DURA PHARMACEUTICALS INC, 10-Q, 1998-08-14

DURA PHARMACEUTICALS INC
10-Q, 1998-08-14
PHARMACEUTICAL PREPARATIONS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 1998.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File number 000-19809

DURA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 95-3645543
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

7475 LUSK BLVD., SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE IS (619) 457-2553

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [ X ] Yes [ ] No

The number of shares of the Registrant's Common Stock outstanding as of July
31, 1998 was 46,366,092.

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

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
DURA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARE AMOUNTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

DECEMBER 31, JUNE 30,
ASSETS 1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 72,003 $ 119,076
Short-term investments 313,218 291,286
Accounts and other receivables 40,987 34,255
Inventory 15,201 10,846
------------ -----------

Total current assets 441,409 455,463

License agreements and product rights 250,781 249,756
Property 48,525 64,826
Other assets 34,165 33,695
------------ -----------

TOTAL $ 774,880 $ 803,740
------------ -----------
------------ -----------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 45,741 $ 53,920
Current portion of long-term obligations 2,798 2,896
------------ -----------

Total current liabilities 48,539 56,816

Convertible subordinated notes 287,500 287,500
Other long-term obligations 9,564 9,944
------------ -----------

Total liabilities 345,603 354,260

STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001; shares authorized - 5,000,000;
no shares issued or outstanding
Common stock, par value $.001; shares authorized - 200,000,000;
issued and outstanding - 45,608,414 and 46,363,738, respectively 46 46
Additional paid-in capital 604,991 608,560
Accumulated other comprehensive income 176 93
Warrant subscriptions receivable (12,252) (10,876)
Accumulated deficit (163,684) (148,343)
------------ -----------

Total stockholders' equity 429,277 449,480
------------ -----------

TOTAL $ 774,880 $ 803,740
------------ -----------
------------ -----------
</TABLE>

See accompanying notes to consolidated financial statements.

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DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ----------------------
1997 1998 1997 1998
------------------------ ----------------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 35,404 $ 34,912 $ 69,339 $ 70,798
Contract 8,227 17,026 15,184 29,906
--------- --------- --------- ---------

Total revenues 43,631 51,938 84,523 100,704
--------- --------- --------- ---------

OPERATING COSTS AND EXPENSES:
Cost of sales 7,976 7,457 15,946 15,550
Clinical, development and regulatory 6,593 11,488 12,353 21,077
Selling, general and administrative 16,760 22,946 32,752 45,461
--------- --------- --------- ---------

Total operating costs and expenses 31,329 41,891 61,051 82,088
--------- --------- --------- ---------

OPERATING INCOME 12,302 10,047 23,472 18,616
--------- --------- --------- ---------

OTHER:
Interest income 2,992 5,937 6,379 11,354
Interest expense (116) (3,069) (289) (6,210)
Other - net (9) (519) 11 (506)
--------- --------- --------- ---------

Total other 2,867 2,349 6,101 4,638
--------- --------- --------- ---------

INCOME BEFORE INCOME TAXES 15,169 12,396 29,573 23,254
PROVISION FOR INCOME TAXES 5,887 4,219 11,504 7,913
--------- --------- --------- ---------

NET INCOME $ 9,282 $ 8,177 $ 18,069 $ 15,341
--------- --------- --------- ---------
--------- --------- --------- ---------

NET INCOME PER SHARE:
Basic $ 0.21 $ 0.18 $ 0.42 $ 0.33
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted $ 0.20 $ 0.17 $ 0.38 $ 0.32
--------- --------- --------- ---------
--------- --------- --------- ---------

WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic 43,672 46,302 43,511 46,139
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted 47,326 48,073 47,285 48,321
--------- --------- --------- ---------
--------- --------- --------- ---------

</TABLE>

See accompanying notes to consolidated financial statements.

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DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1998
------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 30,241 $ 43,633
--------- ---------

INVESTING ACTIVITIES:
Purchases of short-term investments (141,604) (179,606)
Sales and maturities of short-term investments 105,776 201,454
Product acquisitions (69,731) (5,000)
Capital expenditures (13,735) (18,582)
Other (1,155) (363)
--------- ---------

Net cash used for investing activities (120,449) (2,097)
--------- ---------

FINANCING ACTIVITIES:
Issuance of common stock and warrants - net 3,615 5,537
Principal payments on long-term obligations (3,500) -
--------- ---------

Net cash provided by financing activities 115 5,537
--------- ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (90,093) 47,073
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 131,101 72,003
--------- ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41,008 $ 119,076
--------- ---------
--------- ---------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 0 $ 5,832
Income taxes $ 4,438 $ 3,479

See accompanying notes to consolidated financial statements.

</TABLE>

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DURA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared by Dura Pharmaceuticals, Inc. ("Dura" or the "Company") in
accordance with the instructions to Form 10-Q. The consolidated financial
statements reflect all adjustments, consisting of only normal recurring
accruals, which are, in the opinion of management, necessary for a fair
statement of the results of the interim periods presented. These
consolidated financial statements and notes thereto should be read in
conjunction with the audited financial statements and notes thereto included
in the Company's 1997 Annual Report to Stockholders, which statements and
notes are incorporated by reference in the Company's Annual Report on Form
10-K for the year ended December 31, 1997. The results of operations for the
interim periods are not necessarily indicative of results to be expected for
any other interim period or for the year as a whole.

The consolidated financial statements include the accounts of Dura and its
wholly-owned subsidiaries. All intercompany transactions and balances are
eliminated in consolidation.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the consolidated financial statements and
related notes. Changes in those estimates may affect amounts reported in
future periods.

2. NEW ACCOUNTING STANDARD

Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 requires reporting and displaying comprehensive income and its
components which, for Dura, includes net income and unrealized gains and
losses on investments. In accordance with SFAS 130, the accumulated balance
of other comprehensive income is disclosed as a separate component of
stockholders' equity. Prior year financial statements have been reclassified
to conform to the requirements of SFAS 130.

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For the three months and six months ended June 30, 1997 and 1998, comprehensive
income consisted of (in thousands):

Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
------- ------ ------- -------
<S> <C> <C> <C> <C>
Net income $ 9,282 $8,177 $18,069 $15,341
Other comprehensive income (loss):
Unrealized gain(loss) on
investments 579 (167) 114 (83)
------- ------ ------- -------
Comprehensive income $ 9,861 $8,010 $18,183 $15,258
------- ------ ------- -------
------- ------ ------- -------

</TABLE>

3. CAPITAL STOCK

COMMON STOCK. On May 21, 1998, the Company's stockholders approved an
amendment to the Company's Certificate of Incorporation increasing the number
of authorized shares of Common Stock from 100 million to 200 million.

SHAREHOLDER RIGHTS PLAN. In May 1998, the Company adopted a Shareholder
Rights Plan in which Preferred Stock purchase rights ("Rights") were
distributed as a dividend at the rate of one Right for each share of Common
Stock held as of the close of business on June 5, 1998. Each Right entitles
stockholders to buy, upon certain events, one one-thousandth of a share of a
new series of junior participating Preferred Stock of the Company at an
exercise price of $175.00. The Rights are designed to guard against partial
tender offers and other abusive tactics that might be used in an attempt to
gain control of the Company or to deprive stockholders of their interest in
the long-term value of the Company. The Rights are exercisable only if a
person or group acquires 15% or more of the Company's Common Stock or
announces a tender offer of which the consummation would result in ownership
by a person or group of 15% or more of the Company's Common Stock. The
Rights are redeemable for one cent per Right at the option of the Board of
Directors prior to this event occurring. The Rights expire on June 5, 2008.

4. COMMITMENTS AND CONTINGENCIES

TERMINATION OF MERGER AGREEMENT WITH SCANDIPHARM, INC. On December 1, 1997,
the Company terminated a merger agreement with Scandipharm, Inc.
("Scandipharm") entered into on October 20, 1997. On January 16, 1998,
Scandipharm filed suit against the Company for breach of contract. On January
19, 1998, the Company filed suit against Scandipharm seeking a declaratory
judgment that Dura's termination of the merger did not breach the merger
agreement and for damages against Scandipharm. The Company believes that it
had the right to terminate the merger agreement, and that Scandipharm's
claims for specific performance under the agreement or for unspecified
damages are without merit, and that outcome of this matter will not have a
material adverse effect on the Company's financial position or results of
operations.

ACQUISITION OF SPIROS DEVELOPMENT CORPORATION. On December 19, 1997, the
Company acquired all of the outstanding callable common stock of Spiros
Development Corporation. The Company

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is in the process of determining the appropriate values to be assigned to the
assets and liabilities assumed in the acquisition. The Company's estimate of
these values is subject to revision upon completion of its evaluation which
may result in an adjustment to the amount recorded in 1997 for the
acquisition of in-process technology.

5. SUBSEQUENT EVENTS

On July 28, 1998, the Company entered into a series of agreements with a
newly-formed, privately held company, DJ Pharma, Inc. ("DJ"), for the
co-promotion of the Company's Rondec, Keftab, and certain cough, cold and
allergy product lines. As consideration for the co-promotion of these
products, the Company will pay DJ fifty percent of the net sales of such
products in excess of established amounts. DJ also received an option to
acquire these products from the Company at predetermined prices which include
the delivery of a secured promissory note and the right to a percentage of
the net sales of such products over a four year period following the exercise
of its option. The co-promotion and option agreement expires June 30, 1999.

The Company also provided $5 million of financing to DJ in the form of a
convertible secured promissory note, some or all of which will convert to
equity upon the closing of a private offering of equity securities currently
being contemplated by DJ ("DJ Offering"). In addition, the Company has
committed to providing an additional loan of $5 million to DJ in the form of
a non-convertible secured promissory note to be funded upon the closing of a
DJ Offering of at least $15 million.

ACQUISITION OF MYAMBUTOL-Registered Trademark- PRODUCT RIGHTS. On August 3,
1998, the Company acquired from an affiliate of American Home Products
("AHP") exclusive U.S. marketing rights to the single-source tuberculosis
drug Myambutol. The purchase price consisted of a $33.5 million cash
payment made at closing, plus additional payments over the next four years
based upon net sales of Myambutol during that period. Based on historical
sales data for Myambutol provided by AHP, the Company estimates that such
future payments could approximate $50 million.

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

This information should be read in conjunction with the consolidated
financial statements and the notes thereto included in Item 1 of this
Quarterly Report and the audited financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 1997 contained in the Company's
1997 Annual Report to Stockholders, which is incorporated by reference in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
See "Risks and Uncertainties" for a discussion of factors known to the
Company that could cause reported financial information not to be necessarily
indicative of future results, including discussion of the effects of
seasonality on
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the Company. The Company undertakes no obligation to release publicly any
revisions to these forward-looking statements to reflect events and
circumstances arising after the date hereof.

RECENT DEVELOPMENTS

On August 3, 1998, the Company acquired from an affiliate of AHP exclusive
U.S. marketing rights to the single-source tuberculosis drug Myambutol. The
purchase price consisted of a $33.5 million cash payment made at closing,
plus additional payments over the next four years based upon net sales of
Myambutol during that period. Based on historical sales data for Myambutol
provided by AHP, the Company estimates that such future payments could
approximate $50 million.

On May 21, 1998, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation increasing the number of authorized
shares of Common Stock from 100 million to 200 million.

On February 22, 1998, the Company announced that it planned to begin
expanding its field sales force immediately from approximately 270
representatives to approximately 450 representatives by the end of 1998 to
increase the promotional activity of its current products and to prepare for
the launch, subject to receiving regulatory approval, of Albuterol
Spiros-TM-. The Company expects that the rapid expansion of its sales force
will result in an increase in fiscal 1998 in its selling, general and
administrative expenses, both in total and as a percentage of revenues, as
compared to fiscal 1997.

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RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1997 AND 1998

Total revenues for the three months ended June 30, 1998 were $51.9 million,
an increase of $8.3 million, or 19%, over the same period in 1997. Net
income for the three months ended June 30, 1998 was $8.2 million, or $0.17
per diluted share, a decrease of $1.1 million from the same period in 1997.
The principal factors causing these changes are discussed below.

Pharmaceutical sales for the three months ended June 30, 1998 were $34.9
million, a decrease of $500,000, or 1%, over the same period in 1997. This
decrease is due primarily to a decrease in sales of certain of the Company's
older cough, cold and allergy products, partially offset by an increase in
sales of Nasarel-Registered Trademark- and Nasalide-Registered Trademark-,
acquired in May 1997.

Gross profit (pharmaceutical sales less cost of sales) for the three months
ended June 30, 1998 was $27.5 million compared to $27.4 million for the same
period in 1997. Gross profit as a percentage of sales was 79% for the three
months ended June 30, 1998 compared to 77% for the same period in 1997.

Contract revenue relates primarily to amounts received by the Company for the
development of Spiros-Registered Trademark-, the Company's proprietary dry
powder pulmonary drug delivery system. Pursuant to agreements with several
companies, the Company conducts feasibility testing and development work on
various compounds for use with Spiros. Contract revenues include payment for
feasibility and development work performed by the Company as well as
milestone and technology access payments. Contract revenue for the three
months ended June 30, 1998 was $17 million, an increase of $8.8 million, or
107%, over the same period in 1997. This increase is due to increased
development activity conducted on behalf of Spiros Development Corporation,
Inc. II ("Spiros Corp. II") and other pharmaceutical company partners.
Contract revenues from Spiros-related development and feasibility agreements
totaled $16.9 million for the three months ended June 30, 1998 as compared to
$7.8 million for the same period in 1997, including $12.6 million from Spiros
Corp. II as compared to $6.8 million from Spiros Development Corporation for
the same period in 1997.

Clinical, development and regulatory expenses for the three months ended June
30, 1998 were $11.5 million, an increase of $4.9 million, or 74%, over the
same period in 1997. The increase reflects additional expenses incurred by
the Company under feasibility and development agreements covering the use of
various compounds with Spiros as discussed above.

Selling, general and administrative expenses for the three months ended June
30, 1998 were $22.9 million, an increase of $6.2 million, or 37%, over the
same period in 1997, and increased as a percentage of total revenues to 44%
for the three months ended June 30, 1998 as compared to 38% for the second
quarter of 1997. The dollar and percentage increases are primarily due to
increased costs associated with expanding the Company's sales force (increase
of $6.4 million). On February 22, 1998, the Company announced that it planned
to begin expanding its field sales force immediately from approximately 270
representatives to approximately 450 representatives by the

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end of 1998 to increase the promotional activity of its current products and
to prepare for the launch, subject to receiving regulatory approval, of
Albuterol Spiros. The Company expects that the rapid expansion of its sales
force will result in an increase in fiscal 1998 in its selling, general and
administrative expenses, both in total and as a percentage of revenues, as
compared to fiscal 1997.

Interest income for the three months ended June 30, 1998 was $5.9 million, an
increase of $2.9 million, or 98%, as compared to the same period in 1997.
The increase is due to higher balances of cash and short-term investments
resulting primarily from the 3 1/2% Convertible Subordinated Notes issued in
the third quarter of 1997 (see "Liquidity and Capital Resources" below), as
well as cash generated from operations.

Interest expense for the three months ended June 30, 1998 was $3.1 million as
compared to $116,000 for the same period in 1997. The increase is primarily
due to interest expense on the 3 1/2% Convertible Subordinated Notes (see
"Liquidity and Capital Resources" below).

The Company records interim provisions for income taxes based on the
estimated effective combined tax rate to be applicable for the fiscal year.
This estimate is reevaluated by management each quarter based on forecasts of
income before income taxes for the year as well as anticipated adjustments
from statutory federal and state tax rates. The Company's effective tax rate
for the three months ended June 30, 1998 was 34%, compared to 39% for the
same period in 1997. This reduction is due primarily to an increase in 1998
in income earned at foreign subsidiaries which is taxed at lower rates.

SIX MONTHS ENDED JUNE 30, 1997 AND 1998

Total revenues for the six months ended June 30, 1998 were $100.7 million, an
increase of $16.2 million, or 19%, over the same period in 1997. Net income
for the six months ended June 30, 1998 was $15.3 million, or $0.32 per
diluted share, a decrease of $2.7 million from the same period in 1997. The
principal factors causing these changes are discussed below.

Pharmaceutical sales for the six months ended June 30, 1998 were $70.8
million, an increase of $1.5 million, or 2%, over the same period in 1997.
This increase is due primarily to sales of Nasarel and Nasalide, acquired in
May 1997, offset by a decrease in sales of certain of the Company's older
cough, cold and allergy products.

Gross profit (pharmaceutical sales less cost of sales) for the six months
ended June 30, 1998 was $55.2 million, an increase of $1.9 million, or 3%, as
compared to the same period in 1997. This increase is due to the increase in
pharmaceutical sales discussed above. Gross profit as a percentage of sales
was 78% for the six months ended June 30, 1998 compared to 77% for the same
period in 1997.

Contract revenue relates primarily to amounts received by the Company for the
development of Spiros, the Company's proprietary dry powder pulmonary drug
delivery system. Pursuant to agreements with several companies, the Company
conducts feasibility testing and development

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work on various compounds for use with Spiros. Contract revenues include
payment for feasibility and development work performed by the Company as well
as milestone and technology access payments. Contract revenue for the six
months ended June 30, 1998 was $29.9 million, an increase of $14.7 million,
or 97%, over the same period in 1997. This increase is due to increased
development activity conducted on behalf of Spiros Corp. II and other
pharmaceutical company partners. Contract revenue from Spiros-related
development and feasibility agreements for the six months ended June 30, 1998
totaled $29.4 million as compared to $14.6 million for the same period in
1997, including $23 million from Spiros Corp. II as compared to $12.2 million
from Spiros Development Corporation for the same period in 1997.

Clinical, development and regulatory expenses for the six months ended June
30, 1998 were $21 million, an increase of $8.7 million, or 71%, over the same
period in 1997. The increase reflects additional expenses incurred by the
Company under feasibility and development agreements covering the use of
various compounds with Spiros as discussed above.

Selling, general and administrative expenses for the six months ended June
30, 1998 were $45.5 million, an increase of $12.7 million, or 39%, over the
same period in 1997, and increased as a percentage of total revenues to 45%
for the six months ended June 30, 1998 as compared to 39% for the six months
ended June 30, 1997. The dollar and percentage increases are primarily due
to increased costs incurred to support the Company's sales and contract
revenue growth, including costs associated with expanding the Company's sales
force (increase of $11.3 million) and increased operating costs related to
general corporate activities (increase of $1.4 million). On February 22,
1998, the Company announced that it planned to begin expanding its field sales
force immediately from approximately 270 representatives to approximately 450
representatives by the end of 1998 to increase the promotional activity of
its current products and to prepare for the launch, subject to receiving
regulatory approval, of Albuterol Spiros. The Company expects that the rapid
expansion of its sales force will result in an increase in fiscal 1998 in its
selling, general and administrative expenses, both in total and as a
percentage of revenues, as compared to fiscal 1997.

Interest income for the six months ended June 30, 1998 was $11.4 million, an
increase of $5 million, or 78%, as compared to the same period in 1997. The
increase is due to higher balances of cash and short-term investments
resulting primarily from the 3 1/2% Convertible Subordinated Notes issued in
the third quarter of 1997 (see "Liquidity and Capital Resources" below), as
well as cash generated from operations.

Interest expense for the six months ended June 30, 1998 was $6.2 million
compared to $289,000 for the same period in 1997. The increase is primarily
due to interest expense on the 3 1/2% Convertible Subordinated Notes (see
"Liquidity and Capital Resources" below).

The Company records interim provisions for income taxes based on the
estimated effective combined tax rate to be applicable for the fiscal year.
This estimate is reevaluated by management each quarter based on forecasts of
income before income taxes for the year as well as anticipated adjustments
from statutory federal and state tax rates. The Company's effective tax rate
for the six months ended June 30, 1998 was 34%, compared to 39% for the same
period in
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1997. This reduction is due primarily to an increase in 1998 in income
earned at foreign subsidiaries which is taxed at lower rates.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments increased by $25.2 million
to $410.4 million at June 30, 1998 from $385.2 million at December 31, 1997.
The increase is due primarily to cash generated from operations, partially
offset by capital expenditures. Working capital increased by $5.7 million to
$398.6 million at June 30, 1998 from $392.9 million at December 31, 1997. As
discussed in Note 5 to the consolidated financial statements, on August 3,
1998 the Company acquired from an affiliate of American Home Products
Corporation exclusive U.S. marketing rights to the single-source tuberculosis
drug Myambutol for $33.5 million, which was paid at closing, plus additional
payments over the next four years based upon future net sales.

In the third quarter of 1997, the Company issued $287.5 million principal
amount of 3 1/2% Convertible Subordinated Notes ("Notes") due July 15, 2002
with interest payable semiannually. Proceeds from the offering of the Notes
are expected to be used for general corporate purposes, including (i) to
acquire, in-license, co-promote, develop and commercialize pharmaceuticals
targeted at the Company's physician base or in areas related or otherwise
complementary to its existing business; (ii) to fund Spiros development
programs; and (iii) for working capital and facilities expansion. The Notes
are convertible, at the option of the holder, into shares of Dura's Common
Stock at any time prior to maturity or redemption at a conversion price of
$50.635 per share. At June 30, 1998, in addition to the Notes, the Company
had outstanding an aggregate of $12.8 million in current and other long-term
obligations, of which $2.8 million is to be paid during the next 12 months.
Also as of June 30, 1998, additional future contingent obligations totaling
$87.5 million relating to product acquisitions are due through 2004,
including $5 million due in 1998. Dura is also required to make additional
payments related to the August 1998 Myambutol acquisition over the next four
years based upon future net sales of Myambutol.

The Company has entered into a loan agreement which provides for the
borrowing of up to $50 million, subject to maintaining certain financial
ratios, on an unsecured basis through May 1, 1999. As of June 30, 1998, no
borrowings were outstanding under this agreement.

The Company anticipates that its existing capital resources, together with
cash expected to be generated from operations and available bank borrowings,
will be sufficient to finance its operations and working capital through at
least the next 12 months. Significant additional resources, however, may be
required in connection with product or company acquisitions or in-licensing
opportunities. There can be no assurance that such additional resources will
be available to the Company when needed or on terms acceptable to the
Company. At present, the Company is actively pursuing the acquisition of
rights to products and/or companies which may require the use of substantial
capital resources; however there are no present agreements or commitments
with respect to such acquisitions.

The Company recognizes the need to ensure its operations will not be
adversely impacted by the inability of the Company's systems to process data
having dates on or after January 1, 2000

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("Year 2000"). Processing errors due to software failure arising from
calculations using the Year 2000 date are a recognized risk. The Company is
currently addressing the risk, with respect to the availability and integrity
of its financial systems and the reliability of its operating systems, and is
in the process of communicating with suppliers, customers, financial
institutions and others with whom it conducts business to assess whether they
are or will be Year 2000 compliant. While the Company believes its planning
efforts are adequate to address the Year 2000 concerns, there can be no
assurance that the systems of other companies on which the Company's systems
and operations rely will be converted on a timely basis and will not have a
material effect on the Company. In addition, the potential impact of the
Year 2000 on others with whom the Company does business and any resulting
effects on the Company cannot be reasonably estimated at this time. The cost
of the Company's Year 2000 is not expected to be material to the Company's
results of operations or financial position.

RISKS AND UNCERTAINTIES

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

REDUCTION IN GROSS MARGINS. There is no proprietary protection for most of
the products sold by Dura and substitutes for such products are sold by other
pharmaceutical companies. Dura expects average selling prices for many of
its products to decline over time due to competitive and reimbursement
pressures. While Dura will seek to mitigate the effect of this decline in
average selling prices, there can be no assurance that Dura will be
successful in these efforts.

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

13
<PAGE>

DEPENDENCE ON ACQUISITION OF RIGHTS TO PHARMACEUTICALS. Dura's strategy for
growth is dependent, in part, upon acquiring, in-licensing and co-promoting
pharmaceuticals to targeted physicians. Other companies, including those
with substantially greater resources, are competing with Dura for the rights
to such products. There can be no assurance that Dura will be able to
acquire, in-license or co-promote additional pharmaceuticals on acceptable
terms, if at all. The failure to acquire, in-license, co-promote, develop or
market commercially successful pharmaceuticals would have a material adverse
effect on the Company's business, financial condition and results of
operations. Furthermore, there can be no assurance that Dura, once it has
obtained rights to a pharmaceutical and committed to payment terms, will be
able to generate sales sufficient to create a profit or otherwise avoid a
loss on such product.

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

CUSTOMER CONCENTRATION; CONSOLIDATION OF DISTRIBUTION NETWORK. The
distribution network for pharmaceutical products is largely controlled by a
few large wholesale distributors, and, in recent years, the number of
independent and small chain drug stores has decreased. Further consolidation
among, or any financial difficulties of, distributors or retailers could
result in the combination or elimination of warehouses thereby stimulating
product returns to Dura. Further consolidation or financial difficulties
could also cause customers to reduce their inventory levels or otherwise
reduce purchases of Dura's products which could result in a material adverse
effect on Dura's business, financial condition or results of operations.

Dura's principal customers are wholesale drug distributors and major drug
store chains. For the six months ended June 30, 1998, one wholesale customer
(McKesson Corporation) accounted for 13% of sales. For the same period in
1997, four wholesale customers (Bergen Brunswig Corporation, Cardinal Health,
Inc., McKesson Corporation, and AmeriSource Health Corporation) individually
accounted for 18%, 17%, 15%, and 14% of sales, respectively.

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 in 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 Dura's results of
operations in the past. While the growth and productivity of Dura's sales
force and the introduction by Dura of new products have historically
mitigated the impact of seasonality on Dura's results of

14
<PAGE>

operations, recent product acquisitions by Dura, especially Keftab and
Ceclor-Registered Trademark- CD, which are used to treat respiratory
infections, increase the impact of seasonality on Dura's results of
operations. No assurances can be given that Dura's results of operations
will not be materially adversely affected by the seasonality of product
sales.

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 or planned to be offered by Dura.
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 change, 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 drug delivery systems
aimed at the respiratory infection, allergy, cough and cold, and asthma and
chronic obstructive pulmonary disease markets will be based on, among other
things, product efficacy, safety, reliability, availability and price.

There are at least 25 other companies in the U.S. that are currently engaged
in developing, marketing and selling respiratory pharmaceuticals.
Additionally, there are at least 10 companies currently involved in the
development, marketing or sales of dry powder pulmonary drug delivery
systems. There are two types of dry powder inhalers ("DPIs") currently in
commercial use worldwide, individual dose and multiple dose. Individual dose
DPIs currently marketed in the U.S. include the Rotohaler-TM- (developed and
marketed by Glaxo Wellcome ("Glaxo")) and the Spinhaler-Registered Trademark-
(developed and marketed by Fisons Limited). The Turbuhaler-Registered
Trademark- (developed and marketed by Astra Pharmaceuticals, Inc. ("Astra")),
a multiple dose DPI, is the leading DPI in worldwide sales. In June 1997,
the FDA approved the first Turbuhaler product, the Pulmicort Turbuhaler, for
marketing in the U.S., which Astra launched in early 1998. Recently the FDA
also approved two multiple dose DPIs developed by Glaxo, the
Flovent-Registered Trademark- Rotadisk-Registered Trademark- and the
Serevent-Registered Trademark- Diskus-Registered Trademark-, both launched by
Glaxo in early 1998.

DEPENDENCE ON THIRD PARTIES. Dura's strategy for development and
commercialization of certain of its products, including Spiros, 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. There can be no assurance that Dura
will be able to negotiate acceptable arrangements in the future or that such
arrangements or its existing arrangements will be successful. In addition,
partners, licensors and others may pursue alternative technologies or develop
alternative compounds or drug delivery systems either on their own or in
collaboration with others, including Dura's competitors. Dura 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 Dura's
products is subject to cGMP regulations prescribed by the FDA. Dura relies
on a single manufacturer for each of its products. There can be no assurance
that
15
<PAGE>

Dura 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 Dura will be able to enter into agreements for the manufacture
of future products, including Spiros products, with manufacturers whose
facilities and procedures comply with cGMP and other regulatory requirements.
In the event that Dura is unable to obtain or retain third-party
manufacturing, it may not be able to commercialize its products as planned.
Dura's current dependence upon others for the manufacture of its products may
adversely affect future profit margins on the sale of those products and
Dura's ability to develop and deliver products on a timely and competitive
basis.

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

MANAGING GROWTH OF BUSINESS. Dura has experienced significant growth as
total revenues increased 102% in 1996, 74% in 1997, and 19% for the first
half of 1998 as compared to prior periods, primarily as a result of the
acquisition and in-licensing of additional respiratory pharmaceutical
products. Due to Dura's emphasis on acquiring and in-licensing respiratory
pharmaceutical products, Dura anticipates that the integration of the
recently acquired products, as well as any future acquisitions, will require
significant management attention and expansion of its sales force. On
February 22, 1998, the Company announced that it planned to begin expanding
its field sales force immediately from approximately 270 representatives to
approximately 450 representatives by the end of 1998 to increase the
promotional activity of its current products and to prepare for the launch,
subject to receiving regulatory approval, of Albuterol Spiros. Dura's ability
to achieve and maintain profitability is based on management's ability to
manage its changing business effectively.

16
<PAGE>

UNCERTAINTY OF PROFITABILITY; NEED FOR ADDITIONAL FUNDS. Dura has
experienced significant operating losses in the past, and at June 30, 1998,
Dura's accumulated deficit was $148.3 million. The acquisition and
in-licensing of products, the expansion and maintenance of Dura's sales force
in response to acquisition, in-licensing, and enhanced promotion of products
and planned introduction of Spiros products, the upgrade and expansion of its
facilities, continued pricing pressure on its pharmaceutical products, or the
exercise of the Stock Purchase Option or Product Options (defined below) will
require the commitment of substantial capital resources and may also result
in significant impairment of profits, or losses. Depending upon, among other
things, the acquisition and in-licensing opportunities available, Dura may
need to raise additional funds for these purposes. Adequate funds for these
purposes may not be available when needed or on terms acceptable to Dura.
Insufficient funds may require Dura to delay, scale back or suspend some or
all of its product acquisition, in-licensing and promotional programs, the
upgrade and expansion of its facilities, or the potential exercise of the
Stock Purchase Option and/or the Product Options. Dura 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
current operations and working capital requirements through at least the next
12 months.

EFFECT OF EXERCISE OF THE STOCK PURCHASE OPTION AND THE PRODUCT OPTIONS;
DILUTION. Dura has a purchase option with respect to the outstanding shares
of callable common stock of Spiros Corp. II which expires on December 31,
2002 ("Stock Purchase Option"). If Dura exercises the Stock Purchase Option,
it will be required to make a substantial cash payment or to issue shares of
Dura Common Stock, or both. A payment in cash would reduce Dura's capital
resources. A payment in shares of Dura Common Stock would result in a
decrease in the percentage ownership of Dura's stockholders at that time. If
Dura determines to exercise the Stock Purchase Option, it will likely be
required Dura to record a significant charge to earnings and may have an
adverse impact on future operating results. If Dura does not exercise the
Stock Purchase Option prior to its expiration, Dura's rights in and to Spiros
with respect to certain compounds will terminate.

As part of Dura's contractual relationship with Spiros Corp. II, Dura
received options to purchase certain rights to the use of Spiros with
albuterol and with an additional product other than albuterol ("Product
Options"). If Dura exercises either of the Product Options, it will be
required to make a significant cash payment which could have an adverse
effect on its capital resources. Dura may not have sufficient capital
resources to exercise the Product Options, which may result in Dura's loss of
valuable rights.

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

17
<PAGE>

costly and time consuming to obtain. A separate regulatory approval will
need to be obtained for each Spiros drug delivery system. There can be no
assurance that the pharmaceutical products currently in development by Dura
or those products acquired or in-licensed will be approved by the FDA. In
addition, there can be no assurance that all necessary approvals will be
granted for future products or that FDA review or actions will not involve
delays caused by the FDA's request for additional information or testing that
could adversely affect the time to market and sale of the products. For both
currently marketed products and future products of Dura, 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.

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 DESI program and will determine which drugs are considered "new drugs"
requiring approval through an NDA for marketing. A Policy Guide (CPG
440.100) issued by the FDA indicates that the FDA will implement procedures
to determine whether the new drug provisions are applicable to existing
products. This 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 final determination is made that a particular drug
required 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 products must be removed
from the market. Dura believes that twenty-one of its prescription
pharmaceutical products may be covered by paragraph B of the Policy Guide or
may be DESI-related. Also, Dura 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. There can be no assurance as to
which regulatory course the FDA will follow, if any, with respect to many of
Dura's pharmaceutical products or whether Dura will be able to obtain any
approvals that the FDA may deem necessary. If any negative actions are taken
by the FDA, such actions could have a material adverse effect on business of
Dura. Dura's Health Script Pharmacy Services, Inc. ("Health Script")
subsidiary 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.

PATENTS AND PROPRIETARY RIGHTS. Dura'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 six of the pharmaceuticals currently marketed by Dura are covered by
patents. Dura also has licenses or license rights to certain other U.S. and
foreign patent and patent applications. There can be no assurance that
patents, U.S. or foreign, will be obtained, or that, if issued or licensed to
Dura, they will be enforceable or will provide substantial protection from
competition or be of commercial benefit to Dura or that Dura will possess the
financial resources
18
<PAGE>

necessary to enforce or defend any of its patent rights. Federal court
decisions establishing legal standards for determining the validity and scope
of patents in the field are in transition. There can be no assurance that
the historical legal standards surrounding questions of validity and scope
will continue to be applied or that current defenses as to issued patents in
the field will offer protection in the future. The commercial success of
Dura will also depend upon avoiding the infringement of patents issued to
competitors and upon maintaining the technology licenses upon which certain
of Dura's current products are, or any future products under development
might be, based. Litigation, which could result in substantial cost to Dura,
may be necessary to enforce Dura's patent and license rights or to determine
the scope and validity of proprietary rights of third parties. If any of
Dura's products are found to infringe upon patents or other rights owned by
third parties, Dura 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 Dura on commercially
reasonable terms, if at all. If Dura 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 is not possible. Dura 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.

PRODUCT LIABILITY AND RECALL. Dura 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 Dura 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. Dura
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 Dura.

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 corporate 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.

TERMINATION OF MERGER AGREEMENT WITH SCANDIPHARM, INC. On December 1, 1997,
the Company terminated a merger agreement with Scandipharm entered into on
October 20, 1997. On January 16, 1998, Scandipharm filed suit against the
Company for breach of contract. On January 19, 1998, the Company filed suit
against Scandipharm seeking a declaratory judgment that Dura's

19
<PAGE>

termination of the merger did not breach the merger agreement, and for
damages against Scandipharm. The Company believes that it had the right to
terminate the merger agreement and that Scandipharm's claims for specific
performance under the agreement or for unspecified damages are without merit,
and that outcome of this matter will not have a material adverse effect on
the Company's financial position or results of operations.

CHANGE IN CONTROL. Certain provisions of Dura's charter documents and terms
relating to the acceleration of the exercisability of certain warrants and
options in the event of a change in control may have the effect of delaying,
deferring or preventing a change in control of Dura, thereby possibly
depriving stockholders of receiving a premium for their shares of the Dura
Common Stock. In addition, upon a Change in Control (as defined), Dura will
be required to offer to purchase for cash all of the outstanding Notes at a
purchase price of 100% of the principal amount thereof, plus accrued but
unpaid interest through the Change in Control Purchase Date (as defined).
The Change in Control purchase features of the Notes may in certain
circumstances have an anti-takeover effect. If a Change in Control were to
occur, there can be no assurance that Dura would have sufficient funds to pay
the Change in Control Purchase Price (as defined) for all Notes tendered by
the holders thereof and to repay other indebtedness that may become due as a
result of any Change in Control.

In May 1998, the Company adopted a Shareholder Rights Plan in which Preferred
Stock purchase rights ("Rights") were distributed as a dividend at the rate
of one Right for each share of Common Stock held as of the close of business
on June 5, 1998. Each Right entitles stockholders to buy, upon certain
events, one one-thousandth of a share of a new series of junior participating
Preferred Stock of the Company at an exercise price of $175.00. The Rights
are designed to guard against partial tender offers and other abusive tactics
that might be used in an attempt to gain control of the Company or to deprive
stockholders of their interest in the long-term value of the Company. The
Rights are exercisable only if a person or group acquires 15% or more of the
Company's Common Stock or announces a tender offer of which the consummation
would result in ownership by a person or group of 15% or more of the
Company's Common Stock. The Rights are redeemable for one cent per Right at
the option of the Board of Directors prior to this event occurring. The
Rights expire on June 5, 2008.

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

ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends on its
Common Stock. In accordance with a bank loan agreement, Dura is prohibited
from paying cash dividends without prior bank approval. Dura 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.

20
<PAGE>

YEAR 2000 COMPLIANCE CONSIDERATIONS. The Company recognizes the need to
ensure its operations will not be adversely impacted by the inability of the
Company's systems to process data having dates on or after January 1, 2000.
Processing errors due to software failure arising from calculations using the
Year 2000 date are a recognized risk. The Company is currently addressing
the risk, with respect to the availability and integrity of its financial
systems and the reliability of its operating systems, and is in the process
of communicating with suppliers, customers, financial institutions and others
with whom it conducts business to assess whether they are or will be Year
2000 compliant. While the Company believes its planning efforts are adequate
to address the Year 2000 concerns, there can be no assurance that the systems
of other companies on which the Company's systems and operations rely will be
converted on a timely basis and will not have a material effect on the
Company. In addition, the potential impact of the Year 2000 on others with
whom the Company does business and any resulting effects on the Company
cannot be reasonably estimated at this time. The cost of the Company's Year
2000 initiatives is not expected to be material to the Company's results of
operations or financial position.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.

PART II - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

CHANGES IN SECURITIES

In May 1998, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation increasing the number of authorized
shares of Common Stock from 100 million to 200 million.

In May 1998, the Company adopted a Shareholder Rights Plan in which Preferred
Stock purchase rights ("Rights") were distributed as a dividend at the rate
of one Right for each share of Common Stock held as of the close of business
on June 5, 1998. Each Right entitles stockholders to buy, upon certain
events, one one-thousandth of a share of a new series of junior participating
Preferred Stock of the Company at an exercise price of $175.00. The Rights
are designed to guard against partial tender offers and other abusive and
coercive tactics that might be used in an attempt to gain control of the
Company or to deprive stockholders of their interest in the long-term value
of the Company. The Rights will be exercisable only if a person or group
acquires 15% or more of the Company's Common Stock or announces a tender
offer of which the consummation would result in ownership by a person or
group of 15% or more of the Company's Common Stock. The Rights are
redeemable for one cent per Right at the option of the Board of Directors
prior to this event occurring. The Rights expire on June 5, 2008.

21
<PAGE>

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

On May 21, 1998, the Company's Annual Meeting of Stockholders was held in La
Jolla, California for the following purposes:

(a) The following five directors were elected to serve two-year terms to expire
at the 2000 Annual Meeting of Stockholders:

FOR AGAINST WITHHELD
<S> <C> <C> <C>
James C. Blair 41,865,373 0 213,373
Joseph C. Cook, Jr. 41,867,412 0 211,334
Cam L. Garner 41,865,172 0 213,574
David F. Hale 41,865,355 0 213,391
David S. Kabakoff 41,865,010 0 213,736

</TABLE>

The following directors were elected at the May 28, 1997 Annual Meeting of
Stockholders and are currently serving terms that will expire in 1999 (with
the exception of Mr. Spath, who resigned as a director effective June 30,
1998).

Herbert J. Conrad
Gordon V. Ramseier
Charles G. Smith
Walter F. Spath

(b) The Stockholders approved the amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock
from 100,000,000 to 200,000,000. The total number of votes cast for,
against and abstained was 40,187,285, 1,806,390 and 85,071, respectively.

(c) The Stockholders approved an amendment to the Company's 1992 Stock Option
Plan to increase the authorized number shares of Common Stock available for
issuance under such Plan by 1,000,000 shares to a total of 8,607,360. The
total number of votes cast for, against and abstained was 25,688,103,
16,248,353 and 139,500, respectively.

22
<PAGE>

(d) The Stockholders ratified the appointment of Deloitte & Touche LLP as the
Company's independent public accountants for the year ending December 31,
1998. The total number of votes cast for, against and abstained was
41,883,978, 115,190, and 79,478, respectively.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

EXHIBIT NO. DESCRIPTION
- ------------ ------------
<S> <C>
(1) 3.1 Certificate of Incorporation.

(2) 3.2 Certificate of Amendment of Certificate of Incorporation, effective
May 21, 1998.

(3) 4.1 Rights Agreement, dated as of May 21, 1998, between the Company and
ChaseMellon Shareholder Services, L.L.C., which includes the form
of Certificate of Designation for the Series A Junior Participating
Preferred Stock as Exhibit A, the form of Rights Certificate as
Exhibit B and the Summary of Rights to Purchase Series A Junior
Preferred Stock as Exhibit C.

4.2 Specimen Stock Certificate for Dura Common Stock.

10.1 Amendment No. 4 to Business Loan Agreement dated June 25, 1998
between the Company and Bank of America National Trust and Savings
Association.

10.2 1992 Stock Option Plan, as amended.

11 Statements re Computations of Net Income Per Share

27 Financial Data Schedule

</TABLE>

(1) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1997.
(2) Incorporated by reference to the Company's Registration Statement on Form
8-A filed on May 22, 1998.
(3) Incorporated by reference to the Company's Form 8-K, dated May 21, 1998.

(b) Reports on Form 8-K

On May 22, 1998, the Company filed a Current Report on Form 8-K dated May
21, 1998, reporting the adoption of a Shareholder Rights Plan.

23
<PAGE>

SIGNATURES

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

DURA PHARMACEUTICALS, INC.

DATE AUGUST 12, 1998 /s/ ERLE T. MAST
- ------------------------ ------------------------------
ERLE T. MAST
VICE PRESIDENT, FINANCE
(Principal Financial and Accounting Officer)

24
<PAGE>

EXHIBIT INDEX
TO
FORM 10-Q

DURA PHARMACEUTICALS, INC.

Exhibit No. Description
- ---------- -----------
<S> <C>
(1) 3.1 Certificate of Incorporation.

(2) 3.2 Certificate of Amendment of Certificate of Incorporation, effective
May 21, 1998.

(3) 4.1 Rights Agreement, dated as of May 21, 1998, between the Company and
ChaseMellon Shareholder Services, L.L.C., which includes the form of
Certificate of Designation for the Series A Junior Participating
Preferred Stock as Exhibit A, the form of Rights Certificate as
Exhibit B and the Summary of Rights to Purchase Series A Junior
Preferred Stock as Exhibit C.

4.2 Specimen Stock Certificate for Dura Common Stock.

10.1 Amendment No. 4 to Business Loan Agreement dated June 25, 1998
between the Company and Bank of America National Trust and Savings
Association.

10.2 1992 Stock Option Plan, as amended.

11 Statements re Computations of Net Income Per Share

27 Financial Data Schedule

</TABLE>

<PAGE>

FORM OF COMMON STOCK CERTIFICATE

COMMON STOCK

NUMBER SHARES
D DURA PHARMACEUTICALS [LOGO]
Incorporated under the Laws of California
SEE REVERSE FOR CERTAIN DEFINITIONS
AND A STATEMENT AS TO THE RIGHTS,
PREFERENCE, PRIVILEGES AND RESTRICTIONS OF SHARES
CUSIP 26632S 10 9

THIS CERTIFIES THAT

IS THE OWNER OF

FULLY PAID AND NON-ASSESSABLE SHARE OF THE COMMON STOCK, WITHOUT PAR VALUE, OF

DURA PHARMACEUTICALS, INC.

transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this certificate properly
endorsed.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officer.

NOW INCORPORATED IN THE STATE OF DELAWARE
PAR VALUE $.001
Dated:
[ Corporate Seal ]
---------------- --------------- ---------------
Secretary President
---------------
Transfer Agent

<PAGE>

REVERSE OF STOCK CERTIFICATE

A Statement of the rights, preferences, privileges and restrictions granted
to or imposed upon each class of shares authorized to be issued and upon the
holders thereof may be obtained, upon request and without charge, from the
corporation at its principal executive office or from the Transfer Agent.

The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as
tenants in common
COM PROP - as community property
UNIF GIFT MIN ACT - Uniform Gifts to Minors Act
UNIF TRF MIN ACT - Uniform Transfers to Minors Act

Additional Abbreviations may also be used though not in the above list.

For Value Received, ______________ hereby sell(s), assign(s) and
transfer(s) unto:

________________________________________________________________________________
Please insert Social Security or other
Identifying Number of Assignee

________________________________________________________________________________
Name and Address Should Be
Printed or Typewritten

________________________________________________________________________________

________________________________________________________________________________
shares of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
____________________
Attorney-in-fact
to transfer the said Stock on the books of the within named Corporation with
full power of substitution in the premises.

<PAGE>

Dated: _____________________ ________________________________________
Signature

Notice: The signature to this
assignment must correspond with the name
as written upon the face of the
Certificate, in every particular,
without alteration or enlargement, or
any change whatever.

Signature(s) Guaranteed

By ___________________________________________

This certificate also evidences and entitles the holder thereof to certain
rights as set forth in a Rights Agreement between Dura Pharmaceuticals, Inc.
and ChaseMellon Shareholder Services, L.L.C., dated as of May 21, 1998 (the
"Rights Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal executive offices
of Dura Pharmaceuticals, Inc. Under certain circumstances, as set forth in
the Rights Agreement, such Rights will be evidenced by separate certificates
and will no longer be evidenced by this certificate. Dura Pharmaceuticals,
Inc. will mail to the holder of this certificate a copy of the Rights
Agreement without charge after receipt of a written request therefor. Under
certain circumstances, as set forth in the Rights Agreement, Rights issued
to, or held by, any Person who is, was or becomes an Acquiring Person or any
Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement), whether currently held by or on behalf of such Person or by any
subsequent holder, may become null and void.

<PAGE>

[LOGO] BANK OF AMERICA AMENDMENT TO DOCUMENTS
- --------------------------------------------------------------------------------

AMENDMENT NO. 4 TO BUSINESS LOAN AGREEMENT

This Amendment No. 4 (the "Amendment") dated as of June 25, 1998, is
between Dura Pharmaceuticals, Inc. (the "Borrower") and Bank of America
National Trust and Savings Association (the "Bank").

RECITALS

A. The Bank and the Borrower entered into that certain Business Loan
Agreement dated as of April 14, 1997, as amended as of May 8, 1997, July 30,
1997 and October 28, 1997 (the "Agreement").

B. The Bank and the Borrower desire to amend the Agreement to permit
the Borrower to restructure its business in certain respects.

AGREEMENT

1. DEFINITIONS. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Agreement.

2. AMENDMENTS. The Agreement is hereby amended as follows:

2.1 MINIMUM EBIT Paragraph 6.5 is amended and restated in its
entirety to read as follows:

"6.5 MINIMUM EBIT. To maintain on a consolidated basis for the
Borrower and its Domestic Subsidiaries EBIT of not less than a
NEGATIVE One Million Dollars (-$1,000,000) for each quarterly
accounting period.

For purposes of this Agreement, 'EBIT' means net income for such
period, LESS, to the extent added in determining such net income,
interest income, PLUS, to the extent deducted in determining such
net income, (i) interest expense, (ii) all federal, state, local
and foreign income taxes and (iii) the Spiros Charges up to a
maximum of One Hundred Twenty Five Million Dollars ($125,000,000)
in the aggregate."

2.2 In Paragraph 6.9 of the Agreement, the amount "Fifty Five Million
Dollars ($55,000,000)" is substituted for the amount "Fifteen
Million Dollars ($15,000,000)."

2.3 In Paragraph 6.12 of the Agreement, the amount "One Hundred Ninety
Ninety Million Dollars ($190,000,000)" is substituted for the
amount "One Hundred Eighty Million Dollars ($180,000,000)."

3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of
the terms and conditions of the Agreement shall remain in full force and
effect.

This Amendment is executed as of the date stated at the beginning of
this Amendment.

BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION DURA PHARMACEUTICALS, INC.

/s/ SUSAN J. PEPPING /s/ JAMES W. NEWMAN
- ---------------------- -----------------------------------
BY: SUSAN J. PEPPING BY: JAMES W. NEWMAN
TITLE: VICE PRESIDENT TITLE: SENIOR VICE PRESIDENT,
FINANCE AND ADMINISTRATION,
AND CHIEF FINANCIAL OFFICER

/s/ ERLE MAST
-----------------------------------
BY: ERLE MAST
TITLE: VICE PRESIDENT, FINANCE

- --------------------------------------------------------------------------------
-1-

<PAGE>

DURA PHARMACEUTICALS, INC.
1992 STOCK OPTION PLAN

EFFECTIVE DECEMBER 9, 1992; AS AMENDED JUNE 2, 1994; AS
AMENDED MAY 25, 1995; AS AMENDED MAY 29, 1996
AS AMENDED JULY 1, 1996; AS AMENDED FEBRUARY 19, 1997
AS AMENDED FEBRUARY 19, 1998

ARTICLE ONE
GENERAL PROVISIONS

I. PURPOSE OF THE PLAN

A. IMPLEMENTATION. This 1992 Stock Option Plan ("PLAN") is implemented
as of December 9, 1992 ("EFFECTIVE DATE"), to enable Dura Pharmaceuticals,
Inc. ("COMPANY") to grant options to the following eligible individuals
("ELIGIBLE INDIVIDUALS") in order to attract them and to retain their
services: (a) key employees (including officers and directors) of the
Company or its subsidiaries or any parent corporation who are primarily
responsible for the management, growth and financial success of the Company
or its subsidiaries, (b) non-employee members of the Board of Directors
("BOARD") of the Company or any of its subsidiaries, and (c) consultants and
independent contractors who perform valuable services for the Company or its
subsidiaries.

B. SUCCESSOR PLAN. This Plan is a successor to the Company Stock
Option Plan that was adopted by the Board in 1983 ("1983 PLAN"). No further
option grants (including, but not limited to automatic option grants) will be
made under the 1983 Plan on and after the Effective Date of this Plan. All
options outstanding under the 1983 Plan on the Effective Date are hereby
incorporated into this Plan and will be treated as outstanding options under
this Plan. Each outstanding option so incorporated will continue to be
governed solely by the express terms and conditions of the instruments
evidencing such grant. No provision of this Plan will be deemed to affect or
otherwise modify the rights or obligations of the holders of such
incorporated options with respect to their acquisition of shares of the
Company's Common Stock under the terms of the incorporated options.

II. ADMINISTRATION OF THE PLAN

A. COMMITTEE. The Plan will be administered by the Board of Directors
or by a committee or committees appointed by the Board, and consisting of two
or more members of the Board. The Board may delegate the responsibility for
administration of the Plan with respect to designated classes of optionees to
different committees, subject to such limitations as the Board deems
appropriate. With respect to any matter, the term "COMMITTEE," when used in
this Plan, will refer to the committee that has been delegated authority with
respect to such matter. Members of a committee will serve for such term as
the Board may determine, and will be subject to removal by the Board at any
time.

B. SECTION 16(b) COMMITTEE. Notwithstanding any other provision of
this Agreement, each grant of an option or other transaction between the
Company and any Section 16 Insider shall be valid and enforceable only if
approved by the Board of Directors or by a committee composed exclusively of
two or more Non-Employee Directors. For this purpose, a "Section 16 Insider"
shall mean an officer or director of the Corporation subject to the
short-swing profit liabilities of Section 16 of the 1934 Act, and a
Non-Employee Director shall have the meaning set forth in Rule 16b-3(b)(3).

<PAGE>

C. AUTHORITY. Any Committee will have full authority to administer the
Plan within the scope of its delegated responsibilities, including authority
to interpret and construe any relevant provision of the Plan, to adopt such
rules and regulations as it may deem necessary, and to determine the terms of
grants made under the Plan (which need not be identical). Decisions of a
Committee made within the discretion delegated to it by the Board will be
final and binding on all persons.

III. STOCK SUBJECT TO THE PLAN

A. NUMBER OF SHARES. Shares of the Company's Common Stock available
for issuance under the Plan shall be drawn from either the Company's
authorized but unissued shares of Common Stock or from reacquired shares of
Common Stock, including shares repurchased by the Company on the open market.
The maximum number of shares of Common Stock that may be issued over the
term of the Plan shall not exceed 8,307,360 shares, subject to adjustment
from time to time in accordance with the provisions of this Section. This
authorized share reserve is comprised of (i) the number of shares remaining
available for issuance under the 1983 Plan as of the Effective Date,
including the shares subject to the outstanding options incorporated into
this Plan and any other shares that would have been available for future
option grant under the 1983 Plan, plus (ii) an additional 416,040 shares of
Common Stock, plus (iii) an additional increase of 750,000 shares of Common
Stock, plus (iv) an additional increase of 1,000,000 shares of Common Stock,
plus (v) an additional increase of 1,500,000 shares of Common Stock, plus
(vi) an additional increase of 1,600,000 shares of Common Stock, plus (vii) an
additional increase of 1,000,000 shares of Common Stock. Accordingly, to the
extent one or more outstanding options under the 1983 Plan that have been
incorporated into this Plan are subsequently exercised, the number of shares
issued with respect to each such option will reduce, on a share-for-share
basis, the number of shares available for issuance under this Plan.

B. EXPIRED OPTIONS. Should an outstanding option under this Plan
(including any outstanding option under the 1983 Plan incorporated into this
Plan) expire or terminate for any reason prior to exercise in full (including
any option cancelled in accordance with the cancellation-regrant provisions
of this Plan), the shares subject to the portion of the option not so
exercised will be available for subsequent option grant under this Plan.
Shares subject to any option or portion thereof cancelled in accordance with
the stock appreciation (or limited stock appreciation) rights provisions of
this Plan will NOT be available for subsequent option grant under the Plan.

C. ADJUSTMENTS. If any change is made to the Common Stock issuable
under the Plan (including Common Stock issuable under an Automatic Option
Grant) by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without receipt of consideration, then
appropriate adjustments will be made to (i) the number and/or class of shares
issuable under the Plan, (ii) the number and/or class of shares and price per
share in effect under each outstanding option under the Plan, and (iii) the
number and/or class of shares and price per share in effect under each
outstanding option incorporated into this Plan from the 1983 Plan. The
purpose of these adjustments will be to preclude the enlargement or dilution
of rights and benefits under the options.

-2-

<PAGE>

ARTICLE TWO
STANDARD OPTION PROVISIONS

I. TERMS AND CONDITIONS OF OPTIONS

A. COMMITTEE DISCRETION.

(1) Except as provided under the Automatic Option Grant provisions
of this Plan, the Committee will have full authority to determine which
Eligible Individuals are to receive option grants under the Plan, the number
of shares to be governed by each such grant, whether the option is to be an
incentive stock option ("INCENTIVE OPTION") that satisfies the requirements
of Section 422 of the Internal Revenue Code or a non-qualified option not
intended to satisfy such requirements ("NON-QUALIFIED OPTION"), the time or
times at which each such option is to become exercisable, and the maximum
term for which the option is to remain outstanding.

(2) Notwithstanding any other provision of this Plan, no individual
shall be granted options to acquire more than 400,000 shares in any fiscal
year or 1,500,000 shares over the lifetime of the Plan.

B. TERM. No option granted under the Plan will be exercisable after
the expiration of 10 years from the date the option was granted.

C. PRICE. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than 100% percent of the Fair Market
Value per share of Common Stock on the option grant date, provided that the
Plan Administrator may fix the exercise price at less than 100% if the
optionee, at the time of the option grant, shall have made a payment to the
Company (including payment made by means of an agreed salary reduction) equal
to the excess of the Fair Market Value of the Common Stock on the option
grant date over such exercise price.

D. EXERCISE AND PAYMENT. After any option granted under the Plan
becomes exercisable, it may be exercised by notice to the Company at any time
prior to the termination of such option. The option price will be payable in
full in cash or check made payable to the Company; provided, however, that
the Committee may, either at the time the option is granted or at the time it
is exercised and subject to such limitations as it may determine, authorize
payment of all or a portion of the option price in one or more of the
following alternative forms:

(1) a promissory note authorized pursuant to Section IV of this
Article; or

(2) full payment in shares of Common Stock valued as of the
exercise date and held for the requisite period to avoid a charge to the
Company's earnings; or

(3) full payment through a sale and remittance procedure under
which the option holder delivers a properly executed exercise notice together
with irrevocable instructions to a broker to promptly deliver to the Company
the amount of sale proceeds to pay the option prices.

For purposes of Subparagraphs (1) and (3) immediately above, the Exercise
Date shall be the date on which written notice of the exercise of the option
is delivered to the Company. In all other cases, the Exercise Date will be
the date on which written notice and actual payment is received by the
Company.

-3-

<PAGE>

The sale and remittance procedure authorized for the exercise of
outstanding options under this Plan shall be available for all options
granted under this Plan on or after the Effective Date and for all
non-qualified options outstanding under the 1983 Plan and incorporated into
this Plan. The Plan Administrator may also allow such procedure to be
utilized in connection with one or more disqualifying dispositions of
Incentive Option shares effected after the Effective Date, whether such
Incentive Options were granted under this Plan or the 1983 Stock Option Plan.

E. SHAREHOLDER RIGHTS. An option holder will have no shareholder
rights with respect to any shares covered by an option (including an
Automatic Option Grant) prior to the Exercise Date of the option, as defined
in the immediately preceding Paragraph and in the Automatic Option Grant
provisions of Section II of Article Three of this Plan.

F. SEPARATION FROM SERVICE. The Committee will determine whether
options will continue to be exercisable, and the terms of such exercise, on
and after the date that an optionee ceases to be employed by, or to provide
services to, the Company or its subsidiaries PROVIDED, however, that in no
event will an option be exercisable after the specified expiration date of
the option term. The date of termination of an optionee's employment or
services will be determined by the Committee, which determination will be
final.

G. INCENTIVE OPTIONS. Options granted under the Plan that are intended
to be Incentive Options will be subject to the following additional terms:

(1) DOLLAR LIMITATION. The aggregate fair market value (determined
as of the respective date or dates of grant) of the Common Stock for which
one or more options granted to any Employee after December 31, 1986 under
this Plan (or any other option plan of the Company or its parent or
subsidiary corporations) may for the first time become exercisable as
incentive stock options under the Federal tax laws during any one calendar
year shall not exceed the sum of $100,000. To the extent the Employee holds
two or more such options which become exercisable for the first time in the
same calendar year, the foregoing limitation on the exercisability of such
options as incentive stock options under the Federal tax laws shall be
applied on the basis of the order in which such options are granted.

(2) 10% SHAREHOLDER. If any employee to whom an Incentive Option
is to be granted pursuant to the provisions of the Plan is, on the date of
grant, the owner of stock (determined with application of the ownership
attribution rules of Section 424(d) of the Internal Revenue Code) possessing
more than 10% of the total combined voting power of all classes of stock of
his or her employer corporation or of its parent or subsidiary corporation
("10% SHAREHOLDER"), then the following special provisions will apply to the
option granted to such individual:

(i) The option price per share of the stock subject to such
Incentive Option will not be less than 110% of the Fair Market Value of the
option shares on the date of grant; and

(ii) The option will not have a term in excess of 5 years from
the date of grant.

(3) PARENT AND SUBSIDIARY. For purposes of this Section, "PARENT
CORPORATION" and "SUBSIDIARY CORPORATION" will have the meaning attributed to
those terms, as they are used in Section 422(b) of the Internal Revenue Code.

-4-

<PAGE>

(4) EMPLOYEES. Incentive Options may only be granted to employees
of the Company or its subsidiaries.

H. FAIR MARKET VALUE. For all purposes under this Plan (including, but
not limited to Automatic Option Grants) the fair market value per share of
Common Stock on any relevant date under the Plan ("FAIR MARKET VALUE") will
be determined as follows:

(1) If the Common Stock is not at the time listed or admitted to
trading on any national stock exchange but is traded in the over-the-counter
market, the fair market value will be the mean between the highest bid and
lowest asked prices (or, if such information is available, the closing
selling price) per share of Common Stock on the date in question in the
over-the-counter market, as such prices are reported by the National
Association of Securities Dealers through its NASDAQ system or any successor
system. If there are no reported bid and asked prices (or closing selling
price) for the Common Stock on the date in question, then the mean between
the highest bid price and lowest asked price (or the closing selling price)
on the last preceding date for which such quotations exist will be
determinative of fair market value.

(2) If the Common Stock is at the time listed or admitted to
trading on any national stock exchange, then the fair market value will be
the closing selling price per share of Common Stock on the date in question
on the stock exchange determined by the Committee to be the primary market
for the Common Stock, as such price is officially quoted in the composite
tape of transactions on such exchange. If there is no reported sale of
Common Stock on such exchange on the date in question, then the fair market
value will be the closing selling price on the exchange on the last preceding
date for which such quotation exists.

(3) If the Common Stock is at the time neither listed nor admitted
to trading on any stock exchange nor traded in the over-the-counter market,
then the fair market value will be determined by the Committee after taking
into account such factors as the Committee shall deem appropriate.

I. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and
shall not be assignable or transferable other than by will or by the laws of
descent and distribution following the Optionee's death. However, a
Non-Qualified Option may be assigned in whole or in part during the
Optionee's lifetime. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant
to the assignment. The terms applicable to the assigned portion shall be the
same as those in effect for the option immediately prior to such assignment
and shall be set forth in such documents issued to the assignee as the Plan
Administrator may deem appropriate.

II. STOCK APPRECIATION RIGHTS

If, and only if the Committee, in its discretion, elects to implement an
option surrender program under the Plan, one or more option holders may, upon
such terms as the Committee may establish at the time of the option grant or
at any time thereafter, be granted the right to surrender all or part of an
unexercised option in exchange for a distribution equal in amount to the
difference between (i) the Fair Market Value (at date of surrender) of the
shares for which the surrendered option or portion thereof is at the time
exercisable and (ii) the aggregate option price payable for such shares.
The distribution to which an option holder becomes entitled under this

-5-

<PAGE>

Section may be made in shares of Common Stock, valued at Fair Market Value at
the date of surrender, in cash, or partly in shares and partly in cash, as
the Committee, in its sole discretion, deems appropriate. The option
surrender provisions of this Section will not apply to options granted
pursuant to the Automatic Option Grant provisions of this Plan.

III. CORPORATE TRANSACTION/CHANGE OF CONTROL/HOSTILE TAKEOVER

A. CORPORATE TRANSACTION. In the event of any of the following
transactions ("CORPORATE TRANSACTION"):

(1) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is
to change the state of the Company's incorporation,

(2) the sale, transfer or other disposition of all or substantially
all of the assets of the Company in liquidation or dissolution of the
Company,

(3) any reverse merger in which the Company is the surviving entity
but in which fifty percent (50%) or more of the Company's outstanding voting
stock is transferred to holders different from those who held such securities
immediately prior to such merger, or

(4) an acquisition by any person or related group of persons (other
than the Company or a person that directly or indirectly controls, is
controlled by or is under common control with, the Company) of ownership of
more than fifty percent (50%) of the Company's outstanding Common Stock,
pursuant to a tender or exchange offer,

the exercisability of each option at the time outstanding under this Article Two
shall automatically accelerate so that each such option shall, immediately
prior to the specified effective date for the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Common Stock
at the time subject to such option and may be exercised for all or any
portion of such shares. Upon the consummation of the Corporate Transaction,
all outstanding options under this Article Two shall terminate and cease to
be outstanding.

B. HOSTILE TAKEOVER. One or more officers of the Company subject to
the short-swing profit restrictions of the Federal securities laws may, in
the Committee's sole discretion, be granted, in tandem with their outstanding
options, limited stock appreciation rights as described below. In addition
all Automatic Option Grants under this Plan will be made in tandem with
limited stock appreciation rights as described below.

(1) Upon the occurrence of a Hostile Takeover, each outstanding
option with such a limited stock appreciation right in effect for at least
six (6) months will automatically be cancelled in return for a cash
distribution from the Company in an amount equal to the excess of (i) the
Takeover Price (defined below) of the shares of Common Stock at the time
subject to the cancelled option (whether or not the option is otherwise at
the time exercisable for such shares) over (ii) the aggregate exercise price
payable for such shares. The cash distribution payable upon such cancellation
shall be made within five (5) days following the consummation of the Hostile
Takeover. Neither the approval of the Committee nor the consent of the Board
shall be required in connection with such option cancellation and cash
distribution.

(2) For purposes of the limited stock appreciation rights described
above, the following definitions shall be in effect:

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<PAGE>

(i) A Hostile Takeover shall be deemed to occur upon the
acquisition by any person or related group of persons (other than the Company
or a person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) of ownership of more than 50% of the
Company's outstanding Common Stock (excluding the Common Stock holdings of
officers and directors of the Company who participate in this Plan) pursuant
to a tender or exchange offer which the Board does not recommend the
Company's shareholders accept.

(ii) The Takeover Price per share shall be deemed to be equal
to the GREATER of (a) the Fair Market Value per share on the date of
cancellation, or (b) the highest reported price per share paid in effecting
the Hostile Takeover. However, if the cancelled option is an Incentive
Option, the Takeover Price shall not exceed the clause (a) price per share.

C. COMPANY RIGHTS. The grant of options (including Automatic Option
Grants) under this Plan shall in no way affect the right of the Company to
adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer
all or any part of its business or assets.

IV. LOANS OR GUARANTEE OF LOANS

The Committee may assist any optionee (including any officer) in the
exercise of one or more outstanding options under this Article by
(a) authorizing the extension of a loan to such optionee from the Company,
(b) permitting the optionee to pay the option price for the purchased Common
Stock in installments over a period of years or (c) authorizing a guarantee
by the Company of a third-party loan to the optionee. The terms of any loan,
installment method of payment or guarantee (including the interest rate and
terms of repayment) will be established by the Committee in its sole
discretion. Loans, installment payments and guarantees may be granted without
security or collateral (other than to optionees who are consultants or
independent contractors, in which event the loan must be adequately secured
by collateral other than the purchased shares), but the maximum credit
available to the optionee shall not exceed the SUM of (i) the aggregate
option price (less par value) of the purchased shares plus (ii) any federal
and state income and employment tax liability incurred by the optionee in
connection with the exercise of the option. Automatic Option Grants will not
be subject to these loan and loan guarantee provisions.

V. CANCELLATION AND REGRANT OF OPTIONS

The Committee shall have the authority to effect, at any time and from
time to time, with the consent of the affected optionees, the cancellation of
any or all outstanding options under this Article (including outstanding
options under the 1983 Plan incorporated into this Plan) and to grant in
substitution new options under the Plan covering the same or different
numbers of shares of Common Stock but having an option price per share not
less than 100% of the fair market value of the Common Stock on the new grant
date. Automatic Option Grants will not be subject to these cancellation and
regrant provisions.

VI. REPURCHASE RIGHTS

The Committee may in its discretion determine that it shall be a term
and condition of one or more options exercised under the Plan that the
Company (or its assigns) shall have the right, exercisable upon the
optionee's separation from service with the Company and its subsidiaries, to
repurchase any or all of the shares of Common Stock previously acquired by
the optionee upon the exercise of such option. Any such repurchase right
shall be exercisable upon such terms and conditions (including the
establishment of the appropriate vesting schedule and

-7-

<PAGE>

other provisions for the expiration of such right in one or more
installments) as the Committee may specify in the instrument evidencing such
right. The Committee shall also have full power and authority to provide for
the automatic termination of these repurchase rights, in whole or in part,
and thereby accelerate the vesting of any or all of the purchased shares.

ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM

I. GRANTS

A. AUTOMATIC OPTION GRANTS. Non-employee members of the Board will
automatically be granted Non-Qualified Options to purchase the number of
shares of Common Stock set forth below (subject to adjustment under
Section III(C) of Article One of this Plan) on the dates and pursuant to the
terms set forth below ("AUTOMATIC OPTION GRANTS").

B. CONTINUING DIRECTORS. On the date of each Annual Shareholders
Meeting of the Company held after the Effective Date of this Plan, each
continuing non-employee member of the Board will receive an Automatic Option
Grant to purchase 8,000 shares of Common Stock; provided, however, that an
individual who has not served as a non-employee member of the Board for the
immediately preceding 180 days will not receive such a grant.

C. NEW DIRECTORS. Each individual person who is newly elected or
appointed as a non-employee member of the Board on or after the Effective
Date of this Plan will receive, on the effective date of such election or
appointment, an Automatic Option Grant to purchase 30,000 shares of Common
Stock.

II. TERMS

The terms applicable to each Automatic Option Grant will be as follows:

A. PRICE. The option price per share will be equal to 100% of the Fair
Market Value of a share of Common Stock on the date of grant.

B. OPTION TERM. Each Automatic Option Grant will have a maximum term
of 10 years measured from the automatic grant date.

C. EXERCISABILITY. Each Automatic Option Grant will become exercisable
for all Automatic Option Grant shares one (1) year after the automatic grant
date, provided the optionee continues to serve as a Board member throughout
that one (1)-year period.

D. PAYMENT. Upon exercise of the option, the option price for the
purchased shares will become payable immediately in one or more of the
following alternative forms: cash, shares of Common Stock held for the
requisite period to avoid a charge to the Company's reported earnings and
valued at Fair Market Value on the Exercise Date (as defined below), or
pursuant to a sale and remittance procedure under which the option holder
delivers a properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company the amount of
sale proceeds to pay the option price. For these purposes, the Exercise Date
shall be the date on which written notice of the exercise of the option is
delivered to the Company. Except to the extent the sale and remittance
procedure specified above is utilized for the exercise of the option, payment
of the exercise price for the purchased shares must accompany the notice.

-8-

<PAGE>

E. EFFECT OF TERMINATION OF BOARD MEMBERSHIP.

(1) Should the optionee cease to be a Board member for any reason
(other than death) while holding one or more Automatic Option Grants, then
the optionee will have 6 months following the date of such cessation of Board
membership in which to exercise each such option for any or all of the shares
of Common Stock for which the option is exercisable at the time Board
membership ceases; provided however, that in no event may such an option be
exercised after the expiration of its 10-year term.

(2) Should the optionee die while holding one or more Automatic
Option Grants, then each such option may subsequently be exercised, for any
or all of the shares of Common Stock for which the option is exercisable at
the time of the optionee's death, by the personal representative of the
optionee's estate or by the person or persons to whom the option is
transferred pursuant to the optionee's Will or in accordance with the laws of
descent and distribution. Any such exercise must, however, occur before the
earlier of (i) the expiration of the option's 10-year term, or (ii) 12 months
after the date of the optionee's death.

F. ACCELERATION. Automatic Option Grants will be subject to
acceleration and termination in the event of a Corporate Transaction as
described in Article Two, Section III.A. of this Plan.

G. HOSTILE TAKEOVER. Automatic Option Grants will be granted in tandem
with limited stock appreciation rights, as described in the Hostile Takeover
provisions contained in Article Two, Section III.B. of this Plan.

ARTICLE FOUR
MISCELLANEOUS

I. AMENDMENT OF THE PLAN

A. GENERAL RULES. The Board shall have complete and exclusive power
and authority to amend or modify the Plan in any or all respects whatsoever.
However, no such amendment or modification shall, without the consent of the
option holders, adversely affect rights and obligations with respect to
options at the time outstanding under the Plan. In addition, certain
amendments may be made conditional on first having obtained stockholder
approval if required by the Board or pursuant to any applicable laws or
regulations.

B. AUTOMATIC OPTION GRANTS. Amendment of the Automatic Option Grant
provisions of this Plan is subject to the requirements outlined above. In
addition, the Automatic Option Grant provisions of this Plan may not be
amended more than once every 6 months, other than to comport with changes in
the Internal Revenue Code or rules thereunder.

C. AMENDMENT OF OPTIONS. The Committee shall have full power and
authority to modify or waive any or all of the terms, conditions or
restrictions applicable to any outstanding option, to the extent not
inconsistent with the Plan; provided, however, that no such modification or
waiver shall (1) without the consent of the option holder, adversely affect
the holder's rights thereunder or (2) affect any outstanding option granted
pursuant to the Automatic Option Grant provisions of this Plan except to the
extent necessary to conform to any amendment to this Plan.

-9-

<PAGE>

II. TAX WITHHOLDING

A. OBLIGATION. The Company's obligation to deliver shares or cash upon
the exercise of stock options or stock appreciation rights granted under the
Plan is subject to the satisfaction of all applicable Federal, State and
local income and employment tax withholding requirements.

B. STOCK WITHHOLDING. The Plan Administrator may, in its discretion
and upon such terms and conditions as it may deem appropriate (including the
applicable safe-harbor provisions of SEC Rule 16b-3) provide any or all
holders of outstanding option grants under the Plan with the election to have
the Company withhold, from the shares of Common Stock otherwise issuable upon
the exercise of such options, one or more of such shares with an aggregate
fair market value equal to the designated percentage (any multiple of 5%
specified by the optionee) of the Federal and State income taxes ("Taxes")
incurred in connection with the acquisition of such shares. In lieu of such
direct withholding, one or more optionees may also be granted the right to
deliver shares of Common Stock to the Company in satisfaction of such Taxes.
The withheld or delivered shares shall be valued at the Fair Market Value on
the applicable determination date for such Taxes or such other date required
by the applicable safe-harbor provisions of SEC Rule 16b-3.

III. EFFECTIVE DATE AND TERM OF PLAN

A. IMPLEMENTATION. This Plan, as successor to the Company's 1983 Stock
Option Plan, shall become effective as of the Effective Date, and no further
option grants shall be made under the 1983 Plan on or after the Effective
Date of this Plan. If shareholder approval of the 1,600,000-share increase
is not obtained by February 19, 1998, then each option granted under this
Plan subject to this share increase shall terminate without ever becoming
exercisable for the option shares and all shares issued hereunder shall be
repurchased by the Corporation at the purchase price paid, together with
interest (at the applicable Short Term Federal Rate). Subject to the
foregoing limitations, options may be granted under this Plan at any time
from and after the Effective Date of the Plan and before the date fixed
herein for termination of the Plan.

B. TERMINATION. Unless sooner terminated due to a Corporate
Transaction or a Change in Control, the Plan will terminate upon the EARLIER
of (i) December 8, 2002, or (ii) the date on which all shares available for
issuance under the Plan have been issued or cancelled pursuant to exercise,
surrender or cash-out of options. If the date of termination is determined
under clause (i) above, then options outstanding on such date shall
thereafter continue to have force and effect in accordance with the
provisions of the instruments evidencing those options.

C. ADDITIONAL SHARES. Options to purchase shares of Common Stock may
be granted under the Plan which are in excess of the number of shares then
available for issuance under the Plan, provided any excess shares actually
issued are held in escrow until shareholder approval is obtained for a
sufficient increase in the number of shares available for issuance under the
Plan. If such shareholder approval is not obtained within twelve (12) months
after the date the first such excess option grants are made, then (I) any
unexercised excess options shall terminate and cease to be exercisable and
(II) the Corporation shall promptly refund the purchase price paid for any
excess shares actually issued under the Plan and held in escrow, together
with interest (at the applicable Short Term Federal Rate) for the period the
shares were held in escrow.

III. USE OF PROCEEDS

Any cash proceeds received by the Company from the sale of shares
pursuant to options granted under the Plan shall be used for general
corporate purposes.

-10-

<PAGE>

IV. REGULATORY APPROVALS

The implementation of the Plan, the granting of any option under the
Plan, and the issuance of stock upon the exercise or surrender of any such
option shall be subject to the procurement by the Company of all approvals
and permits required by regulatory authorities having jurisdiction over the
Plan, the options granted under it and the stock issued pursuant to it.

V. NO EMPLOYMENT/SERVICE RIGHTS

Neither the establishment of this Plan, nor any action taken under the
terms of this Plan, nor any provision of this Plan shall be construed so as
to grant any individual the right to remain in the employ or service of the
Company (or any parent or subsidiary corporation) for any period of specific
duration, and the Company (or any parent or subsidiary corporation retaining
the services of such individual) may terminate such individual's employment
or service at any time and for any reason, with or without cause.

-11-

<PAGE>

EXHIBIT 11
DURA PHARMACEUTICALS, INC.
STATEMENTS RE COMPUTATIONS OF NET INCOME PER SHARE
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------------
1997 1998 1997 1998
------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET INCOME PER SHARE - BASIC
Net Income. . . . . . . . . . . . . . . . . . $ 9,282 $ 8,177 $ 18,069 $15,341
-------- -------- --------- -------
-------- -------- --------- -------

Weighted Average Number of Common Shares. . . 43,672 46,302 43,511 46,139
-------- -------- --------- -------
-------- -------- --------- -------

Net Income per Share. . . . . . . . . . . . . $ 0.21 $0.18 $0.42 $0.33
-------- -------- --------- -------
-------- -------- --------- -------

NET INCOME PER SHARE - DILUTED

Net Income. . . . . . . . . . . . . . . . . . $ 9,282 $8,177 $18,069 $15,341
-------- -------- --------- -------
-------- -------- --------- -------

Weighted Average Number of Common and Common
Equivalent Shares Assuming Issuance of All
Dilutive Contingent Shares:
Common stock . . . . . . . . . . . . . . 43,672 46,302 43,511 46,139
Stock options. . . . . . . . . . . . . . 1,117 621 1,146 718
Warrants . . . . . . . . . . . . . . . . 2,537 1,150 2,628 1,464
-------- -------- --------- -------
Total. . . . . . . . . . . . . . . . . 47,326 48,073 47,285 48,321
-------- -------- --------- -------
-------- -------- --------- -------

Net Income per Share. . . . . . . . . . . . . $ 0.20 $ 0.17 $ 0.38 $ 0.32
-------- -------- --------- -------
-------- -------- --------- -------

</TABLE>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND THE RELATED
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
THE NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 119,076
<SECURITIES> 291,286
<RECEIVABLES> 34,255
<ALLOWANCES> 0
<INVENTORY> 10,846
<CURRENT-ASSETS> 455,463
<PP&E> 64,826
<DEPRECIATION> 0
<TOTAL-ASSETS> 803,740
<CURRENT-LIABILITIES> 56,816
<BONDS> 287,500
0
0
<COMMON> 46
<OTHER-SE> 449,434
<TOTAL-LIABILITY-AND-EQUITY> 803,740
<SALES> 0
<TOTAL-REVENUES> 100,704
<CGS> 15,550
<TOTAL-COSTS> 66,538
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,210
<INCOME-PRETAX> 23,254
<INCOME-TAX> 7,913
<INCOME-CONTINUING> 15,341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,341
<EPS-PRIMARY> .33
<EPS-DILUTED> .32

</TABLE>