000 from DRC and $161,000 in royalties from
the device division that was sold in 1993.

Clinical, development and regulatory expenses in 1994 increased by $6.5
million over those for 1993. The increase reflects expenses incurred by the
Company under its agreement with DDSI under which the Company incurred direct
development costs in 1994 and 1993 of $8.3 million and $1.5 million,
respectively. Clinical, development and regulatory expenses net of DDSI
development expenses decreased $238,000 from 1993 to 1994.

Selling, general and administrative expenses in 1994 increased by $577,000
over 1993 and decreased as a percentage of revenues from 95% in 1993 to 55% in
1994. The dollar increase resulted primarily from increased sales and
contracting levels. The decrease as a percentage of revenues reflects an
increase in the productivity of the sales force and the introduction of an
internally-developed pharmaceutical product.

Other income-net in 1994 increased by $447,000 as compared to 1993 due
primarily to the write-off of $289,000 in interest payable representing an
overaccrual of interest on a note payable.

The Company recorded an income tax provision of $34,000 in 1994 reflecting
minimum taxes. Pretax income at the expected combined Federal and state tax rate
of 40% was fully offset by the benefit of the reversal of temporary timing
differences for tax reporting purposes which reduced taxable income to zero.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital decreased by $1.0 million to $58.7 million at
March 31, 1996, from $59.7 million at December 31, 1995; cash, cash equivalents
and short-term investments decreased by $5.8 million to $62.0 million at March
31, 1996, from $67.8 million at December 31, 1995. The decreases resulted
primarily from the $5.0 million purchase of preferred stock from Houghten, the
$4.0 million repayment of long-term obligations and the $1.7 million in capital
expenditures during the first quarter of 1996. Partially offsetting the
decreases during the first quarter of 1996 was $4.4 million in cash generated by
operations and $1.0 million in proceeds from issuance of Common Stock and
warrants.

Receivables and inventory at March 31, 1996 increased $2.3 million and
$471,000, respectively, as compared to December 31, 1995. The increases are the
result of increased sales and contracting levels in March 1996 as compared to
December 1995.

In 1995, the Company completed construction, at its headquarters, of a
manufacturing facility that will be used to formulate, mill, blend and fill
drugs to be used with Spiros, pending regulatory approval. Included in
construction in progress at March 31, 1996 are capital expenditures of $9.1
million relating to the facility. Equipment purchases for and initial validation
of the manufacturing facility are currently scheduled through 1997. At March 31,
1996, the Company had open purchase commitments for validation of the facility
and

19
<PAGE> 20

equipment purchases of approximately $2.5 million and is considering an
approximately $2.0 million expansion to its manufacturing facility.

At March 31, 1996, the Company had available a line of credit with a bank
providing for borrowings up to $5.0 million, against which there were no
borrowings outstanding. In accordance with bank loan agreements, all assets of
the Company are pledged as collateral to loans outstanding, and the Company is
required to maintain certain financial covenants.

The development and management agreement between the Company and Spiros
Corp. requires Spiros Corp. to make payments to Dura, for development and
management services, within 15 days after the end of the month in which the
services are incurred. Dura records contract revenues from Spiros Corp. equal to
the amounts due from Spiros Corp. for development and management services less a
pro rata amount allocated to the warrant subscription receivable. The Company
has the Purchase Option with respect to all of the currently outstanding shares
of Spiros Corp. callable common stock which is exercisable through December 31,
1999 at predetermined prices. In addition, the Company has the Albuterol
Purchase Option to acquire Spiros Corp.'s exclusive rights for use of Spiros
with albuterol in the cassette version for a minimum of $15.0 million in cash.

At March 31, 1996, the Company had an aggregate of $21.8 million in future
maturities of principal under notes payable and other obligations, of which $6.3
million is to be paid within the next year.

The Company has a $59.8 million net operating loss carryforward for Federal
income tax purposes, of which approximately $27.5 million is currently available
to offset taxable income. The tax benefit from approximately $9.4 million of the
amount currently available will be credited to Common Stock when and if this
amount is used to offset taxable income. The annual utilization of net operating
loss carryforwards is generally limited to 90% of taxable income.

The Company anticipates that its existing capital resources, together with
cash expected to be generated from operations and available bank borrowings
should be sufficient to finance its operations and working capital through at
least May 1997. Significant additional resources, however, may be required in
connection with product or company acquisitions or in-licensing opportunities.
At present, the Company is actively pursuing the acquisition of rights to
several products and/or companies which may require the use of substantial
capital resources; however, there are no present agreements or commitments with
respect to any such acquisition.

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<PAGE> 21

BUSINESS

OVERVIEW

Dura is a specialty respiratory pharmaceutical and pulmonary drug delivery
company. The Company is engaged in marketing prescription products to physicians
who treat patients suffering from asthma, hay fever, COPD, the common cold and
related respiratory ailments. Dura has strategically focused on the U.S.
Respiratory Market because of its size (approximately $4.8 billion in sales in
1995) and growth opportunities. Additionally, the fragmented nature of the
market and the identifiable base of physician prescribers allow the Company to
achieve significant market penetration with a specialized sales force. The
Company currently markets two patented and 20 off-patent prescription products.
The Company also has Health Script, a separate mail service pharmacy which
dispenses respiratory pharmaceuticals.

Dura employs a dual marketing strategy utilizing its focused field sales
force of approximately 130 people and a dedicated managed care sales and
marketing group that covers managed care organizations and retail pharmacy
chains. Dura's field sales force targets a physician base which includes
approximately 55,000 U.S. allergists, ENTs, pulmonologists and a selected subset
of pediatricians and generalist physicians, who collectively write approximately
70% of respiratory pharmaceutical prescriptions. Dura believes that its field
sales force calls on approximately one-half of the target physician base. The
Company's managed care sales and marketing group concentrates on sales to large
regional and national managed care organizations. The Company expects to
continue expanding both the field sales force and the managed care sales and
marketing group as warranted by market opportunities. During 1995, in addition
to building its existing business of dispensing respiratory pharmaceuticals
through home healthcare providers, Health Script launched a new program under
the name "HomeRx" in which the Dura field sales force provides information
concerning the services of Health Script to Dura's targeted physician base.

The Company is developing or has contracted for the development of four
currently-marketed respiratory prescription pharmaceuticals. Three of these
products are being developed by Elan as part of its collaborative relationship
with the Company and utilize Elan's drug delivery expertise and proprietary
technologies. The fourth product is being developed internally. In March 1996,
the Company launched its internally-developed Rondec Chewable cough/cold product
for the pediatric market.

Another key component of Dura's strategy is to develop Spiros, formerly
known as the Dryhaler. Spiros is being designed to aerosolize pharmaceuticals in
dry powder formulations for delivery to the lungs while providing certain
advantages over other currently-used methods of pulmonary drug delivery. The
Company has a three-level development program for Spiros which entails (i)
developing, on behalf of Spiros Corp., certain drug applications for use in
Spiros, including in the near-term albuterol, beclomethasone and ipratroprium,
three of the most frequently-prescribed pharmaceutical agents to treat
respiratory conditions, and, in the longer term, certain proteins and peptides,
(ii) licensing Spiros primarily to pharmaceutical companies, including
Mitsubishi and Fujisawa, for use with certain of their proprietary respiratory
products, and (iii) developing Spiros, in collaboration with third parties
including Elan and Houghten, for the systemic delivery of compounds through the
lungs for respiratory and non-respiratory indications as an alternative to
current invasive delivery techniques. In February 1996, the Company entered into
a collaborative agreement with Houghten to develop inhalation formulations of
new compounds discovered and developed by Houghten.

In April 1996, Dura completed dosing of subjects in a clinical trial in the
United States on behalf of Spiros Corp. focusing on dose selection using a
formulation of powdered albuterol with Spiros under an IND application filed
with the FDA. Results from this clinical trial are currently being analyzed.
This study, along with a combination of other short-term and long-term trials,
is intended to serve as the basis for the filing of an NDA in 1997 seeking FDA
approval, on behalf of Spiros Corp., to market albuterol in the Spiros cassette
system. The Company is also preparing an IND application for U.S. studies on
beclomethasone in the Spiros

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<PAGE> 22

blisterdisk system which will be filed on behalf of Spiros Corp. In addition,
Dura, on behalf of Spiros Corp., is currently performing powder formulation work
with the peptide drug salmon calcitonin to demonstrate its ability to develop an
appropriate macromolecule aerosol powder formulation, and to demonstrate
systemic delivery using Spiros technology.

In December 1995, the Company acquired all of the outstanding stock of
DDSI, a separate company formed in 1993 to develop certain compounds for use
with Spiros. At the same time Spiros Corp. completed a $28.0 million private
placement. The net proceeds of this private placement and a $13.0 million cash
contribution from Dura will be used by Spiros Corp. to continue a significant
portion of the development program for Spiros, including funding of ongoing and
future clinical trials of albuterol in a cassette version of Spiros, and
formulation, preclinical development and clinical trials of albuterol,
beclomethasone and ipratropium in a blisterdisk version of Spiros. The Company
has the Purchase Option, which entitles the Company to purchase all of the
currently outstanding shares of callable common stock of Spiros Corp. through
December 31, 1999 at predetermined prices.

U.S. RESPIRATORY MARKET

Dura divides the U.S. Respiratory Market into two primary markets: (i)
asthma and COPD; and (ii) allergy, cough and cold.

Asthma and COPD

Asthma is a complex physiological disorder characterized by airway
hyperreactivity to a variety of stimuli such as dust, pollen, stress or physical
exercise, resulting in airway obstruction that is partially or temporarily
reversible. The U.S. asthma population has grown steadily to more than 15
million people, a 66% rise since 1980. The U.S. combined market for therapeutic
drugs to treat asthma and COPD was over $2.3 billion in 1995. The primary
categories of therapeutic drugs used in the treatment of asthma and COPD include
bronchodilators and anti-inflammatories. Bronchodilators dilate the airways and
include beta agonists (such as bitolterol and albuterol), xanthines (such as
theophylline) and anticholinergics (such as ipratropium). Anti-inflammatories
reduce inflammation and include cromolyns and glucocorticoids (such as
triamcinolone, beclomethasone, flunisolide and budesonide).

Allergy, Cough and Cold

While the causes of allergies (which can be seasonal or perennial) and
cough and colds differ, nasal congestion and sneezing are common symptoms of
these diseases. The U.S. combined market for therapeutic drugs to treat
allergies, cough and cold was over $2.5 billion in 1995. Antihistamines and
antihistamine/decongestant combinations are the most widely used forms of
therapy for allergies and represent the largest portion of the allergy, cough
and cold market in the U.S. Cough and cold preparations represent the next
largest portion of the allergy, cough and cold market and include decongestant
and decongestant/expectorant combinations, cough suppressants and antihistamine
combinations and expectorants.

STRATEGY

The Company's objective is to be a leading supplier of respiratory
pharmaceuticals and pulmonary drug delivery systems. The Company attempts to
achieve this objective through the implementation of the following:

- Focusing marketing efforts on respiratory physician specialists. Dura
employs a dual marketing strategy utilizing its focused field sales force
and a dedicated managed care sales and marketing group. Dura's field
sales force targets a physician base which includes approximately 55,000
U.S. allergists, ENTs, pulmonologists and a selected subset of
pediatricians and generalist physicians, who collectively write
approximately 70% of respiratory pharmaceutical prescriptions. Dura
believes that its field sales force calls on approximately one-half of
the target physician base. The Company's managed care sales and marketing
group concentrates on sales to large regional and national managed care
organizations.

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<PAGE> 23

The Company expects to continue expanding both the field sales force and
the managed care sales and marketing group as warranted by market
opportunities. During 1995, in addition to building its existing business
of dispensing respiratory pharmaceuticals through home healthcare
providers, Health Script launched a new program under the name "HomeRx"
in which the Dura field sales force provides information concerning the
services of Health Script to Dura's targeted physician base.

- Acquiring, in-licensing or co-promoting respiratory prescription
pharmaceuticals. The Company seeks to acquire, in-license or co-promote
already approved respiratory prescription pharmaceuticals or companies
developing and/or marketing such pharmaceuticals. The Company is
particularly focused on respiratory drugs that are under-promoted by
large pharmaceutical companies. The Company believes that the
pharmaceutical industry is undergoing a restructuring that may create
greater opportunities for the Company. For example, many large
pharmaceutical companies are reducing their sales forces, which may lead
to the underpromotion of certain products and create significant
acquisition, in-licensing and co-promotion opportunities. Additionally,
consolidation within the sector may make small product lines less
desirable to large pharmaceutical companies. At present, the Company is
actively pursuing the acquisition of rights to several products and/or
companies which may require the use of substantial capital resources;
however, there are no present agreements or commitments with respect to
any such acquisition.

- Developing Spiros. The Company has a three-level development program for
Spiros which entails (i) developing, on behalf of Spiros Corp., certain
drug applications for use in Spiros, including in the near term
albuterol, beclomethesome and ipratroprium, three of the most
frequently-prescribed pharmaceutical agents to treat respiratory
conditions, and, in the longer term, certain proteins and peptides, (ii)
licensing Spiros primarily to pharmaceutical companies for use with
certain of their proprietary respiratory products, and (iii) developing
Spiros, in collaboration with third parties, for the systemic delivery of
compounds through the lungs for respiratory and non-respiratory
indications as an alternative to current invasive delivery techniques.
These Spiros development programs are currently being undertaken
primarily through strategic relationships with Spiros Corp., Elan,
Mitsubishi, Fujisawa and Houghten.

- Developing respiratory pharmaceutical products. The Company is presently
developing or has contracted for the development of four
currently-marketed respiratory prescription pharmaceuticals. The Company
considers a number of factors in determining which currently-marketed
pharmaceuticals to develop, including (i) projected market size and
historical revenues and profits, (ii) ability to be marketed through
Dura's existing distribution channels, (iii) ability to complement or
supplement Dura's existing products and (iv) ability to be differentiated
from other currently-marketed pharmaceuticals, either by reformulation or
method of delivery.

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<PAGE> 24

DURA'S CURRENT PRODUCTS

The following prescription pharmaceuticals are currently being marketed by
Dura in the following therapeutic categories:

<TABLE>
<CAPTION>
RIGHTS YEAR
OBTAINED FROM OR INTRODUCED
PRODUCTS DEVELOPED BY BY DURA
-------------------------------------------------- --------------------- ----------
<S> <C> <C>
ASTHMA
TORNALATE Metered Dose Inhaler.................. Sterling-Winthrop 1993
TORNALATE Solution for Inhalation, 0.2%......... Sterling-Winthrop 1992
Uni-Dur......................................... Schering Corporation 1996
ALLERGY, COUGH AND COLD
DURA-VENT Tablets............................... Dura Pre-1989
DURA-VENT/DA Tablets............................ Dura Pre-1989
DA CHEWABLE Tablets............................. Dura 1991
DURA-TAP/PD Capsules............................ Dura Pre-1989
DURA-VENT/A Capsules............................ Dura Pre-1989
DURA-GEST Capsules.............................. Dura Pre-1989
FENESIN Tablets................................. Dura Pre-1989
FENESIN DM Tablets.............................. Dura 1994
GUAI-VENT/PSE Tablets........................... Dura 1994
CROLOM.......................................... Bausch & Lomb 1995
RONDEC Oral Drops............................... Abbott 1995
RONDEC Syrup.................................... Abbott 1995
RONDEC-TR Tablet................................ Abbott 1995
RONDEC Tablet................................... Abbott 1995
RONDEC DM Oral Drops............................ Abbott 1995
RONDEC-DM Syrup................................. Abbott 1995
RONDEC Chewable................................. Dura 1996
OTHER
Capastat Sulfate................................ Eli Lilly and Company 1995
Seromycin....................................... Eli Lilly and Company 1995
</TABLE>

Dura's agreement with Schering Corporation to market Uni-Dur allows the
Company to further leverage the productivity of its field sales force. The
Company is promoting the product, which is used to treat asthma and reversible
bronchospasm, to a significant portion of its targeted physician base. The
extension of the Rondec product line by the introduction of Rondec Chewable
represents an additional opportunity for Dura to achieve its goal of increasing
sales and its presence in the pediatric market.

The two TORNALATE products are the subject of approved NDAs and are
protected by patents that expire in the near term. Capastat Sulfate and
Seromycin are the subject of approved NDAs and Uni-Dur and CROLOM are the
subject of approved Abbreviated New Drug Applications ("ANDAs"), but none of
these products is protected by patents. The remaining products are branded
pharmaceuticals which are not the subject of NDAs or ANDAs, and are not
protected by patents.

SPIROS

Spiros is a proprietary pulmonary dry powder drug delivery system that is
designed to aerosolize pharmaceuticals in dry powder formulations for delivery
to the lungs. Currently, Metered Dose Inhalers ("MDIs") are the most commonly
used inhalation delivery systems. The Company believes DPIs will gradually
replace MDIs as the leading pulmonary delivery system, due primarily to CFC
regulation and

24
<PAGE> 25

coordination problems associated with MDIs. While many companies are studying
alternative propellants, such as hydrofluorocarbons, for use in MDIs, the
Company believes any product utilizing alternative propellants will still suffer
from many of the limitations of currently-marketed MDIs, including the need for
patients to coordinate breathing with actuation. There are currently two general
classes of DPIs in commercial use worldwide, individual and multiple dose
systems, and both are breath powered and flow rate dependent. In the U.S., only
individual dose DPIs are marketed. Turbuhaler, a multiple dose DPI and the
leading DPI in worldwide sales, is considered the current industry standard
although it is not yet approved for marketing in the U.S. by the FDA.

Potential Advantages of Spiros

The Company believes Spiros may have certain advantages over other
currently used methods of delivery including the following.

- Inspiratory flow rate independence. Spiros is designed to deliver a
relatively consistent drug dose to the lungs over a wide range of
inspiratory flow rates, which can vary depending on a patient's health,
effort or physical abilities. Recently-completed tests of Spiros on human
subjects have shown a relatively consistent and significant level of drug
deposition throughout the clinically relevant inspiratory range.
Currently-available DPIs can vary significantly in their level of drug
deposition depending on the inspiratory flow rate and can deliver
significantly less drug at the lower flow rates typically associated with
asthma attacks.

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

- Free of chlorofluorocarbon propellants. CFC propellants have ozone
destructive characteristics and are subject to regulations aimed at
eliminating their usage within the decade. Spiros will not use CFCs while
MDIs, currently the most popular form of aerosol drug delivery, use CFCs.
Virtually all of the world's industrial nations, under the auspices of
the United Nations Environmental Program, have pledged to cease use of
CFCs by the year 2000. As a result of the phase out of CFCs, the Company
believes that DPIs will become a leading method for pulmonary drug
delivery.

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

- Patient convenience. Spiros is designed to be convenient for patients,
with features such as portability, light weight, small size, breath
actuation, quick delivery time, simple operation, dose delivery feedback
and multi-dose capability.

No assurance can be provided that any of the potential advantages will be
established so as to satisfy FDA approval criteria or to provide a market
benefit.

Development Program for Spiros

The Company intends to proceed with a three-level development program for
Spiros. The first level entails developing certain drug applications for use in
Spiros, including in the near term albuterol, beclomethasone and ipratropium,
three of the most frequently-prescribed pharmaceutical agents to treat
respiratory conditions, and, in the longer term, certain proteins and peptides.
The Company is engaged in on-going discussions with the FDA regarding
submissions for clinical testing requirements for Spiros for albuterol,
beclomethasone and ipratropium aimed at facilitating the regulatory approval
process.

25
<PAGE> 26

A pilot clinical study using an earlier generation Spiros cassette system
and a marketed form of albuterol was completed in 1994, with data showing good
lung delivery performance of the system. An IND application was filed with the
FDA in 1994 to begin clinical testing with Dura's own albuterol dry powder
formulation with the improved, current generation, Spiros cassette system. Dura
exclusively licensed rights to this formulation to Spiros Corp. In April 1996,
Dura completed dosing of subjects in a clinical trial in the United States on
behalf of Spiros Corp. focusing on dose selection using a formulation of
powdered albuterol with Spiros under an IND application filed with the FDA.
Results from this clinical trial are currently being analyzed. This study, along
with a combination of other short-term and long-term trials, is intended to
serve as the basis for the filing of an NDA in 1997 seeking FDA marketing
approval, on behalf of Spiros Corp., for albuterol in the Spiros cassette
system. Considerable formulation work for use of beclomethasone with Spiros has
also been done. A study has been completed in Canada to evaluate dose selection
in 24 subjects. The Company is preparing an IND application for U.S. studies on
beclomethasone in the Spiros blisterdisk system which will be filed on behalf of
Spiros Corp. Additional clinical trials will study albuterol, beclomethasone and
ipratropium in the Spiros blisterdisk system, on behalf of Spiros Corp.

Dura, on behalf of Spiros Corp., is also currently performing powder
formulation work with the peptide drug salmon calcitonin, to demonstrate its
ability to develop an appropriate macromolecule aerosol powder formulation, and
to demonstrate systemic delivery using Spiros technology. To date, particle size
reduction appropriate for aerosol administration has been achieved, and in vitro
measurements have shown good aerosol characteristics in Spiros. The formulation
has been shown to be sufficiently stable, a clinical trial batch has been
manufactured in Dura's cGMP facility and a clinical trial using this formulation
to determine bioavailability began in early 1996 under an individual
investigator IND application.

The second level consists of licensing Spiros primarily to pharmaceutical
companies for use with certain of their proprietary respiratory products. Dura
currently has a development agreement with Fujisawa and is conducting
feasibility studies for other pharmaceutical companies to assess the suitability
of certain compounds to be delivered using Spiros. There can be no assurance
that any of these feasibility studies will prove successful, or even if
successful, that the pharmaceutical companies will proceed to license Spiros for
use with these compounds. See "-- Strategic Alliances."

The third level is to develop Spiros for the systemic delivery of compounds
through the lungs for respiratory and non-respiratory indications as an
alternative to current invasive delivery techniques. The Company commenced
development efforts on the use of Spiros with peptides and proteins in 1995. On
behalf of Spiros Corp., the Company is conducting a pilot feasibility study to
show proof-of-principle in humans of Spiros' ability to deliver proteins and
peptides systemically through the lungs. Dura is also performing feasibility
studies for pharmaceutical companies that desire to develop Spiros for use with
both respiratory drugs and drugs for systemic pulmonary delivery now being
developed by those companies. In February 1996, Dura entered into a
collaborative agreement with Houghten to develop inhalation formulations of new
compounds discovered and developed by Houghten. See "-- Strategic Alliances."

ADDITIONAL RESPIRATORY PRODUCTS UNDER DEVELOPMENT

The Company is also developing or has contracted for the development of
four currently-marketed respiratory prescription pharmaceuticals. Three of these
products are being developed by Elan as part of its collaborative relationship
with the Company and utilize Elan's drug delivery expertise and proprietary
technologies. These products have been selected because they involve complex
delivery problems which make it more difficult for them to be easily and widely
genericized. Elan is currently performing dissolution and bioavailability
studies on two of these products. See "-- Strategic Alliances." The Company is
also developing a chewable cough/cold product which would add to Dura's products
already offered to the pediatric market. This product is being developed under
contract with outside manufacturers for Dura's exclusive use and utilizes a
proprietary taste masking technology. Dura intends to seek FDA approval to
market this product under an ANDA.

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<PAGE> 27

SALES AND MARKETING

Field Sales Force

Dura's specialized sales and marketing organization targets a physician
base which includes approximately 55,000 U.S. allergists, ENTs, pulmonologists,
and a selected subset of pediatricians and generalist physicians who treat a
large number of allergy and asthma patients. This relatively small group of
physicians writes approximately 70% of respiratory pharmaceutical prescriptions
for the $4.8 billion U.S. Respiratory Market. This concentration allows for
effective market penetration by a specialized sales and marketing organization.

As of March 31, 1996, Dura had 115 full-time pharmaceutical sales
representatives nationwide, supervised by 15 district managers and two regional
directors. Dura believes its focused sales force currently calls on
approximately one-half of its target physician base. The Company intends to
continue expansion of its field sales force as product opportunities warrant.

The Company believes that the personal relationships of Dura's sales
representatives with their physician customers are essential to the Company's
business. Dura's sales representatives differentiate themselves from the
competition by focusing primarily on asthma and allergy, cough and cold, and by
promoting pharmaceuticals used by respiratory specialists in treating patients.
With a relatively small target audience, promotional spending by Dura on
advertising and direct mail is generally inexpensive and efficient. The Company
regularly participates in local, regional and national medical meetings of the
key specialty groups. The Company believes that it has established a national
awareness of the Dura name within the U.S. Respiratory Market.

Managed Care Sales and Marketing Group

To implement Dura's dual marketing strategy, the Company established a
dedicated managed care sales and marketing group, currently consisting of four
experienced national account managers, which concentrates on sales to large
regional and national managed care organizations. These organizations include
HMOs, preferred provider organizations ("PPOs"), large drug merchandising
chains, nursing home providers and mail order pharmacies. A primary goal of the
managed care sales and marketing group is to place Dura's products on approved
formulary lists of HMOs and PPOs.

HEALTH SCRIPT

In March 1995, the Company acquired Health Script, located in Denver,
Colorado. Health Script, a wholly-owned subsidiary of the Company, is a mail
service pharmacy which dispenses respiratory pharmaceuticals. Mail order
services are particularly well-suited for respiratory patients who are
long-term, chronic users of certain pharmaceuticals and to whom the convenience
and cost efficiency of mail order is appealing. Health Script was formed in 1990
to supply value priced respiratory pharmaceutical products to patients through
the mail. Health Script currently dispenses, to its approximately 30,000
patients nationwide, over 100 respiratory products manufactured by third
parties. Since inception, Health Script has focused on working with home
healthcare providers and their patients to coordinate respiratory medication
services and patient management programs. These home healthcare providers, which
principally distribute nebulizers, inform patients about the mail services of
Health Script. The existing patient base is maintained by telephone
conversations between pharmacists and the patients in which the patients'
compliance with their doctors' prescriptions are reviewed. During 1995, in
addition to building its existing business of dispensing respiratory
pharmaceuticals through home healthcare providers, Health Script launched a new
program under the name "HomeRx" in which the Dura field sales force provides
information concerning the services of Health Script to Dura's targeted
physician base.

RELATIONSHIP WITH SPIROS CORP.

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<PAGE> 28

trials of albuterol in a cassette version of Spiros, and formulation,
preclinical development and clinical trials of albuterol, beclomethasone and
ipratropium in a blisterdisk version of Spiros.

The financing involved the issuance and sale of 933,334 units at $30.00 per
unit. Each unit consisted of one share of Spiros Corp. callable common stock and
one Series S Warrant exercisable for 1.2 shares of the Company's Common Stock at
an exercise price of $38.94 per share. In consideration for the issuance of the
Series S Warrants and Dura's cash contribution, the Company received the
Purchase Option, which can be exercised through December 31, 1999, to purchase
all of the currently outstanding shares of Spiros Corp. callable common stock at
predetermined prices, beginning at $46.88 per share (an aggregate of $43.7
million) through December 31, 1997 and increasing on a quarterly basis
thereafter to a maximum of $76.17 per share (an aggregate of $71.1 million) on
December 31, 1999. Such purchase price may be paid, at the Company's discretion,
in cash, shares of the Company's Common Stock, or a combination thereof. Any
shares of Dura Common Stock delivered in payment of the purchase price must be
covered by an effective registration statement. If the development efforts of
Spiros Corp. are successful, the Company may exercise its right to purchase
Spiros Corp.'s callable common stock; however, the Company does not have a legal
obligation to do so. In addition, Dura has the Albuterol Purchase Option through
specified dates. In the event Dura exercises the Albuterol Purchase Option and
does not exercise the Purchase Option, Dura will pay a royalty to Spiros Corp.
on net sales of such product.

In connection with the private placement, the Company entered into the
following agreements with Spiros Corp.:

- Technology License Agreement -- Under this agreement, the Company and
DDSI granted to Spiros Corp., subject to existing agreements with Elan
and Mitsubishi, a royalty-bearing, perpetual, exclusive license to use
Spiros in connection with albuterol, beclomethasone and ipratropium and
certain other proteins and peptides (including calcitonin) and certain
non-exclusive rights to all other compounds to which Dura and/or DDSI
have or acquire rights capable of transfer during the term of the
Development and Management Agreement.

- Interim Manufacturing and Marketing Agreement -- Under this agreement,
Spiros Corp. granted to the Company an exclusive license to manufacture
and market Spiros Corp. products in the U.S. in exchange for a royalty of
10.0% on net product sales, as defined in the agreement. This agreement
expires upon termination or expiration of the Purchase Option.

- Development and Management Agreement -- Under this agreement, Spiros
Corp. has engaged the Company to develop the Spiros Corp. products and
provide general management services to Spiros Corp.

STRATEGIC ALLIANCES

Elan Corporation plc. In September 1994, Dura, DDSI and Elan signed
certain agreements resulting in the formation of a strategic alliance. These
agreements expanded the relationship established in April 1994 with the
definitive stock purchase agreement signed by Dura and Elan, under which Elan,
for an aggregate consideration of $3,480,000, purchased 342,857 shares of Dura
Common Stock, along with warrants exercisable into 300,000 additional shares of
Dura Common Stock at an exercise price of $8.75 per share. Under a technology
access agreement, Elan is developing generic versions of certain drugs. If Elan
successfully develops and obtains the appropriate regulatory approvals for the
drugs, Dura plans to market these drugs in the U.S. through its established
pharmaceutical sales and marketing organization. In November 1994, Dura
deposited with Elan $2.5 million and is required to make certain other milestone
payments in connection with this agreement. In the event such development
efforts are unsuccessful, Elan will be required to refund in cash the Company's
$2.5 million deposit.

A separate development agreement provides for Elan to develop up to five
compounds, including at least one protein and one peptide compound, for systemic
delivery through the lungs utilizing Spiros. Dura and Elan have agreed that at
or before the expiration of this agreement, if the results of Elan's research
and development are characterized by both parties as favorable, the parties will
negotiate a further agreement

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<PAGE> 29

relating to the sales and marketing of these compounds for use in Spiros. The
agreement expires in September 1996. Dura retains the right to license Spiros to
other pharmaceutical and biotechnology companies which are currently developing
proteins and peptides. These rights could include establishing co-promotion and
co-marketing arrangements with other pharmaceutical and biotechnology companies.
The parties are in discussions concerning a development agreement intended to
succeed the expiring development agreement; however, there can be no assurances
that such a development agreement will be entered into on terms which are
acceptable to Dura, if at all.

Further, DDSI, Dura and Elan are parties to a product licensing agreement
under which Elan received exclusive rights to develop, manufacture and market to
most countries outside the U.S. eight identified asthma and COPD compounds for
use in Spiros, including albuterol, beclomethasone and ipratropium. Dura and
DDSI assigned certain of their rights under this license agreement to Spiros
Corp. in December 1995. Additionally, Elan made a $10.0 million investment in
the units of Spiros Corp.

Mitsubishi Chemical Corporation. In October 1994, Dura, DDSI and
Mitsubishi entered into a license and supply agreement, under which Mitsubishi
was granted the exclusive right to use and sell Spiros together with a dry
powder formulation of an asthma compound in Japan, Hong Kong, Singapore, the
Republic of China (Taiwan), the Republic of Korea and the People's Republic of
China (collectively the "Territory"). DDSI's rights under the agreement were
assigned to Spiros Corp. in December 1995. Spiros Corp. has agreed to develop a
dry powder formulation of such compound for Mitsubishi and will manufacture and
supply to Mitsubishi its requirements for both Spiros and such compound.
Mitsubishi will be responsible for conducting all clinical and other work needed
to obtain regulatory approvals of Spiros and such compound in the Territory. In
connection with the license and supply agreement, Mitsubishi is obligated to
make milestone and other payments to Dura and Spiros Corp. in certain
circumstances.

Fujisawa Pharmaceutical Co., Ltd. In April 1995, the Company entered into
a collaborative development agreement with Fujisawa covering the use of Spiros
to deliver one of Fujisawa's new chemical entity asthma compounds. The agreement
was an extension of previous feasibility work completed by Dura. Pursuant to the
agreement, the Company will provide dry powder formulation assistance,
manufacturing process development and clinical trial supplies to Fujisawa
through the completion of clinical trials in Japan or June 30, 1998, whichever
occurs first. The Company received an up-front payment and is to receive
additional milestone payments and reimbursement of costs from Fujisawa. Fujisawa
can terminate the agreement upon 30 days notice to the Company. If Fujisawa's
clinical trials are successful, the parties have agreed to negotiate additional
agreements, which could include license and supply agreements.

Houghten Pharmaceuticals, Inc. In February 1996, the Company entered into
a research and development agreement with Houghten to develop inhalation
formulations of new compounds discovered and developed by Houghten. In addition,
Dura will provide to Houghten, for a four-year period, contract services for
Houghten's drug development programs using Dura's development capabilities and
proprietary formulation and delivery technology. The Company will receive a
percentage of proceeds received by Houghten with respect to jointly-developed
compounds, and will receive contract revenues from Houghten for services
provided. Concurrently, Dura made a $5.0 million equity investment in Houghten,
which was subsequently converted into 775,193 shares of Houghten Common Stock.

In addition, the Company has executed agreements with a number of
international pharmaceutical companies to conduct feasibility studies on
formulations of certain compounds for use with Spiros, including growth hormones
and proteins and peptides.

COMPETITION

The Company directly competes with at least 25 other companies in the U.S.
which are currently engaged in developing, marketing and selling of respiratory
pharmaceuticals. Additionally, there are at least 10 companies currently
involved in developing, marketing and selling of dry powder pulmonary drug
delivery systems. In the U.S., only individual dose DPIs are marketed, including
the Rotohaler (developed and marketed by Glaxo) and the Spinhaler (developed and
marketed by Fisons). The Turbuhaler (developed and

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<PAGE> 30

marketed by Astra), a multiple dose DPI and the leading DPI in worldwide sales,
is considered the current industry standard, although it is not yet marketed in
the U.S.

Many of these companies, including large pharmaceutical firms with
financial and marketing resources and development capabilities substantially
greater than those of the Company, are engaged in developing, marketing and
selling products that compete with those offered by the Company. 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 current or future products. The industry is characterized by
rapid technological changes, and competitors may develop their products more
rapidly than the Company. Competitors may also be able to complete the
regulatory process sooner and, therefore, may begin to market their products in
advance of the Company's products. Dura believes that competition among both
prescription pharmaceuticals and pulmonary drug delivery systems aimed at asthma
and allergy, cough and cold markets will be based on, among other things,
product efficacy, safety, reliability, availability and price.

CLINICAL, DEVELOPMENT AND REGULATORY

The Company's clinical, development and regulatory expenses relate
primarily to product development and regulatory compliance activities. Clinical,
development and regulatory expenses were $2,819,000, $9,354,000, $8,408,000,
$2,091,000 and $3,399,000 for the years ended December 31, 1993, 1994, 1995 and
the three months ended March 31, 1995 and 1996, respectively. The clinical,
development and regulatory expenses associated with Spiros development, for
which the Company recorded contract revenues from DDSI, were $1,487,000,
$8,260,000, $6,428,000 and $1,679,000 for the years ended December 31, 1993,
1994, 1995 and the three months ended March 31, 1995, respectively. The
clinical, development and regulatory expenses associated with Spiros
development, for which the Company recorded contract revenues from Spiros Corp.,
were $2,970,000 for the three months ended March 31, 1996.

PATENTS AND PROPRIETARY RIGHTS

The Company considers the protection of discoveries in connection with its
development activities important to its business. The Company intends to seek
patent protection in the U.S. and selected foreign countries where deemed
appropriate. On July 12, 1994, the Company was issued a U.S. patent on Spiros
and the Company has filed a continuation-in-part covering certain improvements.
The issued patent covers, among other claims, use in Spiros of an impeller to
create an aerosol cloud of a drug intended for inhalation. There can be no
assurance that the issued patent or subsequent patents, if issued, will
adequately protect the Company's design or that such patents will provide
protection against infringement claims by competitors. Dura has reserved its
rights to file certain foreign patent applications relating to Spiros
technology. There can be no assurance that additional patents, U.S. or foreign,
will be obtained covering Company products or that, if issued or licensed to the
Company, the patents covering Company products will provide substantial
protection or be of commercial benefit to the Company.

The Company also relies upon trade secrets, unpatented proprietary know-how
and continuing technological innovation to develop its competitive position. The
Company enters into confidentiality agreements with certain of its employees
pursuant to which such employees agree to assign to the Company any inventions
relating to the Company's business made by them while in the Company's employ.
There can be no assurance, however, that others may not acquire or independently
develop similar technology or, if patents are not issued with respect to
products arising from research, that the Company will be able to maintain
information pertinent to such research as proprietary technology or trade
secrets.

Tornalate Inhalation Solution and Tornalate MDI are protected by patents
filed by Sterling Winthrop, Inc. which expire in the near term. The Company's
other asthma, allergy, cough and cold pharmaceuticals are not protected by
patents.

GOVERNMENT REGULATION

The manufacturing and marketing of the Company's products are subject to
regulation by Federal and state government authorities, including the FDA, the
Environmental Protection Agency ("EPA") and the

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<PAGE> 31

Occupational Safety and Health Administration ("OSHA"), in the U.S. and other
countries. In the U.S., pharmaceuticals and drug delivery systems, including
Spiros are also subject to rigorous FDA regulation. The Federal Food, Drug and
Cosmetic Act and the Public Health Service Act govern the testing, manufacture,
safety, efficacy, labeling, storage, record keeping, approval, advertising and
promotion of the Company's products. Product development and approval within
this regulatory framework takes a number of years and involves the expenditure
of substantial resources.

To obtain FDA approval for Spiros and the compounds to be used with it,
Dura is required to conduct each of the following steps and possibly others: (i)
preclinical (laboratory and possibly animal tests), (ii) the submission to the
FDA of an application for an IND, which must become effective before human
clinical trials may commence, (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy, (iv) the submission of an NDA to
the FDA for marketing approval, and (v) the FDA approval of the NDA prior to any
commercial sale or shipment. In addition to obtaining FDA approval for each
product, each domestic drug and/or device manufacturing facility must be
registered with and approved by the FDA. Domestic manufacturing facilities are
subject to biennial inspections by the FDA and must comply with cGMP for both
drugs and devices. To supply products for use in the U.S., foreign manufacturing
establishments must comply with cGMP and other requirements and are subject to
periodic inspection by the FDA or by regulatory authorities in such countries
under reciprocal agreements with the FDA.

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

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

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

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

Although the FDA has considerable discretion to decide what requirements
must be met prior to approval, the Company believes the FDA is likely to
regulate each combination of Spiros with a compound as

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<PAGE> 32

a discrete pharmaceutical or drug product requiring separate approval as a new
drug. The Company believes that the approval process for each drug/delivery
combination now under development may be shorter than the full NDA process
described above because the safety and efficacy of the compounds have already
been established in currently marketed formulations and delivery mechanisms.
There can be no assurance, however, that the approval process will be shorter or
that any NDA submitted by the Company will eventually be approved.

For both currently-marketed and future products, failure to comply with
applicable regulatory requirements after obtaining regulatory approval can,
among other things, result in the suspension of regulatory approval, as well as
possible civil and criminal sanctions. In addition, changes in regulations could
have a material adverse effect on the Company.

The Federal Food, Drug and Cosmetic Act requires that any "new drug" must
be approved pursuant to an NDA. The term "new drug" is defined as any drug which
is not generally recognized among qualified experts as safe and effective for
its labeled intended uses. Certain exemptions from this definition exist for
products marketed without change since prior to 1938 (the date of enactment of
the Federal Food, Drug and Cosmetic Act) or, with respect to the need to show
effectiveness for drug products marketed prior to October 10, 1962 (the date of
enactment of the "Drug Amendments of 1962"). The Company presently markets 16
drug products for which the FDA has not yet made a determination as to their
status as new drugs under the Federal Food, Drug and Cosmetic Act. The FDA is
continuing an evaluation of the effectiveness of all products containing
ingredients marketed prior to 1962 that are not the subject of an approved NDA
as part of its DESI program and will determine which are new drugs requiring
approval through an NDA for marketing. The existence of currently-marketed
prescription pharmaceuticals that contain one or more active ingredients first
introduced in the marketplace before 1962 and that are marketed based on their
manufacturers' belief that such products are not subject to the new drug
provisions of the Act is recognized in paragraph B ("Pre-1962 Prescription Drugs
Not Covered By An NDA") of the Food and Drug Administration's Compliance Policy
Guide, Chapter 32c (Guide 7132c.02). This Policy Guide indicates that the FDA
will implement procedures to determine whether the new drug provisions are or
are not applicable to these products. The Policy Guide requires that products
covered by paragraph B not be similar or related to any drug included in the
DESI program, or have a different formulation or conditions for use than
products marketed before November 13, 1984. If a product is not covered by
paragraph B, the FDA could make a determination as to whether or not the new
drug provisions are applicable to it without first implementing the procedures
called for by the Policy Guide. The Company believes that five of its
prescription pharmaceutical products may be covered by paragraph B of the Policy
Guide and it is aware that one of its products may be considered to be similar
or related to a DESI drug. Also, it is not aware of evidence to substantiate
that three of its products have the same formulation or conditions for use as
products marketed before November 13, 1984. These products could be subject at
any time to an FDA determination that an NDA is required. If a final
determination is made that a particular drug requires an approved NDA, such
approval will be required for marketing to continue. If such a determination is
made, the FDA might impose various requirements: for example, it might require
that the current product be the subject of an approved NDA, that the product be
reformulated and NDA approval obtained, that the product must be sold on an
over-the-counter basis rather than as a prescription drug, or that the product
must be removed from the market. There can be no such assurance as to which of
these courses the FDA will require or whether the Company will be able to obtain
any approvals which the FDA may deem necessary. If any of these actions are
taken by the FDA, such actions could have a material adverse effect on the
Company's business.

For marketing outside the United States before FDA approval to market, the
Company must submit an export permit application to the FDA. The Company also
will be subject to foreign regulatory requirements governing human clinical
trials and marketing approval for pharmaceuticals. The requirements relating to
the conduct of clinical trials, product licensing, pricing and reimbursement
vary widely from country to country and there can be no assurance that the
Company or any of its collaborators will meet and sustain any such requirements.

Health Script is subject to regulation by state regulatory authorities,
principally state boards of pharmacy. In addition, Health Script is subject to
regulation by other state and Federal agencies with respect to

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<PAGE> 33

reimbursement for prescription drug benefits provided to individuals covered
primarily by publicly funded programs.

MANUFACTURING

In June 1995, the Company completed construction of its manufacturing
facility located in a Company-owned building adjacent to its headquarters. The
facility initially is intended to be used to formulate, mill, blend and
manufacture drugs to be used with Spiros, pending regulatory approval. Equipment
purchases for and validation of the facility are currently scheduled through
1997. The Company's manufacturing facility must be registered with and licensed
by various regulatory authorities and comply with cGMP requirements prescribed
by the FDA. Any failure or significant delay in the validation of or obtaining a
satisfactory regulatory inspection of the new facility could have a material
adverse effect on the Company's ability to manufacture products in connection
with Spiros.

The Company has limited experience manufacturing products for commercial
purposes and currently does not have the capability to manufacture its
pharmaceutical products and therefore is dependent on contract manufacturers for
the production of such products for development and commercial purposes. The
Company's current dependence upon others for the manufacture of its products may
adversely affect the future profit margin, if any, on the sale of those products
and the Company's ability to develop and deliver products on a timely and
competitive basis.

FACILITIES

The Company owns and occupies two buildings that are situated on one parcel
of land located in San Diego, California. The property is subject to loans
aggregating approximately $7.0 million at March 31, 1996. One building,
consisting of approximately 31,000 square feet, is used primarily as office
space for research, regulatory, sales and administrative personnel. The second
building, consisting of approximately 49,000 square feet, contains the Company's
manufacturing facility that will be used to formulate, mill, blend and fill
drugs to be used with Spiros, lab and research facilities, and warehouse space.
The Company is currently seeking to lease additional office and laboratory space
and is examining other longer term space opportunities.

The Company also leases approximately 16,660 square feet of space in
Denver, Colorado which houses the operations of Health Script's mail service
pharmacy. The lease term expires in December 2000 with one five-year renewal
option.

HUMAN RESOURCES

The Company employed 321 employees (of which 306 are full-time) as of March
31, 1996, consisting of 148 people in sales and marketing (of which 136
constitute the field sales force and the managed care sales and marketing
group), 33 in administration and finance, 47 in clinical, regulatory and
research and development, 20 in operations and 73 at Health Script. None of the
Company's employees are represented by a labor union and the Company believes it
maintains positive relations with both field and corporate personnel.

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<PAGE> 34

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES

The executive officers, directors and key employees of Dura as of May 1,
1996 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION HELD WITH THE COMPANY
- ----------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Cam L. Garner...................... 48 President, Chief Executive Officer, and Chairman of
the Board
David S. Kabakoff.................. 48 Executive Vice President
James W. Newman.................... 51 Senior Vice President, Finance and Administration,
Chief Financial Officer and Assistant Secretary
Charles W. Prettyman............... 50 Senior Vice President, Development and Regulatory
Affairs
Walter F. Spath.................... 51 Senior Vice President, Sales and Marketing, and
Director
Julia Brown........................ 48 Vice President, Business Development
Chester Damecki.................... 48 Vice President, Operations
Robert K. Schultz.................. 40 Vice President, Product Development
David Sudolsky..................... 37 Vice President, Marketing
Curtis A. Talley................... 51 Vice President, President of Health Script
Clyde L. Witham.................... 48 Vice President, Aerosol Technology
Mitchell R. Woodbury............... 54 Vice President, General Counsel and Secretary
Jerry C. Benjamin(1)(2)............ 54 Director
James C. Blair(1)(2)............... 56 Director
Herbert J. Conrad(2)............... 63 Director
Joseph C. Cook..................... 54 Director
David F. Hale...................... 47 Director
Gordon V. Ramseier(1).............. 52 Director
Charles G. Smith................... 68 Director
</TABLE>

- ---------------
(1) Members of the Audit Committee of the Board of Directors.

(2) Members of the Compensation Committee of the Board of Directors.

MR. GARNER joined the Company in October 1989 as Executive Vice President
and a Director of the Company. He has served as President and Chief Executive
Officer since May 1990 and was named Chairman of the Board in 1995. Mr. Garner
also currently serves as a Director of Spiros Corp. Prior to joining the
Company, Mr. Garner served as President of Syntro Corporation, a biotechnology
company, from November 1987 to June 1989. Mr. Garner is currently a Director of
Houghten. From October 1983 to October 1987, he served as Senior Vice President
of Sales and Marketing at Hybritech, Inc., a biotechnology company
("Hybritech"). Mr. Garner received an MBA from Baldwin-Wallace College and a BS
in Biology from Virginia Wesleyan College.

MR. KABAKOFF joined the Company in May 1996 as Executive Vice President.
Mr. Kabakoff is nominated for election as a director at the Company's 1996
annual shareholders meeting. Mr. Kabakoff also currently serves as President and
a Director of Spiros Corp. Prior to joining the Company, Mr. Kabakoff held
several positions at Corvas International, Inc., a biopharmaceutical company
("Corvas") since 1989, most recently serving as Chief Executive Officer,
President and a director. He was named Chairman of the Board of Corvas in
January 1996. From March 1983 to March 1989, Mr. Kabakoff was employed by
Hybritech, most recently as Senior Vice President of Research and
Development -- Diagnostics. Mr. Kabakoff received a Ph.D. in Chemistry from Yale
University and a BA in Chemistry from Case Western Reserve University.

MR. NEWMAN joined the Company in September 1991 and currently serves as
Senior Vice President, Finance and Administration, Chief Financial Officer and
Assistant Secretary. Prior to joining the Company, Mr. Newman served as
President of George Wimpey of Texas and previously as Vice President, Chief

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<PAGE> 35

Financial Officer, of George Wimpey, Inc., a land development and homebuilding
company, from October 1987 to September 1991. Mr. Newman holds an MBA in Finance
from Golden Gate University and a BS in Accounting from University of Illinois.
Mr. Newman has been a Certified Public Accountant in California since 1972.

MR. PRETTYMAN joined the Company in December 1991 and currently serves as
Senior Vice President, Development and Regulatory Affairs. Prior to joining the
Company, Mr. Prettyman served as Vice President, Regulatory Affairs and
Compliance at The Purdue Frederick Company, a privately-held pharmaceutical
company, from August 1988 to November 1991. From January 1987 until August 1988,
Mr. Prettyman served as Executive Director, Drug Regulatory Affairs, Central
Nervous System Development at Ciba-Geigy Pharmaceuticals. From January 1977
until December 1987, Mr. Prettyman held various positions with the FDA,
including Director, Program Management, Office of the Commissioner. Mr.
Prettyman received an MS in biological science from George Washington University
and a BS in biology from Randolph Macon College.

MR. SPATH joined the Company in July 1988 and currently serves as Senior
Vice President, Sales and Marketing, and has served as a Director since
September 1991. Prior to joining the Company, Mr. Spath was Corporate Vice
President, Commercial Development, at Searle Pharmaceuticals ("Searle") from
October 1986 to July 1988. He joined Searle in May 1975 and held various
marketing and sales positions from 1975 to 1986. Prior to joining Searle, Mr.
Spath was a marketing manager at Pfizer Pharmaceuticals. Mr. Spath received an
MBA in Marketing from University of Maryland and a BS in Economics from
Villanova.

MS. BROWN joined the Company in March 1995 as Vice President, Business
Planning and became Vice President, Business Development in October 1995. Prior
to joining the Company, Ms. Brown spent over 25 years with Eli Lilly and Company
("Lilly") and certain subsidiaries dealing with pharmaceuticals, medical devices
and diagnostics. From October 1992 to December 1994, she was general manager of
IVAC Corporation's Vital Signs Division. From September 1986 to October 1992,
Ms. Brown held several marketing positions with Hybritech, including Division
Vice President of Marketing. Ms. Brown holds a BS in microbiology from Louisiana
Tech University.

MR. DAMECKI joined the Company in December 1995 as Vice President,
Operations. Prior to joining the Company, Mr. Damecki was Vice President of
Operations with Gensia from January 1991 to February 1995. From November 1985 to
December 1990 he was Vice President of Operations with Hybritech. Before joining
Hybritech, Mr. Damecki was Vice President of Operations for BBL Microbiology
Systems, a division of Becton, Dickinson and Company. Earlier in his career he
held several key operations positions at Ortho Pharmaceutical Corporation, a
division of Johnson and Johnson. He holds an MBA from Fairleigh Dickinson
University and a BS in Engineering from New Jersey Institute of Technology.

DR. SCHULTZ joined the Company in September 1994, and was promoted to Vice
President, Product Development in January 1995. Prior to joining Dura, he was a
project manager for the Inhalation Technology Group at 3M Pharmaceuticals ("3M")
where he managed the evaluation and development of new aerosol technologies and
existing metered dose inhaler products. During his 14 years with 3M, Dr. Schultz
specialized in developing inhalation drug delivery systems. Dr. Schultz received
a Ph.D. in pharmaceutics and a BS in pharmacy from the University of Minnesota.

MR. SUDOLSKY joined the Company in June 1987, was promoted to Vice
President, Business Development in March 1990 and became Vice President,
Marketing in October 1995. Prior to joining the Company, Mr. Sudolsky served as
an associate with Booz, Allen & Hamilton, a management consulting firm ("Booz
Allen"), where he specialized in health care and high technology industries. Mr.
Sudolsky received an MBA in marketing, finance and international business from
Columbia University Graduate School of Business and a BS in chemical engineering
from Columbia University School of Engineering and Applied Science.

MR. TALLEY joined the Company in March 1995 as Vice President and President
of the Company's Health Script division. In 1990, Mr. Talley founded Health
Script, which provides mail order respiratory pharmacy services for patients
throughout the United States. He served as President and Chief Executive Officer
of Health Script until its acquisition by the Company in March 1995. From 1981
to 1990, Mr. Talley was

35
<PAGE> 36

Executive Vice President of Mountain Medical Equipment, Inc., a manufacturer of
equipment for respiratory homecare. Mr. Talley held various management positions
with Xerox Corporation from 1969 to 1981. Mr. Talley holds a BA in history from
California State University, Fullerton.

MR. WITHAM joined the Company in October 1994, and was promoted to Vice
President, Aerosol Technology in January 1995. Prior to joining Dura, he was
manager of the Fine Particle Technology Program in the Physical Sciences
Division at SRI International ("SRI"), a contract research firm. During his 21
years with SRI, Mr. Witham specialized in fine particle technology, aerosol
generation technology, polymer compounding, air pollution control, equipment
design, product development and manufacturing process improvement. Mr. Witham
received an MS degree in environmental engineering from Stanford University and
a BS degree in chemical engineering from Brigham Young University.

MR. WOODBURY joined the Company in June 1994 as Vice President, General
Counsel and Secretary. Prior to joining the Company, Mr. Woodbury served as Vice
President, General Counsel and Secretary at Advanced Tissue Sciences, Inc., a
biomedical company, from June 1992 to June 1994. From October 1991 until June
1992, Mr. Woodbury served as Senior Vice President, General Counsel of
Intermark, Inc. ("Intermark"), a publicly held operating/holding company. He was
elected Vice President and Corporate Counsel of Intermark in 1980 and had served
as Corporate Secretary since 1981. Mr. Woodbury received his J.D. from the
University of San Diego School of Law and a BA in Business Administration from
San Diego State University.

MR. BENJAMIN has served as a Director of the Company since April 1986. Mr.
Benjamin is not standing for re-election at the upcoming annual meeting of
shareholders of the Company. Mr. Benjamin has served as a general partner of
Advent, Ltd., a venture capital firm, since February 1988, with responsibility
for life science venture capital investments. Mr. Benjamin served at Monsanto
Co. for approximately 20 years in a variety of technical and managerial
positions. Mr. Benjamin is currently a director of Gensia, Inc. ("Gensia"), a
biopharmaceutical company, Biomagnetic Technologies, Inc., a medical devices
company, and Orthofix International NV, an orthopedic company.

DR. BLAIR has served as a Director of the Company since April 1986. Dr.
Blair has been a general partner of Domain Associates ("Domain"), a venture
capital management company, since 1985. Domain manages Domain Partners, L.P.,
Domain Partners II, L.P., Domain Partners III, L.P. and is the venture capital
advisor to Biotechnology Investments Limited ("BIL"). BIL has been a principal
shareholder of the Company since 1986. From 1969 to 1985, Dr. Blair was an
officer of three investment banking and venture capital firms. Dr. Blair is a
director of Amylin Pharmaceuticals, Inc. ("Amylin"), CoCensys Inc., Genta
Incorporated ("Genta") and Gensia, all biopharmaceutical companies, and
Houghten.

MR. CONRAD has served as a Director of the Company since June 1994. Mr.
Conrad served as President of the Pharmaceuticals Division and Senior Vice
President of Hoffmann-La Roche Inc. ("Roche") from 1988 until his retirement in
August 1993. Mr. Conrad joined Roche in 1960 and held various positions over the
years, including Senior Vice President of the Pharmaceuticals Division, Chairman
of the Board of Medi-Physics, Inc. and Vice President, Public Affairs and
Planning Division. Mr. Conrad is a director of Gensia, Biotechnology General
Corp., a biotechnology company, and Bradley Pharmaceuticals, a pharmaceutical
company.

MR. COOK has served as a Director of the Company since August 1995. Mr.
Cook has been President of Cambrian Associates, LLC since 1994 and has been a
principal of Life Science Advisors, Inc. ("Life Science Advisors") since it was
founded in 1994. Mr. Cook retired as Group Vice President, Global Manufacturing,
Engineering and Corporate Quality at Lilly in 1993. During his 28 years with
Lilly, Mr. Cook was Vice President of Sales and Marketing, Chief Financial
Officer for Elanco Products Company, and General Manager of a worldwide business
unit of Lilly. He is currently a director of Amylin, NABI, Inc., a
biopharmaceutical company, and Personnel Management, Inc., a temporary services
company.

MR. HALE has served as a Director of the Company since March 1986. Mr. Hale
has served as President and Chief Executive Officer of Gensia since June 1987
and Chairman of the Board since 1991. Prior to joining Gensia, Mr. Hale was
President and Chief Executive Officer of Hybritech. From 1980 to 1982, Mr. Hale
was

36
<PAGE> 37

Vice President, General Manager of BBL Microbiology Systems, a division of
Becton-Dickinson and Company, and from 1970 to 1980 he held various sales and
marketing management positions with Ortho Pharmaceutical Corporation, a division
of Johnson & Johnson. Mr. Hale is currently Chairman of the Board of Gensia and
is a director of Genta.

MR. RAMSEIER has served as a Director of the Company since September 1986.
Mr. Ramseier has been Executive Director of a private consulting company, The
Sage Group, since 1995. The Sage Group provides consulting services to companies
in the health care field. Prior to his consulting work, Mr. Ramseier served as
President and Chief Executive Officer of Onco Therapeutics, Inc. from 1992 until
1994. Prior to joining Onco, Mr. Ramseier operated a private consulting company
from May 1990 to April 1992. From September 1986 to May 1990, Mr. Ramseier
served as President and Chief Executive Officer of the Company. From 1979 to
1986, Mr. Ramseier served as a Vice President of Booz Allen.

DR. SMITH has served as a Director of the Company since December 1988. Dr.
Smith also serves as a member of the Company's Scientific Advisory Board. He has
operated a private consulting company since April 1986 and is currently a
consultant for several health care companies. Prior to his consulting work, Dr.
Smith served with Revlon Health Care Group as Vice President of Research and
Development from January 1975 to March 1986. Dr. Smith is a founder of Vanguard
Medical Ltd., a British start-up company, and is currently a director of Chemex
Pharmaceuticals, Inc., a dermatalogic company.

37
<PAGE> 38

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of March 31, 1996, and as adjusted to reflect
the sale of the shares of the Common Stock offered hereby by the Company, by (i)
all those known by the Company to be beneficial owners of more than five percent
of its outstanding Common Stock, (ii) each director and the five most highly
compensated executive officers of the Company and (iii) all executive officers
and directors of the Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES(2)
NAME AND ADDRESS NUMBER OF SHARES ----------------------------------
OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING
- ---------------------------------------------- --------------------- --------------- --------------
<S> <C> <C> <C>
George D. Bjurman & Associates(3)............. 794,094 5.0% 4.4%
10100 Santa Monica Blvd., Suite 1200
Los Angeles, California 90067
Jerry C. Benjamin(4).......................... 25,418 * *
James C. Blair(5)............................. 11,500 * *
Herbert J. Conrad(6).......................... 8,000 * *
Joseph C. Cook(7)............................. 30,363 * *
Cam L. Garner(8).............................. 143,887 * *
David F. Hale(9).............................. 27,500 * *
James W. Newman(10)........................... 63,651 * *
Charles W. Prettyman(11)...................... 16,525 * *
Gordon V. Ramseier(12)........................ 21,000 * *
Charles G. Smith(13).......................... 27,000 * *
Walter F. Spath(14)........................... 69,803 * *
David Sudolsky(15)............................ 64,803 * *
All directors and executive officers as a
group (14 persons)(16)...................... 518,917 3.2% 2.8%
</TABLE>

- ---------------
* Less than 1%

(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them. Share ownership in
each case includes shares issuable upon exercise of certain outstanding
options and warrants as described in the footnotes below.

(2) Percentage of ownership is calculated pursuant to SEC Rule 13d-3(d)(1).

(3) George D. Bjurman & Associates ("GDBA"), as an investment advisor, shares
power to vote and dispose of the shares to the extent that its clients may
be able to give instructions that would supersede GDBA's otherwise full
discretionary authority over the disposition or voting of the securities in
its portfolios. Messrs. George Andrew Bjurman and O. Thomas Barry III may,
as a result of their ownership in and positions with GDBA, be deemed to be
indirect beneficial owners of the shares held by GDBA.

(4) Includes options, now exercisable or exercisable within 60 days, to
purchase 25,000 shares of Common Stock held by Mr. Benjamin. Mr. Benjamin
is not standing for re-election at the upcoming annual meeting of
shareholders of the Company.

(5) Includes options, now exercisable or exercisable within 60 days, to
purchase 4,000 shares of Common Stock held by Mr. Blair.

(6) Includes options, now exercisable or exercisable within 60 days, to
purchase 8,000 shares of Common Stock held by Mr. Conrad.

38
<PAGE> 39

(7) Includes options, now exercisable or exercisable within 60 days, to
purchase 29,363 shares of Common Stock held by Life Science Advisors, Inc.
("LSA"). As a principal of LSA, Mr. Cook may be deemed to be the indirect
beneficial owner of shares held by LSA.

(8) Includes options, now exercisable or exercisable within 60 days, to
purchase 97,096 shares of Common Stock held by Mr. Garner.

(9) Includes options and warrants, now exercisable or exercisable within 60
days, to purchase 27,500 shares of Common Stock held by Mr. Hale.

(10) Includes options, now exercisable or exercisable within 60 days, to
purchase 57,490 shares of Common Stock held by Mr. Newman.

(11) Includes options, now exercisable or exercisable within 60 days, to
purchase 16,525 shares of Common Stock held by Mr. Prettyman.

(12) Includes options, now exercisable or exercisable within 60 days, to
purchase 21,000 shares of Common Stock held by Mr. Ramseier.

(13) Includes options, now exercisable or exercisable within 60 days, to
purchase, 27,000 shares of Common Stock held by Dr. Smith.

(14) Includes options, now exercisable or exercisable within 60 days, to
purchase 69,512 shares of Common Stock held by Mr. Spath.

(15) Includes options, now exercisable or exercisable within 60 days, to
purchase 62,312 shares of Common Stock held by Mr. Sudolsky.

(16) Includes options and warrants, now exercisable or exercisable within 60
days, to purchase 454,085 shares of Common Stock held by directors and
executive officers as a group.

39
<PAGE> 40

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock and 5,000,000 shares of Preferred Stock, no par value
("Preferred Stock"). The Company's shareholders will vote at the 1996 annual
meeting to be held on May 29, 1996 on a proposal to increase the number of
shares of Common Stock the Company is authorized to issue from 25,000,000 to
100,000,000 shares.

COMMON STOCK

At March 31, 1996, there were 15,765,327 shares of Common Stock outstanding
and held of record by approximately 310 shareholders. The holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the shareholders, except that upon giving the legally
required notice, shareholders may cumulate their votes in the election of
directors. In cumulative voting, the holders of Common Stock are entitled to
cast for each share held the number of votes equal to the number of directors to
be elected. A holder may cast all of his or her votes for one nominee or
distribute them among any number of nominees for election. Subject to
preferences that may be applicable to any outstanding Preferred Stock, holders
of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available. See "Price
Range of Common Stock" and "Dividend Policy." In the event of liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities and the
liquidation preference of any outstanding Preferred Stock. Holders of Common
Stock have no preemptive rights and no right to convert their Common Stock into
any other securities. All outstanding shares of Common Stock are fully paid and
nonassessable.

PREFERRED STOCK

The Board of Directors has the authority to issue the Preferred Stock in
one or more series and to fix the rights, priorities, preferences,
qualifications, limitations and restrictions, including the dividend rates,
conversion rights, voting rights, terms of redemption, terms of sinking funds,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without any further vote or action by the
shareholders, which could decrease the amount of earnings and assets available
for distribution to holders of Common Stock or adversely affect the rights and
powers, including voting rights, of the holders of the Common Stock. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
shareholders, may discourage bids for the Company's Common Stock at a premium
over the market price of the Common Stock and may adversely affect the market
price of and the voting and other rights of the holders of Common Stock. At
present, the Company has no plans to issue any of the Preferred Stock.

WARRANTS TO PURCHASE COMMON STOCK

At March 31, 1996, there were outstanding warrants to purchase an aggregate
of 12,278 shares at prices ranging from $.50 per share to $12.00 per share,
300,000 shares at $8.75 per share, 100,000 shares at $12.95 per share and
600,000 shares at $14.63 per share. On April 26, 1996, the Company exercised its
option to redeem the warrant to purchase 600,000 shares by issuing 125,808
shares of the Company's Common Stock to the holder of the warrant. See Note 7 of
the Notes to Consolidated Financial Statements. Each warrant contains provisions
for the adjustment of the exercise price and the aggregate number of shares
issuable upon exercise of the warrant under certain circumstances, including
stock dividends, stock splits, reorganization, reclassifications or
consolidations. The holder of one of the warrants is entitled to certain
registration rights with respect to the Common Stock issued or issuable upon
exercise thereof. See "-- Registration Rights."

Also outstanding at March 31, 1996, were Series W Warrants to purchase an
aggregate of 819,010 shares at $4.75 per share and Series S Warrants to purchase
an aggregate of 1,120,001 shares at an exercise price of $38.94 per share,
subject to adjustment as defined in the warrants (collectively, the Series W
Warrants and the Series S Warrants are referred to herein as the "Warrants").
The Series W Warrants are currently exercisable through September 27, 2000. The
Series S Warrants will be exercisable after December 29, 1997 or sooner under
certain circumstances (the "Series S Exercise Date") through December 29, 2000.
The

40
<PAGE> 41

Warrants contain provisions for the adjustment of the exercise price and the
aggregate number of shares issuable upon exercise of the Warrants under certain
circumstances, including stock splits, stock combinations, rights offerings,
stock dividends or certain special dividends with respect to the Company's
Common Stock. In addition, the exercise price and the number of shares issuable
upon exercise of the Series W Warrants and the Series S Warrants will be
appropriately adjusted, with respect to the Series W Warrants, in the event of
the issuance of the Company's Common Stock at a per share price less than the
exercise price of the Series W Warrants, and with respect to the Series S
Warrants, in the event of the issuance of the Company's Common Stock below fair
market value (as defined in the Series S Warrants). The Company has registered
the resale of shares of Common Stock issuable upon exercise of the Series W
Warrants on a shelf Form S-3. The Company is obligated to register the shares of
Common Stock issuable upon exercise of the Series S Warrants, and in certain
circumstances, the Series W Warrants, upon demand or with the registration of
other securities of the Company. See "-- Registration Rights."

REGISTRATION RIGHTS

Pursuant to the Investors' Rights Agreement dated as of September 27, 1993
(the "1993 Registration Rights Agreement"), the holders of shares issuable upon
exercise of the Company's Series W Warrants are entitled to notice of a
registration of securities by the Company. The Company has registered on a shelf
Form S-3 the resale of the 819,010 shares of Common Stock issuable upon exercise
of all of the currently outstanding Series W Warrants issued by the Company (the
"Series W Shares"). The Company is further obligated to file a registration
statement with respect to the resale of the Series W Warrants 30 days after a
registration statement on Form S-3 becomes available for use by the Company with
respect to the registration of the resale of the Series W Warrants. If, prior to
the earlier of (i) September 27, 1996 (or, in the case of any holder who cannot
resell his Series W Warrant under Rule 144(k), September 27, 1998) or (ii) the
effective date of a registration statement on Form S-3 with respect to the
resale of the Series W Warrants, the Company registers its securities, the
holders of the Series W Warrants will have the right to include their Series W
Warrants in such registration. Until the earlier of September 27, 1998 or the
effective date of a registration statement on Form S-3 with respect to the
registration of the resale of the Series W Warrants, the holders of a majority
of the then outstanding Series W Warrants can demand the filing of one
registration statement on Form S-3 with respect to the resale of the Series W
Warrants then outstanding.

Pursuant to the Registration Rights Agreement dated as of April 17, 1994,
the holder of 457,012 outstanding shares of the Company's Common Stock (and
300,000 shares issuable upon exercise of an outstanding warrant) is entitled to
notice of registration of any of the Company's securities under the Securities
Act and is entitled to include its registrable securities in such registration.
In addition, such holder is entitled to request registration of its registrable
securities on Form S-3 (or other successor form) under the Securities Act. All
registration expenses in connection with Company registrations will be borne by
the Company and all registration expenses in connection with the holder's
requested registration on Form S-3 will be borne by the holder, up to a maximum
of $100,000. All selling expenses will be borne by the holder. The Company is
required to indemnify the holder and the underwriters for such holder, if any,
under certain circumstances. Registration rights may be transferred only to a
transferee of registrable securities who, after such transfer, holds 100,000
shares of registrable securities. The registration rights granted under this
agreement terminate on April 17, 1999 (or, with respect to registration on Form
S-3, if earlier, the date on which the holder is able to sell all registrable
securities under Rule 144(k)).

Pursuant to the Investors' Rights Agreement dated as of December 29, 1995
(the "1995 Registration Rights Agreement"), the Company is obligated to use its
best efforts to file a registration statement on Form S-3 with respect to the
resale of the shares of Common Stock issuable upon exercise of the Series S
Warrants (the "Series S Shares") on or before December 29, 1997. In addition, if
at any time after December 29, 1997, the Company registers its securities, the
holders of the Series S Warrants will have the right to include the resale of
the Series S Shares in such registration.

Pursuant to the 1993 Registration Rights Agreement and the 1995
Registration Rights Agreement, the Company is required to bear all the
registration expenses. The Company is required to indemnify the holders and the
underwriters for such holders, if any, under certain circumstances. The
Company's respective

41
<PAGE> 42

obligations to register the Series W Warrants and the Series S Shares will each
terminate in certain circumstances.

CALIFORNIA LAW AND CERTAIN CHARTER PROVISIONS

The Company's Sixth Restated Articles of Incorporation contain a provision
(the "Fair Price Provision") that applies to mergers and certain other types of
business combinations with a person holding 15% or more of the voting stock of
the Company (an "Interested Shareholder"). Under California law, with certain
exceptions, an affirmative vote is required by the holders of the majority of
the outstanding shares of each constituent corporation to any proposed merger or
consolidation and of any corporation proposing to sell all or substantially all
of its assets. Other transactions that are considered business combinations
under the Fair Price Provision would not be subject to any legal requirement for
a shareholder vote. The Fair Price Provision requires that shareholders who are
independent of the Interested Shareholder receive in connection with a business
combination at least the amount paid by the Interested Shareholder for other
shares acquired by the Interested Shareholder. If the requirements of the Fair
Price Provision are not satisfied, then, with certain limited exceptions, the
merger or other business combination must be approved by either (i) holders of
not less than 50% of the then outstanding voting stock, or (ii) by a majority of
the Continuing Directors. A "Continuing Director" is a director not affiliated
with the Interested Shareholder and elected prior to the time the Interested
Shareholder became an Interested Shareholder and any successor chosen by a
majority of the Continuing Directors.

The Company's Sixth Restated Articles of Incorporation and Bylaws require
that any action required or permitted to be taken by shareholders of the Company
must be effected at a duly called annual or special meeting of shareholders and
may not be effected by a consent in writing.

The Company's Sixth Restated Articles of Incorporation divide the Board
into two classes of directors serving staggered two-year terms, with one class
of directors to be elected at each annual meeting of shareholders. The
classification of directors has the effect of making it more difficult to change
the composition of the Board.

The Company's Sixth Restated Articles of Incorporation and Bylaws provide
that vacancies created by an increase in the size of the Board of Directors may
be filled only by an affirmative vote of the majority of the directors in
office, although less than a quorum. Vacancies resulting from other causes may
be filled either by holders of a majority of the Company's voting stock or a
majority of directors in office, although less than a quorum. The ability of
less than the majority of the Company's directors to fill vacancies is limited
by Section 305 of the California Corporations Code. Under such Section 305, if,
after the filling of any vacancy by the directors of a corporation, the
directors then in office who have been elected by the corporation's shareholders
constitute less than a majority of the directors then in office, then: (i) any
holder of more than five percent of the corporation's outstanding voting stock
may call a special meeting of shareholders, or (ii) the superior court of the
appropriate county may order a special meeting of the shareholders to elect the
entire board of directors of the corporation. The provision that newly created
directorships are to be filled only by the Board would prevent a person seeking
majority representation on the Board from obtaining such representation simply
by enlarging the Board and filling the new directorships created thereby with
his or her own nominees.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Company's Common Stock is Wells
Fargo and Company.

42
<PAGE> 43

UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Hambrecht & Quist LLC and Oppenheimer &
Co., Inc. are acting as representatives (the "Representatives"), has severally
agreed to purchase from the Company the number of shares of Common Stock set
forth opposite its name below. In the Purchase Agreement, the several
Underwriters have agreed, subject to the terms and conditions set forth therein,
to purchase all of such shares if any are purchased. In the event of default by
an Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or the
Purchase Agreement may be terminated.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................. 583,334
Hambrecht & Quist LLC..................................................... 583,333
Oppenheimer & Co., Inc. .................................................. 583,333
Alex. Brown & Sons Incorporated........................................... 75,000
ABB Aros Securities Inc. ................................................. 75,000
William Blair & Company, L.L.C. .......................................... 75,000
Robertson, Stephens & Company LLC......................................... 75,000
Rodman & Renshaw, Inc. ................................................... 75,000
UBS Securities LLC........................................................ 75,000
Vector Securities International, Inc. .................................... 75,000
Wheat, First Securities, Inc. ............................................ 75,000
-------
Total........................................................ 2,350,000
=======
</TABLE>

The Representatives of the Underwriters have advised the Company that they
propose initially to offer the shares to the public at the public offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $1.75 per share. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of $.10 per share
on sales to certain other dealers. After the public offering, the public
offering price, concession and discount may be changed.

The Company has granted the Underwriters an option exercisable for 30 days
from the date hereof to purchase up to 352,500 additional shares of Common Stock
to cover over-allotments, if any, at the public offering price, less the
underwriting discount. If the Underwriters exercise this option, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the number of shares of
Common Stock to be purchased by it shown in the foregoing table is of the
2,350,000 shares of Common Stock initially offered hereby.

The Purchase Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.

In connection with this offering, certain underwriters and selling group
members may engage in passive market making transactions in the Common Stock on
Nasdaq immediately prior to the commencement of sales in this offering, in
accordance with Rule 10b-6A under the Exchange Act. Passive market making
consists of, among other things, displaying bids on Nasdaq limited by the bid
prices of independent market makers and purchases limited by such prices and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a specified prior period
and all passive market making activities must be discontinued when such limit is
reached. Passive market making may stabilize the market price of

43
<PAGE> 44

Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.

The holders of approximately 525,000 shares of Common Stock (and
approximately 800,000 shares of Common Stock issuable upon exercise of
outstanding options and warrants) have agreed not to sell, offer to sell, grant
any option for the sale of, or otherwise dispose of or transfer any shares of
Common Stock without the prior written consent of the Representatives for a
period of 90 days after the date of the pricing agreement to be executed by the
Company and the Representatives pursuant to the terms of the Purchase Agreement
(the "Pricing Agreement"). The Company has agreed that, for a period of 90 days
after the date of the Pricing Agreement, it will not, without the prior written
consent of the Representatives, issue, offer for sale, sell, transfer, grant
options to purchase or otherwise dispose of any shares of its Common Stock or
securities convertible into or exchangeable for its Common Stock or other equity
security, except shares issued pursuant to the exercise of warrants outstanding
as of the date of this Prospectus and pursuant to its stock option plan.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, San Diego, California. Pillsbury
Madison & Sutro LLP, San Francisco, California are acting as counsel for the
Underwriters in connection with certain legal matters relating to the shares of
Common Stock offered hereby.

EXPERTS

The financial statements of the Company as of December 31, 1994 and 1995
and for each of the three years in the period ended December 31, 1995 included
and incorporated by reference in this Prospectus and the financial statements of
DDSI as of December 31, 1993 and 1994 and for the periods then ended
incorporated by reference in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are included
and incorporated by reference herein, and have been so included and incorporated
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.

The statements concerning the U.S. federal regulatory process for
investigating and obtaining FDA clearance of drugs and medical devices in this
Prospectus under the caption "Risk Factors -- Government Regulation; No
Assurance of FDA Approval," "Business -- Government Regulation" and other
references herein relating to such processes have been reviewed and approved by
Kleinfeld, Kaplan and Becker, regulatory counsel for the Company, as an expert
in such matters, and are included herein in reliance upon that review and
approval. In conducting this review, Kleinfeld, Kaplan and Becker assumed the
accuracy and adequacy of the factual statements and conclusions in this
Prospectus concerning the Company's manufacturing capabilities and procedures,
compliance with regulatory requirements, the status of its drugs under
development and the potential significance of such drugs in targeting the
disease states identified.

ADDITIONAL INFORMATION

The Company has filed the Registration Statement with the Commission under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules filed therewith. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to such Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus regarding the
contents of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement or the documents incorporated into
the Prospectus by reference, each such statement being qualified in all respects
by such reference. The Registration Statement, including the exhibits and
schedules thereto, may be inspected without charge at the principal office of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of
all or any part thereof may be obtained from such office upon payment of the
prescribed fees.

44
<PAGE> 45

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES:
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and (Unaudited)
March 31, 1996...................................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994, and
1995 and for the Three Months Ended (Unaudited) March 31, 1995 and 1996............. F-4
Consolidated Statements of Shareholders' Equity for the Period from January 1, 1993 to
December 31, 1995 and the Period from (Unaudited) January 1, 1996 to March 31,
1996................................................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995 and the Three Months Ended (Unaudited) March 31, 1995 and 1996................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE> 46

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
Dura Pharmaceuticals, Inc.:

We have audited the accompanying consolidated balance sheets of Dura
Pharmaceuticals, Inc. and subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Dura Pharmaceuticals, Inc. and
subsidiaries as of December 31, 1994 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.

DELOITTE & TOUCHE LLP

San Diego, California
January 29, 1996
(April 26, 1996 as to the
reclassifications described in
Note 2)

F-2
<PAGE> 47

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 33,463 $ 25,554 $ 21,008
Short-term investments...................................... 2,563 42,266 40,972
Accounts and other receivables.............................. 2,792 6,957 9,227
Inventory................................................... 1,819 3,069 3,540
Prepaid and other........................................... 409 612 527
-------- -------- -----------
Total current assets................................ 41,046 78,458 75,274
PROPERTY...................................................... 8,332 16,133 17,623
LICENSE AGREEMENTS AND PRODUCT RIGHTS......................... 3,496 39,065 38,639
GOODWILL...................................................... 518 7,083 6,970
OTHER......................................................... 2,680 3,258 8,467
-------- -------- -----------
TOTAL......................................................... $ 56,072 $143,997 $ 146,973
======== ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 3,505 $ 7,225 $ 8,717
Accrued wages, taxes and benefits........................... 915 1,341 1,540
Current portion of long-term obligations.................... 120 10,175 6,311
-------- -------- -----------
Total current liabilities........................... 4,540 18,741 16,568
-------- -------- -----------
LONG-TERM OBLIGATIONS:
Notes payable -- bank....................................... 2,780 6,611 6,471
Other long-term obligations................................. 8,816 8,974
-------- -------- -----------
Total long-term obligations......................... 2,780 15,427 15,445
-------- -------- -----------
OTHER NON-CURRENT LIABILITIES................................. 215 732 828
-------- -------- -----------
Total liabilities................................... 7,535 34,900 32,841
-------- -------- -----------
COMMITMENTS (Note 5)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, shares
authorized -- 5,000,000; no shares issued or outstanding
Common stock, no par value, shares authorized -- 25,000,000;
issued and outstanding -- 10,453,182, 15,539,712 and
15,765,327, respectively................................. 116,269 216,514 217,354
Accumulated deficit......................................... (67,542) (103,320) (99,263)
Unrealized gain (loss) on investments....................... 103 (38)
Warrant subscriptions receivable............................ (4,200) (3,921)
Notes receivable from shareholders.......................... (190)
-------- -------- -----------
Total shareholders' equity.......................... 48,537 109,097 114,132
-------- -------- -----------
TOTAL......................................................... $ 56,072 $143,997 $ 146,973
======== ======== =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 48

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- -------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales.......................................... $15,816 $22,199 $ 39,308 $6,879 $14,055
Contract....................................... 2,297 10,481 12,194 2,558 4,532
------- ------- -------- ------ -------
Total revenues......................... 18,113 32,680 51,502 9,437 18,587
------- ------- -------- ------ -------
OPERATING COSTS AND EXPENSES:
Cost of sales.................................. 3,782 3,894 10,618 1,388 3,623
Clinical, development and regulatory........... 2,819 9,354 8,408 2,091 3,399
Selling, general and administrative............ 17,294 17,871 25,580 5,539 7,740
Goodwill amortization.......................... 143 105 375 26 113
Charges for acquired in-process technology and
purchase options............................ 2,315 43,773
------- ------- -------- ------ -------
Total operating costs and expenses..... 26,353 31,224 88,754 9,044 14,875
------- ------- -------- ------ -------
OPERATING INCOME (LOSS).......................... (8,240) 1,456 (37,252) 393 3,712
------- ------- -------- ------ -------
OTHER:
Interest income................................ 332 483 2,768 524 909
Interest expense............................... (261) (246) (906) (294)
Other -- net................................... (4) 277 18
------- ------- -------- ------ -------
Total other............................ 67 514 1,880 524 615
------- ------- -------- ------ -------
INCOME (LOSS) BEFORE INCOME TAXES................ (8,173) 1,970 (35,372) 917 4,327
PROVISION FOR INCOME TAXES....................... 34 406 60 270
------- ------- -------- ------ -------
NET INCOME (LOSS)................................ $(8,173) $ 1,936 $(35,778) $ 857 $ 4,057
======= ======= ======== ====== =======
NET INCOME (LOSS) PER SHARE...................... $ (1.09) $ 0.19 $ (3.05) $ 0.07 $ 0.23
======= ======= ======== ====== =======
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES.............................. 7,494 9,930 11,720 12,743 17,850
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 49

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN THOUSANDS, EXCEPT PER SHARE DATA

<TABLE>
<CAPTION>
UNREALIZED NOTES
COMMON STOCK GAIN WARRANT RECEIVABLE
----------------- ACCUMULATED (LOSS) ON SUBSCRIPTIONS FROM
SHARES AMOUNT DEFICIT INVESTMENTS RECEIVABLE SHAREHOLDERS TOTAL
------ -------- ----------- ------------ ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993............... 7,482 $ 79,953 $ (61,305) $ (338) $ 18,310
Exercise of stock options............ 17 9 9
Compensation expense -- stock
options............................ 177 177
Cancellation of restricted stock and
related notes receivable........... (20) (148) 148
Issuance of common stock warrants.... 2,247 2,247
Net loss............................. (8,173) (8,173)
------ ------- ------ ---- ------ ----- -------
BALANCE, DECEMBER 31, 1993............. 7,479 82,238 (69,478) (190) 12,570
Issuance of common stock at $8.75 per
share, net of issuance costs of
$11................................ 343 2,990 2,990
Issuance of common stock at $10.95
per share.......................... 114 1,250 1,250
Issuance of common stock at $12.75
per share, net of issuance costs of
$2,269............................. 2,450 28,968 28,968
Exercise of stock options and
warrants........................... 67 157 157
Issuance of common stock warrants,
net of issuance costs of $5........ 625 625
Compensation expense -- stock
options............................ 41 41
Net income........................... 1,936 1,936
------ ------- ------ ---- ------ ----- -------
BALANCE, DECEMBER 31, 1994............. 10,453 116,269 (67,542) (190) 48,537
Issuance of common stock at $25.50
per share, net of issuance costs of
$3,483............................. 2,247 53,815 53,815
Issuance of common stock in
connection with the purchase of
DDSI callable common stock......... 1,143 33,489 33,489
Issuance of common stock warrants.... 5,040 $(4,200) 840
Collections on notes receivable...... 177 177
Cancellation of restricted stock and
related notes receivable........... (2) (13) 13
Exercise of stock options and
warrants........................... 1,699 7,914 7,914
Unrealized gain on available-for-sale
short-term investments............. $ 103 103
Net loss............................. (35,778) (35,778)
------ ------- ------ ---- ------ ----- -------
BALANCE, DECEMBER 31, 1995............. 15,540 216,514 (103,320) 103 (4,200) -0- 109,097
Unaudited:
Collections on warrant subscriptions
receivable......................... 279 279
Exercise of stock options and
warrants........................... 225 840 840
Unrealized loss on available-for-sale
short-term investments............. (141) (141)
Net income........................... 4,057 4,057
------ ------- ------ ---- ------ ----- -------
BALANCE, MARCH 31, 1996................ 15,765 $217,354 $ (99,263) $ (38) $(3,921) $ -0- $114,132
====== ======= ====== ==== ====== ===== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 50

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------- ---------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................. $(8,173) $ 1,936 $(35,778) $ 857 $ 4,057
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities:
Depreciation and amortization............... 1,034 687 1,962 183 794
Charges for acquired in-process technology
and purchase options...................... 2,210 30,773
Other....................................... 555 84 20
Changes in assets and liabilities:
Accounts and other receivables............ (521) (1,309) (4,089) (520) (2,270)
Inventory................................. 334 (738) (1,110) (29) (471)
Prepaid and other assets.................. 39 74 (241) 27 105
Accounts payable and other liabilities.... (463) 1,356 3,655 758 1,968
Accrued wages, taxes and benefits......... 68 166 400 (40) 198
------- ------- -------- -------- --------
Net cash provided by (used for)
operating activities................. (4,917) 2,256 (4,428) 1,256 4,381
------- ------- -------- -------- --------
INVESTING ACTIVITIES:
Purchases of short-term investments........... (21) (95,716) (6,136) (14,531)
Sales and maturities of short-term
investments................................. 2,764 56,117 15,683
Purchases of long-term investments............ (494) (5,119)
Capital expenditures.......................... (1,909) (2,756) (7,835) (3,888) (1,744)
Company/product acquisitions, net of cash
received.................................... 744 (4,891)
Development deposit........................... (1,250)
Other......................................... (15) (40) (60) (110)
------- ------- -------- -------- --------
Net cash provided by (used for)
investing activities................. 840 (4,067) (47,244) (14,915) (5,821)
------- ------- -------- -------- --------
FINANCING ACTIVITIES:
Issuance of common stock and warrants, net.... 46 32,739 61,606 50 989
Issuance of notes payable..................... 4,360 529
Principal payments on notes payable........... (157) (1,464) (203) (30) (95)
Principal payments on other long-term
obligations................................. (22,000) (4,000)
Other......................................... 33
------- ------- -------- -------- --------
Net cash provided by (used for)
financing activities................. (78) 31,275 43,763 549 (3,106)
------- ------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (4,155) 29,464 (7,909) (13,110) (4,546)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD........................................ 8,154 3,999 33,463 33,463 25,554
------- ------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...... $ 3,999 $33,463 $ 25,554 $ 20,353 $ 21,008
======= ======= ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized)....... $ 257 $ 852 $ 68 $ -0- $ 48
Income taxes................................ $ -0- $ 34 $ 44 $ 15 $ 23
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 51

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

1. THE COMPANY AND ITS BUSINESS

Organization -- Dura Pharmaceuticals, Inc. ("Dura" or the "Company") is a
developer and marketer of prescription pharmaceutical products for the treatment
of allergies, asthma and related respiratory conditions.

Principles of Consolidation -- The consolidated financial statements
include the accounts of Dura and its wholly owned subsidiaries, Health Script
Pharmacy Services, Inc., acquired on March 22, 1995 and Dura Delivery Systems,
Inc., ("DDSI") acquired on December 29, 1995. All intercompany transactions and
balances are eliminated in consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. Assets, liabilities, revenues and expenses, and disclosure of
contingent assets and liabilities are affected by such estimates and
assumptions. Actual results could differ from those estimates.

Interim Financial Data -- The interim financial data relating to March 31,
1996 and the three months ended March 31, 1995 and 1996 are unaudited; however,
in the opinion of management, the interim data includes all adjustments,
consisting of normal recurring accruals, necessary for a fair statement of the
financial position and results of operations for the interim periods. The
results for the three months ended March 31, 1996 are not necessarily indicative
of the results to be expected for the full year or for any other interim
periods.

Cash Equivalents -- Cash equivalents include only highly liquid securities
with an original maturity of three months or less.

Short-term Investments -- Short-term investments consist of government
securities, corporate bonds and commercial paper, which management has
classified as available-for-sale securities in the accompanying consolidated
financial statements (Note 3). Such investments are carried at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity. The amortized cost of short-term investments is adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income.

Concentration of Credit Risk -- The Company invests its excess cash in U.S.
Government securities and debt instruments of financial institutions and
corporations with strong credit ratings. The Company has established guidelines
relative to diversification of its cash investments and their maturities that
are designed to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any significant losses on its cash equivalents
or short-term investments.

The Company extends credit on an uncollateralized basis primarily to
wholesale drug distributors and home healthcare providers throughout the United
States. Historically, the Company has not experienced significant credit losses
on its customer accounts. Two customers individually accounted for 19% and 14%
of 1993 sales, three customers individually accounted for 21%, 14% and 12% of
1994 sales, and two customers individually accounted for 16% and 11% of 1995
sales.

Inventory -- Inventory is stated at the lower of cost (first-in, first-out
method) or market and is comprised of finished goods and samples.

Property -- Property is stated at cost and depreciated over the estimated
useful lives of the assets (primarily five years, with the exception of the
Company's building, which is depreciated over a period of 30

F-7
<PAGE> 52

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

years) using the straight-line method. Depreciation and amortization expense
totaled $336,500, $380,300 and $530,000 during 1993, 1994 and 1995,
respectively.

License Agreements and Product Rights -- The cost of license fees and
product rights are capitalized and amortized on a straight-line basis over the
periods estimated to be benefited, ranging from 20 to 25 years. Amortization of
capitalized license fees and product rights, and related royalty payments are
included in selling, general and administrative expenses in the consolidated
statements of operations. Amortization of license fees and product rights
totaled $200,000, $200,000 and $1,055,000 in 1993, 1994 and 1995, respectively.

Goodwill -- Goodwill is stated at cost and amortized on a straight-line
basis over the periods estimated to be benefited, which range from 10 to 20
years.

Evaluation of License Agreements, Product Rights and Goodwill -- The
Company's policy is to evaluate, at each balance sheet date, the appropriateness
of the carrying values of the unamortized balances of license agreements,
patents and goodwill on the basis of estimated future cash flows and other
factors. If such evaluations were to indicate a material impairment of these
intangible assets, such impairment would be recognized by a writedown of the
applicable asset.

Revenue Recognition -- Revenues from product sales are recognized upon
shipment. The Company is obligated to accept from customers the return of
pharmaceuticals which have reached their expiration date for which it generally
ships replacement merchandise. The Company has not historically experienced
significant returns of expired pharmaceuticals.

Contract revenue is recognized on a basis consistent with the performance
requirement of the contract. Payments received in advance of performance are
recorded as deferred revenue.

Clinical, Development and Regulatory Expenses -- Clinical, development and
regulatory costs are expensed as incurred.

Net Income (Loss) per Share -- Net income (loss) per share is computed
based on the weighted average number of common and common equivalent shares
during each year. Common equivalent shares consist of stock options and warrants
and are included in the computation of net income per share using the treasury
stock method. In loss years, common equivalent shares are excluded as the effect
would be antidilutive. Net income (loss) per share is unchanged on a
fully-diluted basis for all periods presented.

Accounting for Stock-Based Compensation -- In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation", which requires the
Company to adopt disclosure provisions for stock-based compensation effective
January 1, 1996. The standard defines a fair value method of accounting for
stock options and other equity instruments. Under the fair value method,
compensation is measured at the grant date based on the fair value of the award
and is recognized over the service period, which is usually the vesting period.
This standard encourages rather than requires companies to adopt the fair value
method of accounting for employee stock-based transactions. Companies are
permitted to continue to account for such transactions under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", but will be required to disclose in a note to the financial
statements pro forma net income and net income per share as if the new method of
accounting had been applied. The Company has elected to continue to apply APB
Opinion No. 25 in its financial statements and will disclose in future annual
reports the required pro forma information in a footnote.

Reclassifications -- Prior to Dura's acquisition of DDSI on December 29,
1995, Dura recorded costs made on behalf of DDSI as they were incurred and
simultaneously accrued reimbursement from DDSI by crediting the related costs.
In 1996, Dura is recording contract revenues from Spiros Development Corporation
("Spiros Corp."), a separate entity formed in December 1995, equal to the
amounts due from Spiros Corp. for

F-8
<PAGE> 53

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

development and management services less a prorata amount allocated to the
warrant subscription receivable. The DDSI reimbursements included in the 1993,
1994 and 1995 statements of operations have been reclassified to contract
revenues to conform to the presentation used for Spiros Corp. The following
summarizes the impact of the reclassification on the previously reported
captions in the statements of operations (in thousands):

<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------ ------ ------ THREE MONTHS
ENDED
MARCH 31,
1995
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Contract................................... $2,297 $9,161 $8,016 $2,035
Total revenues............................. 2,297 9,161 8,016 2,035
OPERATING COSTS AND EXPENSES:
Clinical, development and regulatory:
Less reimbursement from Dura Delivery
Systems, Inc. ........................ 1,487 8,260 6,428 1,679
Selling, general and administrative........ 810 901 1,588 356
Total operating costs and expenses......... 2,297 9,161 8,016 2,035
</TABLE>

In addition, certain other reclassifications have also been made to amounts
included in the prior periods' financial statements to conform with the
financial statement presentation for the year ended December 31, 1995 and the
three months ended March 31, 1996.

3. SHORT-TERM INVESTMENTS

The following is a summary of available-for-sale investments (in
thousands):

<TABLE>
<CAPTION>
GROSS
UNREALIZED ESTIMATED FAIR
COST GAINS VALUE
------- ---------- --------------
<S> <C> <C> <C>
DECEMBER 31, 1995:
U.S. government securities........................ $23,148 $ 80 $ 23,228
U.S. corporate debt securities.................... 19,015 23 19,038
------- ---- -------
Total........................................ $42,163 $103 $ 42,266
======= ==== =======
DECEMBER 31, 1994:
U.S. government securities........................ $ 2,563 $ -- $ 2,563
======= ==== =======
</TABLE>

The amortized cost and estimated fair value of available-for-sale
investments at December 31, 1995, by contractual maturity, are shown below (in
thousands):

<TABLE>
<CAPTION>
ESTIMATED
FAIR
COST VALUE
------- ---------
<S> <C> <C>
Due in one year or less................................... $31,548 $31,588
Due after one year through two years...................... 10,615 10,678
======= =======
Total................................................ $42,163 $42,266
======= =======
</TABLE>

F-9
<PAGE> 54

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. BALANCE SHEET DETAILS

<TABLE>
<CAPTION>
MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
(IN THOUSANDS)
Property -- at cost:
Land.............................................. $ 1,615 $ 1,615 $ 1,615
Building.......................................... 3,305 3,450 3,494
Machinery and equipment........................... 954 2,365 3,536
Furniture and fixtures............................ 816 1,392 1,494
Construction in progress -- manufacturing
facility....................................... 2,430 8,687 9,115
-------- ------- -------
9,120 17,509 19,254
Less accumulated depreciation and amortization.... (788) (1,376) (1,631)
-------- ------- -------
Property.......................................... $ 8,332 $16,133 $17,623
======== ======= =======
License agreements and product rights:
Capitalized cost.................................. $ 4,000 $40,624 $40,624
Less accumulated amortization..................... (504) (1,559) (1,985)
-------- ------- -------
License agreements and product rights............. $ 3,496 $39,065 $38,639
======== ======= =======
Goodwill:
Goodwill from acquisitions........................ $ 4,124 $11,063 $11,063
Less accumulated amortization..................... (3,606) (3,980) (4,093)
-------- ------- -------
Goodwill.......................................... $ 518 $ 7,083 $ 6,970
======== ======= =======
Accounts payable:
Accounts payable.................................. $ 2,023 $ 3,412 $ 4,090
Contractual sales rebates......................... 513 1,605 2,368
Other accrued expenses............................ 969 2,208 2,259
-------- ------- -------
Accounts payable.................................. $ 3,505 $ 7,225 $ 8,717
======== ======= =======
</TABLE>

5. COMMITMENTS

Leases -- The Company leases and subleases office space under operating
leases expiring through December 2000. Rent expense, net of sublease income, was
$-0-, $30,000 and $121,000 for 1993, 1994 and 1995, respectively. Aggregate
future minimum lease obligations under non-cancelable operating leases are
summarized as follows (in thousands):

<TABLE>
<CAPTION>
LEASE
YEAR ENDING DECEMBER 31, OBLIGATIONS
------------------------------------------------------------------ -----------
<S> <C>
1996......................................................... $ 294
1997......................................................... 304
1998......................................................... 181
1999......................................................... 160
2000......................................................... 173
------
Total................................................... $ 1,112
======
</TABLE>

F-10
<PAGE> 55

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Employee Savings Plans -- The Company has a 401(k) plan that allows
participating employees to contribute 1% to 15% of their salary, subject to
annual limits. The Board may, at its sole discretion, approve Company
contributions. The Company made contributions to the plan totaling $89,800 and
$223,500 in 1994 and 1995, respectively.

The Company has a non-qualified deferred compensation plan that allows
eligible employees to defer up to 100% of their compensation. As of December 31,
1995, $506,600 has been deferred under this plan which is included in other
assets and other non-current liabilities. The amounts deferred under this plan
are transferred to a trust and managed by an investment manager. At December 31,
1995 the investments held by the trust consisted primarily of 16,666 units of
Spiros Corp. (Note 10).

Capital -- In 1995 the Company completed construction, at its headquarters,
of a manufacturing facility that will be used to formulate, mill, blend and fill
drugs to be used with Spiros, a dry powder pulmonary drug delivery system (Note
10), pending regulatory approval. Cumulative capital expenditures on the
facility as of December 31, 1995 were approximately $8.7 million. Equipment
purchases for and validation of the manufacturing facility are currently
scheduled through 1997. At March 31, 1996, the Company had open purchase
commitments for validation of the facility and equipment purchases of
approximately $2.5 million. During the years ended December 31, 1994 and 1995
the Company capitalized interest of $40,000 and $487,000, respectively, as a
cost of constructing the manufacturing facility.

6. DEBT AND OTHER OBLIGATIONS

Line of Credit -- The Company has a loan and security agreement with a bank
for the borrowing of up to $5.0 million that terminates in June 1997. Borrowings
under the agreement are limited to 2.5 times the most recent quarter's earnings
(as defined) before interest, taxes and depreciation and amortization ($5.0
million available at December 31, 1995 and March 31, 1996) and bear interest at
the bank's prime rate plus 0.5% (9.0% at December 31, 1995 and 8.75% at March
31, 1996). At December 31, 1994 and 1995, and March 31, 1996 there were no
borrowings outstanding under this agreement.

Secured Promissory Notes -- At December 31, 1995 the Company had $7,056,500
in outstanding borrowings under secured promissory notes with a bank. The
borrowings bear interest at the bank's prime rate plus 1.5% (10.0% at December
31, 1995) with a minimum annual rate of 7% and a maximum of 12%. Principal and
interest are payable monthly with balloon principal payments in October 1997 and
November 2000.

The bank loans are collateralized by a first deed of trust on the Company's
facility and a blanket lien on substantially all Company assets. The agreements
require the Company to maintain certain covenants including, among others, quick
assets (as defined) to current liabilities of not less than 1.25 to one and debt
service ratio not less than 1.5 to one. The agreements also stipulate that the
Company shall maintain profitability on a quarterly basis with allowance for one
loss quarter. At December 31, 1994 and 1995, and March 31, 1996 the Company was
in compliance with all loan covenants.

Note Payable -- In connection with the acquisition of Health Script (Note
11), the Company issued a $1.5 million non-interest bearing note due April 1,
1996. The note was paid in full on April 1, 1996.

Other Obligations -- In connection with the acquisition of license and
product rights in 1995 (Note 10), the Company entered into agreements which
require future payments. The obligations are non-interest bearing and, as they
pertain to the product rights agreement, are principally contingent on the
products remaining available by prescription only.

F-11
<PAGE> 56

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At March 31, 1996, the future annual maturities of principal under notes
payable and other obligations are summarized as follows (in thousands):

<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
-------------------------------------------------------------------
<S> <C>
1996.......................................................... $ 6,399
1997.......................................................... 6,130
1998.......................................................... 3,523
1999.......................................................... 3,523
2000.......................................................... 2,935
Thereafter.................................................... 2,000
-------
24,510
Imputed interest (5.0%-7.0%).................................. (2,754)
-------
Net obligation................................................ 21,756
Less current portion.......................................... (6,311)
-------
Net long-term obligations $15,445
=======
</TABLE>

The future annual maturities exclude approximately $7.5 million in future
contingent obligations due in years 2000 through 2004.

7. CAPITAL STOCK

Common Stock -- In November 1994 and August 1995, the Company completed
offerings of 2,450,000 and 2,247,000 shares of common stock, respectively,
resulting in net proceeds to the Company of $29.0 million and $53.8 million,
respectively.

In April 1994, the Company entered into a definitive stock and warrant
purchase agreement with Elan Corporation, plc, ("Elan"), a developer and
marketer of drug delivery systems. Under the purchase agreement Elan purchased
342,857 shares of the Company's common stock for $3.0 million. In November 1994,
the Company issued 114,155 shares of common stock to Elan, at a price per share
of $10.95, as partial consideration for a development deposit (Note 10).

In December 1995, the Company issued 1,142,554 shares of common stock in
connection with the acquisition of DDSI (Note 11).

Common Stock Warrants -- In connection with the private placement completed
by the Company and DDSI in September 1993 (Note 10), DDSI investors received
1,300,000 Series W warrants to purchase 1.4 shares each of the Company's common
stock and 1,300,000 callable warrants to purchase 1.3 shares each of the
Company's common stock. The Series W warrants (i) are exercisable at $4.75 per
share, subject to adjustment upon the occurrence of certain events as defined,
(ii) are exercisable through September 27, 2000 and (iii) provide for certain
registration rights. The callable warrants were canceled in December 1995 when
the Company exercised its right to purchase the DDSI callable common stock (Note
10).

On April 17, 1994, Elan acquired a warrant to purchase 300,000 shares of
the Company's common stock for total consideration of $480,000. The warrant (i)
is exercisable at $8.75 per share, subject to adjustment upon the occurrence of
certain events as defined in the agreement, (ii) is exercisable through April
17, 2001, and (iii) provides for certain piggyback and demand registration
rights.

On September 21, 1994, DRC (Note 10) acquired a warrant to purchase 100,000
shares of the Company's common stock for total consideration of $150,000. The
warrant (i) is exercisable at $12.95 per share, subject to adjustment upon the
occurrence of certain events as defined in the agreement, (ii) is

F-12
<PAGE> 57

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

exercisable through September 21, 1999, and (iii) provides for certain
piggy-back registration rights. In June 1995, the Company filed a registration
statement to register the common stock underlying the warrant.

On March 22, 1995, the Company, in connection with the acquisition of
Health Script (Note 11), issued warrants for 600,000 shares of the Company's
common stock. The warrants (i) are exercisable at $14.625 per share, subject to
adjustment upon the occurrence of certain events as defined in the warrant
agreement, (ii) are exercisable through March 22, 2000, and (iii) provide for
demand registration rights for the underlying common stock. The Company acquired
an option to redeem the warrants by the payment of cash or registered shares of
the Company's common stock, upon notice of exercise, at a per share price equal
to the difference between the then current market price, as defined, and the
exercise price, not to exceed $10.83 per share. If the warrants for all 600,000
shares of common stock had been exercised on December 31, 1995 and the Company
had elected to exercise its option to redeem the warrants by the payment of
registered shares of the Company's common stock, approximately 190,000 (130,000
at March 31, 1996) net shares of Company stock would have been issued.

In connection with the private placement completed by the Company and
Spiros Corp. on December 29, 1995 (Note 10), Spiros Corp. investors received
933,334 Series S warrants to purchase an aggregate of 1,120,001 shares of the
Company's common stock. The Series S warrants (i) are exercisable at $38.94 per
share, subject to adjustment upon the occurrence of certain events as defined,
(ii) are exercisable through December 29, 2000, (iii) provide for certain
registration rights and (iv) separate from the Spiros Corp callable common stock
on December 29, 1997 or earlier upon the occurrence of certain events as
defined.

The following table summarizes the warrants outstanding at (unaudited)
March 31, 1996 (in thousands, except per share data):

<TABLE>
<CAPTION>
WARRANTS SHARES COVERED EXERCISE PRICE
WARRANT DESCRIPTION OUTSTANDING BY WARRANTS PER SHARE
-------------------------------------------- ----------- -------------- --------------
<S> <C> <C> <C>
Series W warrants........................... 585 819 $ 4.75
Series S warrants........................... 933 1,120 $38.94
Health Script warrants...................... 600 600 $14.63
Elan warrants............................... 300 300 $ 8.75
DRC warrants................................ 100 100 $12.95
Other....................................... 12 12 $0.50-$12.00
----- -----
Total warrants outstanding............. 2,530 2,951
===== =====
</TABLE>

Common Shares Reserved -- The Company had reserved shares of common stock
for issuance as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
----- ----- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Issuance under 1992 stock option plan................... 1,638 1,591 1,390
Exercise of common stock warrants....................... 4,109 2,987 2,951
----- ----- -----
Total shares reserved.............................. 5,747 4,578 4,341
===== ===== =====
</TABLE>

8. STOCK OPTIONS

The Company's 1992 stock option plan (the "Plan") provides for the grant of
options to officers and other key employees of the Company, and to certain
directors, consultants and independent contractors of the Company, to purchase
up to 2,253,680 shares of the Company's common stock. The plan provides for the
automatic issuance of options to purchase 4,000 and 15,000 shares of the
Company's common stock to non-

F-13
<PAGE> 58

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

employee Board members at the date of each annual shareholders' meeting and upon
initial election to the Board of Directors, respectively. Generally, options are
to be granted at prices equal to at least 100% of the fair market value of the
stock at the date of grant, expire not later than ten years from the date of
grant and become exercisable ratably over a four-year period following the date
of grant.

The Plan provides that in the event of a corporate transaction, as defined,
all outstanding options shall become fully exercisable immediately prior to the
effective date of such transaction and shall terminate upon such effective date.
The Board of Directors may also grant officers of the Company limited stock
appreciation rights in tandem with their outstanding options. In addition,
limited stock appreciation rights shall be granted in connection with all
automatic option grants under the Plan. Upon the occurrence of a hostile
takeover, as defined, each outstanding option with such a limited stock
appreciation right in effect for at least six months will automatically be
canceled in return for a cash distribution from the Company in an amount equal
to the excess of the takeover price, as defined, over the aggregate exercise
price. As of December 31, 1994 and 1995, options to purchase 99,000 and 122,000
shares of common stock, respectively, were outstanding with limited stock
appreciation rights.

The following table summarizes stock option activity under the Plan:

<TABLE>
<CAPTION>
SHARES
--------------------------------- EXERCISE
OPTIONS OPTIONS AVAILABLE PRICE
OUTSTANDING FOR GRANT PER SHARE
----------- ----------------- -------------
<S> <C> <C> <C>
Balance, January 1, 1993................. 1,090,000 256,330 $ 0.50-$ 9.00
Options granted........................ 210,430 (210,430) $ 4.56-$ 6.00
Options exercised...................... (17,153) $ 0.50-$ 4.56
Options canceled....................... (30,946) 30,946 $ 0.50-$ 9.00
--------- --------
Balance, December 31, 1993............... 1,252,331 76,846 $ 0.50-$ 9.00
Options authorized..................... 375,000
Options granted........................ 436,130 (436,130) $ 7.00-$12.00
Options exercised...................... (65,982) $ 0.50-$ 7.25
Options canceled....................... (59,620) 59,620 $ 0.50-$ 9.75
--------- --------
Balance, December 31, 1994............... 1,562,859 75,336 $ 0.50-$12.00
Options authorized..................... 500,000
Options granted........................ 550,303 (550,303) $13.00-$30.63
Options exercised...................... (546,924) $ 0.50-$18.44
Options canceled....................... (40,054) 40,054 $ 0.50-$30.63
--------- --------
Balance, December 31, 1995............... 1,526,184 65,087 $ 0.50-$30.63
Unaudited:
Options granted........................ 65,200 (65,200) $33.63-$52.75
Options exercised...................... (200,615) $ 0.50-$24.75
Options canceled....................... (2,458) 2,458 $ 4.56-$33.63
--------- --------
Balance, March 31, 1996.................. 1,388,311 2,345 $ 0.50-$52.75
========= ========
Exercisable, December 31, 1995........... 762,045 $ 0.50-$30.63
=========
Exercisable, (unaudited) March 31,
1996................................... 630,534 $ 0.50-$52.75
=========
</TABLE>

F-14
<PAGE> 59

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Deductible temporary differences:
Net operating loss carryforwards............................. $ 20,786 $ 22,052
Capitalized research and development......................... 6,388
Research and development credits............................. 1,670
Reserves and accruals not currently deductible............... 83 728
Depreciation and amortization................................ -- (319)
-------- --------
Total deferred tax assets...................................... 20,869 30,519
Valuation allowance for deferred tax assets.................... (20,869) (30,519)
-------- --------
Net deferred tax assets........................................ $ -- $ --
======== ========
</TABLE>

The Company has provided a 100% valuation allowance against deferred tax
assets as of December 31, 1994 and 1995 as realization of such assets is
uncertain. At December 31, 1995, the valuation allowance for deferred tax assets
included approximately $3.5 million that will be credited to common stock when
and if the underlying deferred tax asset is recognized.

At December 31, 1995, the Company had Federal and California net operating
loss ("NOL") carryforwards of approximately $59.8 million and $28.1 million,
respectively. The difference between the NOL carryforwards for Federal and
California income tax purposes is attributable to the 50% limitation on
California NOL carryforwards. The Federal and California NOL carryforwards will
begin expiring in 1998 and 1996, respectively, unless previously utilized. As of
December 31, 1995, approximately $27.5 million of the total Federal NOL
carryforwards were currently available for use by the Company to generally
offset 90% of pretax income. The difference between the total NOL carryforwards
and the NOL carryforwards currently available for use by the Company results
from the limitations of Section 382 of the Internal Revenue Code due to a
"change of ownership." The NOL carryforwards available for use by the Company as
a result of the Section 382 limitation will be increased by approximately $2.9
million per year through 2006. While the Company believes the limitation is
approximately $2.9 million per year, this amount is not certain, nor is it
certain that a subsequent change of ownership could not result in a further
limitation. In addition, the NOL carryforwards are subject to review and
potential disallowance by the Internal Revenue Service upon audit of the Federal
income tax returns of the Company.

F-15
<PAGE> 60

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A reconciliation of the income tax provision (benefit) based on Federal
statutory rates and income (loss) before income taxes to the provision for
income taxes, as reported, is as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1994 1995
----- --------
<S> <C> <C>
Provision (benefit) at Federal statutory rates................ $ 660 $(12,027)
Tax effect of timing differences -- Write-off of development
inventory................................................... (660)
Charges for acquired in-process technology and purchase
options..................................................... 14,883
NOL carryforwards utilized.................................... (2,946)
Federal alternative minimum tax............................... 235
Other......................................................... 34 261
----- --------
Provision for income taxes.................................... $ 34 $ 406
===== ========
</TABLE>

During the year ended December 31, 1995 the Company recorded a tax benefit
from stock option exercises of $235,000 which was credited to common stock.

10. LICENSE, ROYALTY AND DEVELOPMENT AGREEMENTS

General Agreements -- The Company has several license, royalty and
development agreements. The following agreements, exclusive of those related to
Spiros Corp., generally provide for royalty payments on product sales in the
range of 3.5% to 15%. Generally, product commercialization establishes the
obligation for certain royalty and/or license payments.

Powder Inhaler -- The Company has a worldwide license from a private
inventor to certain dry powder drug delivery technology. The technology uses a
device to aerosolize pharmaceuticals in dry powder formulations for
intrapulmonary and intranasal administration. The Company is required to pay the
inventor royalties on future sales of this device. The following development
arrangements have been entered into regarding the dry powder inhaler technology
("Spiros"):

Private Placement with DDSI -- On September 27, 1993, DDSI, a Delaware
corporation, completed a $13.0 million private placement to fund the
development of Spiros for use with certain compounds. The private placement
consisted of 1.3 million units at $10.00 per unit. Each unit consisted of
one share of DDSI callable common stock, a Series W warrant (Note 7) to
purchase 1.4 shares of the Company's common stock and a callable warrant
(Note 7). In exchange for the Series W warrants, the Company acquired the
right ("DDSI Purchase Option") through December 31, 1999 to buy all of the
shares of DDSI callable common stock. A one-time purchase option expense of
$2.2 million was recorded by the Company in September 1993 representing the
fair market value of the Series W warrants. Under the Development and
Management Agreement described below between the Company and DDSI, DDSI
used the proceeds from the private placement to develop Spiros and Spiros
applications for the drugs albuterol and beclomethasone.

In September 1994, DDSI and Elan entered into a loan agreement under
which Elan loaned to DDSI $5.0 million in September 1994 and $5.0 million
in March 1995. Under certain conditions the loans were convertible by Elan
into shares of DDSI Callable Common Stock. On December 7, 1995 Elan
converted the principal and interest due under the loans into 639,119
shares of DDSI callable common stock.

On December 29, 1995, the Company executed its right under the DDSI
Purchase Option and purchased 100% of DDSI's callable common stock (Note
11). Under a development and management agreement, DDSI engaged the Company
to develop the DDSI products and provide general management services to
DDSI for a management fee equal to 10% of direct development costs, as
defined. During

F-16
<PAGE> 61

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1993, the Company received a reimbursement of approximately $1.6 million
representing development costs incurred by the Company during the period
February 1, 1993 to September 27, 1993 and organization and offering
expenses related to the private placement. Dura recorded contract revenues
under the agreement with DDSI for the years ended December 31, 1993, 1994
and 1995 of $2,297,000, $9,161,000 and $8,016,000, respectively. Included
in contract revenues from DDSI for the years ended December 31, 1993, 1994
and 1995, is $47,400, $166,600 and $358,200, respectively, representing the
10% management fee.

Private Placement with Spiros Corp. -- On December 29, 1995, Spiros
Corp., a separate, newly formed Delaware corporation, completed a $28.0
million private placement to fund the development of Spiros for use with
certain compounds. Under agreements described below between the Company and
Spiros Corp., Spiros Corp. will use the proceeds from the private placement
and a $13.0 million contribution from Dura to develop Spiros and Spiros
applications for albuterol, beclomethasone and ipratropium (the
"Compounds"), and selected proteins and peptides. If these development
efforts are successful, the Company may execute its right to purchase
Spiros Corp.'s callable common stock; however, the Company does not have a
legal obligation to purchase such shares of Spiros Corp.

The private placement consisted of 933,334 units at $30.00 per unit.
Each unit consisted of one share of Spiros Corp. callable common stock and
a Series S warrant (Note 7) to purchase 1.2 shares of the Company's common
stock. In exchange for the Series S warrants and the contribution of $13.0
million to Spiros Corp., the Company has the right ("Spiros Purchase
Option") through December 31, 1999, to purchase all of the currently
outstanding shares of Spiros Corp. callable common stock at predetermined
prices. The purchase price begins at $46.88 per share (an aggregate of
$43.7 million) through December 31, 1997 and increasing on a quarterly
basis thereafter to a maximum of $76.17 per share (an aggregate of $71.1
million) on December 31, 1999. Such purchase price may be paid, at the
Company's discretion, in cash, shares of the Company's common stock, or a
combination thereof. In addition, Dura has the option through specified
dates, to acquire Spiros Corp's exclusive rights for use of Spiros with
albuterol in the cassette version (the "Albuterol Purchase Option"). In the
event Dura acquires rights for use of Spiros with albuterol in the cassette
version and does not exercise the Spiros Purchase Option, Dura will pay a
royalty to Spiros Corp. on net sales of such product. A purchase option
expense of $13.0 million representing the cash contributed to Spiros Corp.
was recorded in December 1995. The Company also recorded a warrant
subscription receivable and corresponding increase in common stock of $4.2
million representing the fair market value of the Series S warrants.

In connection with the December 29, 1995 private placement, the
Company also entered into certain other agreements with Spiros Corp. which
are summarized as follows:

Technology License Agreement -- Under this agreement, the Company
granted to Spiros Corp., subject to existing agreements with Elan and
Mitsubishi Chemical Corporation, a royalty-bearing, perpetual, exclusive
license to use Spiros in connection with the Compounds and certain
off-patent proteins and compounds, and certain non-exclusive rights to
other compounds. Such agreement expires upon exercise by the Company of
the Spiros Purchase Option and prior to such expiration, the Company may
exercise the Albuterol Purchase Option under terms set forth in the
agreement.

Interim Manufacturing and Marketing Agreement -- Under this
agreement, Spiros Corp. granted to the Company exclusive license to
manufacture and market Spiros Corp. products in the U.S. in exchange for
a royalty of 10.0% on net product sales, as defined. Such agreement
expires on exercise or termination of the Spiros Purchase Option.

Development and Management Agreement -- Under this agreement,
Spiros Corp. has engaged the Company to develop the Spiros Corp.
products and provide general management services to Spiros Corp. The
agreement requires Spiros Corp to make payments to Dura for development
and

F-17
<PAGE> 62

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

management services within 15 days after the end of the month in which
the services are provided. Dura will record contract revenues from
Spiros Corp. equal to the amounts due from Spiros Corp. for costs and
fees less a prorata amount allocated to the Series S warrant
subscription receivable (Note 7). At December 31, 1995 the Company had a
receivable from Spiros for $413,000 representing amounts due from Spiros
Corp. for development costs incurred by the Company in 1995 and
organization and offering expenses related to the private placement.
During the three months ended March 31, 1996 the Company recorded
contract revenues under the development and management agreement with
Spiros Corp. of $3,671,000.

Fujisawa -- In April 1995, the Company entered into a collaborative
development agreement with Fujisawa Pharmaceutical Co., Ltd. ("Fujisawa")
covering the use of Spiros to deliver one of Fujisawa's new chemical entity
asthma compounds. The agreement was an extension of previous feasibility work
completed by the Company. Pursuant to the agreement the Company will provide dry
powder formulation assistance, manufacturing process development and clinical
trial supplies to Fujisawa through the completion of clinical trials in Japan or
June 30, 1998, whichever occurs first. The Company received an up-front payment
and is to receive additional milestone and reimbursement payments from Fujisawa.
Fujisawa can terminate the agreement upon 30 days notice to the Company. If
Fujisawa's clinical trials are successful, the parties have agreed to negotiate
additional agreements, which would include license and supply agreements.

Elan -- On September 5, 1994, the Company and Elan signed certain
agreements as part of the formation of a strategic alliance. The agreements
which set forth this strategic alliance include the (i) Technology Access
Agreement and (ii) Protein and Peptide Development Agreement. The Technology
Access Agreement provides for Elan to utilize its drug delivery expertise and
proprietary technologies to develop respiratory pharmaceuticals and to supply
such drugs to the Company for sale exclusively in the U.S. in such dosage
strengths and package sizes as are typically marketed in the U.S. After Elan
obtains the appropriate regulatory approvals, the Company plans to market these
drugs in the U.S. through its established pharmaceutical sales and marketing
organization. On November 1, 1994, the Company deposited with Elan $2.5 million
in cash and common stock (Note 7) and is required to make certain other
milestone payments, aggregating $300,000 for each approved drug, in connection
with this agreement. In the event Elan's development efforts are unsuccessful,
Elan shall be required to refund in cash the Company's $2.5 million deposit. The
Protein and Peptide Development Agreement provides for the development by Elan
of up to five compounds, including at least one protein and one peptide
compound, for systemic delivery through the lungs utilizing Spiros. The Company
and Elan have agreed that at or before the expiration of this agreement, if the
results of Elan's research and development are characterized by both parties as
favorable, the parties will negotiate a further agreement relating to the sales
and marketing of these compounds for use in Spiros.

In addition, the Company, Elan and DDSI entered into a product licensing
agreement, under which Elan received exclusive rights to develop, manufacture
and market to most countries outside of North America eight identified
respiratory compounds for use with Spiros. In December 1995, the Company and
DDSI assigned their rights and obligations under this agreement to Spiros Corp.
Additionally, Elan made a $10.0 million investment in the units of Spiros Corp.
(Note 10).

Houghten Pharmaceuticals, Inc. -- In February 1996, Dura entered into an
agreement with Houghten Pharmaceuticals, Inc. ("Houghten") to provide, for a
four-year period, contract services for Houghten's drug development programs
using Dura's development capabilities and proprietary formulation and delivery
technology. Dura will receive (a) contract revenues from Houghten for services
provided and (b) rights to collaborate with Houghten on the development of new
compounds. Concurrently, Dura made a $5.0 million equity investment in Houghten,
which was subsequently converted into 775,193 shares of Houghten common stock.

Sterling Winthrop -- The Company has a worldwide license agreement for the
sale of bitolterol inhalation solution (excluding Italy) and bitolterol metered
dose inhaler (excluding Italy and Puerto Rico),

F-18
<PAGE> 63

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

pharmaceuticals used in the treatment of asthma. The agreement provides for the
payment of royalties on sales and certain other upfront and anniversary license
fees and terminates in June 2022.

DRC -- In September 1994, the Company entered into a ten-year agreement
with DRC USA Inc., a Nevada corporation ("DRC"), under which the Company
received funding during the period October 1, 1994 through December 31, 1995 to
expand its sales force in specified territories. In connection with entering
into such agreement, the Company issued a warrant to an affiliate of DRC (Note
7) and is required to pay royalties on net revenues in the specified
territories, as defined, through September 2004. For the period October 1, 1994
through December 31, 1994 and the year ended December 31, 1995 the Company
recorded contract revenue of $400,000 and $1,600,000, respectively, under this
agreement.

Eli Lilly & Co. -- On April 13, 1995, the Company signed an exclusive
licensing agreement to market two anti-tuberculosis products to the United
States respiratory market. The agreement required payments in 1995 of
approximately $3.6 million and provides for an additional payment in December
1996 of $550,000 (Note 6). The agreement also requires semi-annual royalty
payments based on net sales of the licensed products.

Rondec Product Line -- On June 14, 1995, the Company signed an agreement
with Ross Products Division of Abbott Laboratories to acquire domestic rights to
the Rondec product line of six prescription cough/cold drugs. The acquisition
closed on June 30, 1995. Under the agreement the Company received cash at
closing of approximately $4.4 million, paid $20.0 million on July 14, 1995, and
is obligated to make additional future minimum payments which are contingent
principally on the acquired products remaining available by prescription only
(Note 6).

11. ACQUISITIONS

These following acquisitions have been accounted for under the purchase
method of accounting and, accordingly, the operating results of these
acquisitions are included in the Company's consolidated results of operations
from the date of acquisition.

Health Script -- On March 22, 1995, the Company acquired all of the common
stock of Health Script Pharmacy Services, Inc. and certain assets of a related
affiliate, Quintex, Ltd. (collectively "Health Script"). Health Script, located
in Denver, Colorado, is a mail service pharmacy which dispenses respiratory
pharmaceuticals. The purchase price of $7,340,000 consisted of a cash payment of
$5.0 million, a $1.5 million non-interest bearing note due April 1, 1996 (Note
6), and warrants to purchase 600,000 shares of the Company's common stock (Note
7). The assets acquired include cash, inventory, furniture and equipment valued
at $425,000, and goodwill valued at approximately $6.9 million.

DDSI -- On December 29, 1995, the Company acquired all of the outstanding
callable common stock of DDSI (Note 10). The purchase price of approximately
$33.5 million consisted of 1,142,554 registered shares of the Company's common
stock. The net assets acquired included cash of $3.4 million, equipment valued
at $380,000 and DDSI's payable to Dura for development and management services
of $995,000. The excess of the purchase price over the fair value of the net
assets acquired of approximately $30.8 million was allocated to in-process
technology. The Company concluded, based on an assessment of the additional
development, testing and regulatory approvals required, that the commercial
viability of the technology had not yet been established. In addition, no
alternative future uses of the technology, not requiring regulatory approval,
have been established. As a result of this assessment the acquired in-process
technology was expensed as a non-cash charge in December 1995.

F-19
<PAGE> 64

DURA PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisitions had occurred on January 1, 1994, after
giving effect to certain adjustments, including amortization of goodwill and
issuance of Company common stock. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what would have
occurred had the acquisitions been made on January 1, 1994, nor is it indicative
of future results.

(IN THOUSANDS, EXCEPT PER SHARE DATA -- UNAUDITED)

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1994 1995
------- --------
<S> <C> <C>
Revenues........................................................ $31,784 $ 45,719
Net loss........................................................ $(7,166) $(13,535)
Net loss per share.............................................. $ (0.65) $ (1.05)
</TABLE>

F-20
<PAGE> 65

SPIROS(TM)

<TABLE>
<CAPTION>
<S> <C>
[PHOTO]

The cassette system was the first to be
developed by Dura. It features a 30-dose
plastic cassette, and is being used in
clinical trials with albuterol.

[PHOTO]
[PHOTO]

The blisterdisk system features a 16-dose
blisterpack powder storage system which
will provide a barrier against moisture,
critical to many sensitive drugs including
macromolecules, or peptides and proteins.

[PHOTO]
Spiros(TM) is a proprietary pulmonary dry powder drug delivery system
under development that is designed to aerosolize pharmaceuticals in dry
powder formulations for propellant-free delivery to the lungs. The unit-dose system is being designed
- Inspiratory Flow Rate Independence for certain compounds, such as
- Minimum Need for Patient Coordination biotechnology products, where the cost of
- Free of Chlorofluorocarbon Propellants the drug, dosing frequency or threat of
- Patient Convenience microbial contamination preclude the use
of the other systems.

Product candidates based on the Company's Spiros(TM) system are in various stages of research or development and have not been
cleared by the United States Food and Drug Administration for commercial sale. There can be no assurance that the Company's products
will be successfully developed or approved by regulatory authorities for commercial sale.

------------------------

DURA-VENT(R) and DURA-TAP(R)/PD are registered trademarks of the Company. The Company claims common law trademark rights to
Spiros(TM), Dryhaler(TM), DURA-VENT(TM), DURA-GEST(TM), DURA-TAP/PD(TM), FENESIN(TM), DURA-VENT/DA(TM), D.A. CHEWABLE(TM),
GUAI-VENT/PSE(TM) and HomeRx(TM). TORNALATE(R) is a registered trademark of Sterling Winthrop Inc. CROLOM(TM) is a trademark of
Bausch & Lomb Pharmaceuticals, Inc. RONDEC(R) and RONDEC-TR(R) are registered trademarks of Abbott Laboratories, Ross Products
Division. Capastat(R) and Seromycin(R) are registered trademarks of Eli Lilly and Company. Spinhaler(R) is a registered trademark of
Fisons Limited. Turbuhaler(R) is a registered trademark of Astra Pharmaceuticals. Rotohaler(TM) is a trademark of Glaxo Wellcome,
Inc. UNI-DUR(R) is a registered trademark of Key Pharmaceuticals, a unit of Schering-Plough Corporation.

</TABLE>

<PAGE> 66

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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER

<TABLE>
<S> <C>
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.

------------------------

TABLE OF CONTENTS
PAGE
----
Available Information................. 3
Information Incorporated by
Reference........................... 3
Prospectus Summary.................... 4
Risk Factors.......................... 7
Use of Proceeds....................... 12
Price Range of Common Stock........... 13
Dividend Policy....................... 13
Capitalization........................ 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 21
Management............................ 34
Principal Shareholders................ 38
Description of Capital Stock.......... 40
Underwriting.......................... 43
Legal Matters......................... 44
Experts............................... 44
Additional Information................ 44
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

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2,350,000 SHARES

LOGO
COMMON STOCK

---------------------------

PROSPECTUS
---------------------------

MERRILL LYNCH & CO.
HAMBRECHT & QUIST
OPPENHEIMER & CO., INC.

MAY 22, 1996

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