UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended September 30, 2008Oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                             to


Commission file number 0-19410



Sepracor Inc.(Exact name of registrant as specified in its charter)

Delaware(State or Other Jurisdiction of
Incorporation or Organization)

22-2536587(IRS Employer
Identification No.)84 Waterford Drive
Marlborough, Massachusetts(Address of principal executive offices)

01752(Zip Code)


Registrant's
telephone number, including area code: (508) 481-6700



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

The number of shares outstanding of the registrant's class of Common Stock as of October 31, 2008 was 108,872,341 shares.



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SEPRACOR INC.
INDEX

Part IFinancial InformationItem 1.

Condensed Consolidated Interim Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007


3Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007
(unaudited)


4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (unaudited)


5Notes to Condensed Consolidated Interim Financial Statements (unaudited)


6Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations


28Item 3.

Quantitative and Qualitative Disclosures About Market Risk


54Item 4.

Controls and Procedures


54Part IIOther InformationItem 1.

Legal Proceedings


57Item 1A.

Risk Factors


62Item 6.

Exhibits


89Signatures


90Exhibit Index


91


2

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PART IFINANCIAL INFORMATION

Item 1.    Financial Statements

SEPRACOR INC.        CONDENSED CONSOLIDATED BALANCE SHEETS        (In Thousands)

September 30,
2008

December 31,
2007(Unaudited)AssetsCurrent assets:Cash and cash equivalents

$
554,763

$
598,929Short-term investments


133,678


292,659Accounts receivable, net


203,839


159,644Inventories


74,100


53,125Deferred tax asset


99,248


Other current assets


38,680


26,948Total current assets


1,104,308


1,131,305Long-term investments


98,935


174,031Property and equipment, net


107,890


87,308Investment in affiliate


3,335


4,313Deferred financing costs, net


4,017


7,071Intangible assets, net


163,204


501Goodwill


23,909


Deferred tax asset


379,477


Other assets


196


197Total assets

$
1,885,271

$
1,404,726Liabilities and Stockholders' EquityCurrent liabilities:Accounts payable

$
26,832

$
17,317Accrued expenses


149,028


210,109Current portion of capital lease obligation


1,137


1,162Current portion of convertible subordinated debt


72,800


72,800Deferred tax liabilities


1,766


Product sales allowances and reserves


263,204


245,839Other current liabilities


155


6,887Total current liabilities


514,922


554,114Capital lease obligation


606


1,443Convertible subordinated debt


616,720


648,020Deferred tax liabilities


8,581


Other liabilities


121,868


24,736Total liabilities


1,262,697


1,228,313Stockholders' equity:Preferred stock, $1.00 par value, 1,000 shares authorized; none outstanding at September 30, 2008 and December 31, 2007





Common stock, $.10 par value, 240,000 shares authorized at September 30, 2008 and December 31, 2007; 113,128 and 111,955 shares issued,
108,867 and 107,694 shares outstanding, at September 30, 2008 and December 31, 2007, respectively


11,312


11,195Treasury stock, at cost (4,261 shares at September 30, 2008 and December 31, 2007)


(232,028
)

(232,028
)Additional paid-in capital


1,892,831


1,858,775Accumulated deficit


(1,045,006
)

(1,471,716
)Accumulated other comprehensive (loss) income


(4,535
)

10,187Total stockholders' equity


622,574


176,413Total liabilities and stockholders' equity

$
1,885,271

$
1,404,726


The accompanying notes are an integral part of the condensed consolidated financial statements.

3

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SEPRACOR INC.        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        (Unaudited)        (In Thousands, Except Per Share Amounts)

Three Months Ended

Nine Months EndedSeptember 30,
2008

September 30,
2007

September 30,
2008

September 30,
2007Revenues:Product sales, net

$
289,249

$
271,837

$
864,739

$
853,726Royalties and license fees


18,424


8,921


57,858


31,524Total revenues


307,673


280,758


922,597


885,250Costs and expenses:Cost of product sold


34,987


26,226


91,623


82,719Cost of royalties


590


194


1,659


849Research and development


63,014


49,025


187,542


135,184Research and developmentin-process upon acquisition








89,995


Selling, marketing and distribution


176,635


154,648


511,270


538,282General and administrative


27,349


20,442


79,309


58,546Amortization of intangible assets


1,689


35


5,872


120Litigation settlement, net











34,000Restructuring








(566
)

Total costs and expenses


304,264


250,570


966,704


849,700Income (loss) from operations


3,409


30,188


(44,107
)

35,550Other income (expense):Interest income


5,312


11,173


19,910


34,882Gain on extinguishment of debt


2,260





2,260


Interest expense


(3,173
)

(88
)

(5,343
)

(2,958
)Equity in investee losses


(293
)

(37
)

(768
)

(441
)Other income (expense)


38


(621
)

(9,394
)

(907
)Income (loss) before income taxes


7,553


40,615


(37,442
)

66,126(Benefit from) provision for income taxes


(11,885
)

907


(464,152
)

2,792Net income

$
19,438

$
39,708

$
426,710

$
63,334Basic net income per common share

$
0.18

$
0.37

$
3.97

$
0.59Diluted net income per common share

$
0.17

$
0.34

$
3.70

$
0.54Shares used in computing basic and diluted net income per common share:Basic


107,572


107,318


107,462


106,628Diluted


115,455


116,033


115,389


116,508


The
accompanying notes are an integral part of the condensed consolidated financial statements.

4

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SEPRACOR INC.        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        (Unaudited)        (In Thousands)

Nine Months EndedSeptember 30,
2008

September 30,
2007Cash flows from operating activities:Net income

$
426,710

$
63,334Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


25,551


15,178Research and developmentin-process upon acquisition


89,995


Interest accretion on license fee liabilities


5,165


Gain on extinguishment of debt


(2,260
)

Impairment on investments


9,106


Equity in investee losses


768


441Stock compensation


29,547


27,926Changes in deferred income taxesrelease of valuation allowance


(463,884
)

Loss on asset disposal


737


218Changes in operating assets and liabilities, net of acquisitions:Accounts receivable


(42,261
)

20,617Inventories


(17,035
)

(11,119
)Other assets


(20,919
)

(5,848
)Accounts payable


9,097


6,426Accrued expenses


(62,271
)

10,699Product sales allowances and reserves


17,370


29,716Other liabilities


165


24,729Net cash provided by operating activities


5,581


182,317Cash flows from investing activities:Purchases of short- and long-term investments


(313,327
)

(730,355
)Sales and maturities of short and long term investments


526,072


947,885Additions to property and equipment


(34,493
)

(19,739
)Payments for purchased intangibles


(151,000
)

Business acquisition, net of cash acquired


(49,812
)

Net cash (used in) provided by investing activities


(22,560
)

197,791Cash flows from financing activities:Net proceeds from issuance of common stock


4,626


32,200Repayments of long-term debt and capital leases


(29,704
)

(440,877
)Net cash used in financing activities


(25,078
)

(408,677
)Effect of exchange rate changes on cash and cash equivalents


(2,109
)

399Net decrease in cash and cash equivalents


(44,166
)

(28,170
)Cash and cash equivalents at beginning of period


598,929


415,411Cash and cash equivalents at end of period

$
554,763

$
387,241Supplemental cash flow data:Cash paid during the period for interest

$
146

$
11,148Cash paid during the period for income taxes

$
8,288

$
3,976Supplemental schedule of noncash investing and financing activities:Fair value of assets acquired under acquisition and license and development agreement

$
148,122

$
Fair value of liabilities assumed under acquisition and license and development agreement

$
(97,310
)
$
Net cash paid upon execution of acquisition and license and development agreement

$
50,812

$
Additions to capital leases

$


$
3,260


The accompanying notes are an integral part of the condensed consolidated financial statements.

5

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS        (UNAUDITED)

1. Basis of Presentation

The accompanying condensed consolidated interim financial statements are unaudited and have been prepared on a basis substantially consistent with the audited financial statements.
Certain information and footnote disclosures normally included in our annual financial statements have been condensed or omitted. The condensed consolidated interim financial statements, in the
opinion of our management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for the interim periods ended September 30, 2008
and 2007. Certain prior period amounts have been reclassified to conform to the current period presentation.

The
condensed interim consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, including Sepracor Canada Limited and Oryx
Pharmaceuticals, Inc., or Oryx. We also have an investment in BioSphere Medical, Inc., or BioSphere, which we record under the equity method.

The
condensed consolidated results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year. These
condensed consolidated interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2007, which are contained in our annual
report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission, or SEC.

The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the following:
(i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the dates of the financial statements and (iii) the reported
amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

2. Recent Accounting Pronouncements

In October 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position, or FSP, No. 157-3,Determining the Fair Value
of a Financial Asset When the Market for That Asset Is Not Active,or FSP 157-3, to clarify the application of the provisions of Statement of Financial Accounting
Standards, or SFAS, No. 157,Fair Value Measurements,or SFAS 157, in an inactive market and how an entity would determine fair value in
an inactive market. FSP 157-3 was effective upon issuance and applies to our current financial statements. The application of the provisions of FSP 157-3 did not materially
affect our results of operations or financial condition as of and for the three and nine months ended September 30, 2008.

In
June 2008, the Emerging Issues Task Force of the FASB, or EITF, issued FSP No. EITF 03-6-1,Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities,or EITF 03-6-1, which states that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share under the
two-class method. This statement is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. We are currently evaluating the
impact this standard will have on our consolidated financial statements.

In
May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles,or SFAS 162.
SFAS 162 identifies the sources of accounting principles and the framework for

6

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

2. Recent Accounting Pronouncements (Continued)

selecting
the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles. This statement will become effective
60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Comformity
with Generally Accepted Accounting Principles. We do not expect the adoption of SFAS 162 to have a material impact on our consolidated financial statements.

In
May 2008, the FASB issued FSP No. APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement), or FSP 14-1, which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash
settlement) upon conversion. FSP 14-1 requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the
issuer's nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. FSP 14-1 requires bifurcation of a component of the debt, classification of that component in
equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in our consolidated statement of operations. FSP 14-1 requires retrospective
application to the terms of instruments as they existed for all periods presented. Accordingly, prior periods will be restated as if the new rule had been in effect in these prior periods. This
statement is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008 and early adoption is not permitted. While cash payments for
interest will not be affected, the adoption of FSP 14-1 could increase reported interest expense in a manner that reflects interest rates of similar non-convertible debt. We are
evaluating the impact this standard will have on our consolidated financial statements but expect it to result in greater interest expense and therefore lower earnings per share.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement
No. 133, or SFAS 161. SFAS 161 requires enhanced disclosures about an entity's derivative and hedging activities to make transparent the effect of those
activities on the entity's financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We do not expect the
adoption of SFAS 161 to have a material impact on our consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB
No. 51, or SFAS 160. SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial
statements. This pronouncement will be effective for fiscal years beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. We do not expect the adoption of SFAS 160 to have a material impact on
our consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 141(R),Business Combinations, or SFAS 141(R), which will require an acquiring
company to measure all assets acquired and liabilities assumed, including contingent considerations and all contractual contingencies, at fair value as of the acquisition date. In addition, an
acquiring company is required to capitalize in-process research and development,

7

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

2. Recent Accounting Pronouncements (Continued)

or
IPR&D, and either amortize it over the life of the product, or write it off if the project is abandoned or impaired. This statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are evaluating the impact this standard will have on our
consolidated financial statements.

In
November 2007, the EITF reached a final consensus on Issue No. 07-1,Accounting for Collaborative Arrangements Related to the Development
and Commercialization of Intellectual Property,or EITF 07-1. This statement is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years, and is to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective
date. We do not expect the adoption of EITF 07-1 to have a material impact on our consolidated financial statements.

In
June 2007, the EITF, reached a final consensus on Issue No. 07-3,Accounting for Nonrefundable Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities,or EITF 07-3. EITF 07-3 requires nonrefundable advance payments for future research
and development activities to be capitalized until the goods have been delivered or related services have been performed. EITF 07-3 is effective, on a prospective basis, for fiscal
years beginning after December 15, 2007 and interim periods within those fiscal years. The adoption of EITF 07-3 did not have a material impact on our consolidated financial
statements.

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilitiesincluding an amendment of
FASB Statement No. 115,or SFAS 159. SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or
liabilities to be carried at fair value. The objective of SFAS 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Under SFAS 159, a company may elect to use fair value to measure
eligible items at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This election
is irrevocable. Eligible items include, but are not limited to, accounts and loans receivable, available-for-sale and held-to-maturity securities,
equity method investments, accounts payable, guarantees, issued debt and firm commitments. This statement is effective for financial statements issued for fiscal years and interim periods beginning
after November 15, 2007, with early adoption permitted. Currently, we have not expanded our eligible
items subject to the fair value option under SFAS 159. Accordingly, adoption of this statement has had no impact on our financial results.

3. Acquisitions

In June 2008, in order to establish a Canadian commercial presence, we acquired the outstanding capital stock of Oryx, a specialty pharmaceutical company that markets branded
prescription pharmaceutical products to physician specialists and hospitals within Canada and is focused in the cardiovascular, central nervous system disorder, pain and infectious diseases
therapeutic areas, for approximately $49.8 million, including $3.0 million of acquisition-related transaction costs. In addition, the selling shareholders are entitled to receive
milestone payments of up to an aggregate of $20.0 million upon the accomplishment of various regulatory milestones. This acquisition was accounted for under the purchase method of accounting
and the results of operations of Oryx have been included

8

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

3. Acquisitions (Continued)

in
our consolidated results from the acquisition date. The purchase price of the acquisition was allocated to tangible and intangible assets and assumed liabilities based on their estimated fair
values. We have allocated $34.1 million of the purchase price to intangible assets primarily comprised of acquired technology. We are amortizing the acquired technology over estimated average
useful lives of 3 to 13 years. The excess purchase price of $25.0 million after this allocation has been accounted for as goodwill.

The
following table presents the fair values of assets and liabilities recorded in connection with the Oryx acquisition:

Total(in thousands)Accounts receivable

$
1,982Inventory


4,568Other current assets


3,450Goodwill


25,016Intangible assets


34,070Fixed assets


40Total assets acquired


69,126Accrued expenses and other current liabilities


8,994Deferred tax liability


10,320Cash consideration paid, net of cash acquired

$
49,812


The
Oryx acquisition is not material to our condensed consolidated statements of operations, and therefore pro forma information is not presented.

4. Earnings Per Share

Basic earnings per share, or EPS, excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Unvested restricted
shares, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic EPS. Diluted EPS is calculated by dividing net income by the weighted-average number
of common shares outstanding plus the dilutive effect, if any, of outstanding stock options, restricted shares and restricted stock units. Potential common shares result from the assumed conversion of
convertible subordinated debt and the assumed exercise of outstanding stock options, the proceeds of which are then assumed to have been used to repurchase outstanding stock options using the treasury
stock method. Potential common shares are not included in the per share calculation when the effect of their inclusion would be anti-dilutive.

9

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

4. Earnings Per Share (Continued)

For
the three and nine months ended September 30, 2008 and 2007, the following options to purchase shares of common stock were excluded from the computation of diluted EPS because
they would have had an anti-dilutive effect:

Three Months
Ended
September 30,
2008

Three Months
Ended
September 30,
2007

Nine Months
Ended
September 30,
2008

Nine Months
Ended
September 30,
2007(in thousands, except price per share data)Number of options


9,498


3,569


9,200


4,459Price range per share


$18.06 to $87.50


$22.71 to $87.50


$18.06 to $87.50


$38.26 to $87.50


We
have issued 0% convertible subordinated notes due 2024, which were not convertible into equity as of September 30, 2008 or 2007, or at any time during the nine months ended
September 30, 2008 or 2007. Once these notes become convertible into equity, shares of common stock will be reserved under the conversion formula for issuance upon conversion if and when our
common stock price exceeds $67.20 per share on the NASDAQ Global Select Market. Prior to such occurrence, the notes are only convertible into cash.

5. Inventories

Inventories consist of the following:

September 30,
2008

December 31,
2007(in thousands)Raw materials

$
24,643

$
26,811Finished goods


49,457


26,314Total

$
74,100

$
53,125


6. Business Investments

In January 2005, we entered into a collaboration agreement with ACADIA Pharmaceuticals, Inc., or ACADIA, for the development of new drug candidates targeted toward the treatment
of central nervous system disorders. This agreement expired pursuant to its terms in January 2008, and we are no longer pursuing the development of the drug candidates subject to this agreement.

In
2005 and 2006, under the terms of the collaboration agreement with ACADIA, we purchased a total of 1,890,422 shares of ACADIA's common stock for $16.1 million. These publicly
traded securities, which are classified as available-for-sale, are accounted for under SFAS No. 115,Accounting for Certain Investments in Debt
and Equity Securities.We adjust the carrying value of our available-for-sale securities to fair value and report the related temporary unrealized gains
and losses as a separate component in other comprehensive income. Declines in the fair value of an available-for-sale security that are estimated to be
"other-than-temporary" are recognized as other expense in the condensed consolidated statements of operations, thus establishing a new cost basis for such investments. We
evaluate our investment securities portfolio on a quarterly basis to determine whether declines in the fair value of these securities are other-than-temporary. This quarterly
evaluation consists of reviewing, among other things, the fair value of our investment securities compared to their carrying amount, the

10

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

6. Business Investments (Continued)

historical
volatility of the price of each security and any market and company-specific factors related to each security.

In
the second quarter of 2008, based on a significant decline in the value of ACADIA's common stock, which we believe was the result of adverse clinical results announced in June 2008,
we recorded an other-than-temporary impairment charge of $9.1 million related to this security. These amounts were recognized as other expense in the interim condensed
consolidated
statements of operations, thus establishing a new cost basis for the ACADIA investment. During the third quarter of 2008, we recorded an additional unrealized loss of approximately $1.9 million
within stockholders equity. As of September 30, 2008, the fair market value of our investment in ACADIA was approximately $5.1 million, which is recorded in long-term
investments on the accompanying condensed consolidated balance sheet.

7. Goodwill and Intangible Assets

In accordance with SFAS No. 142,Goodwill and Other Intangible Assets, or SFAS 142, goodwill is tested for impairment at
least annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value. We completed
our annual impairment review as of September 30, 2008 and concluded that no impairment charge was required as of that date.

The
carrying value of goodwill was $23.9 million at September 30, 2008, which is attributed to the Oryx acquisition (See Note 3 "Acquisitions"). Currency translation
adjustments of approximately $1.1 million were recorded for the three months ended September 30, 2008.

Intangible
assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in
accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, or SFAS 144. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash flows expected to be generated by the asset group. If the
carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds the fair value of
the asset group. No impairment charges were required for the three or nine months ended September 30, 2008.

In
April 2008, we entered into a worldwide license and development agreement with Arrow International Limited, or Arrow, for the development, commercialization, marketing, sale and
distribution of Arrow's levalbuterol/ipratropium combination inhalation solution product, which we refer to as the Levalbuterol/ipratropium Product, in current and all future formulations and delivery
modes. We refer to this agreement as the Levalbuterol/ipratropium Product Agreement. The Levalbuterol/ipratropium Product is currently ready to enter Phase III clinical development. We paid
Arrow $500,000 upon execution of this agreement and we are also required to pay Arrow an additional $70.0 million as further consideration under the agreement, provided Arrow is not in material
breach of certain of its obligations under the agreement. Although these future payments are subject to Arrow's continued compliance with the agreement, they have been recorded because we believe it
is probable that Arrow will be entitled to these future payments. Arrow will also receive single-digit royalties on our sales of the Levalbuterol/ipratropium Product, subject to Arrow's
one-time option

11

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

7. Goodwill and Intangible Assets (Continued)

exercisable
in the fourth quarter of 2009 to receive a lump sum discounted amount of $23.5 million in lieu of ongoing royalty payments.

In
April 2008, we also entered into a worldwide license and development agreement with Arrow, which we refer to as the Ciclesonide Agreement, for know-how and intellectual
property rights related to stable sterile suspension formulations, for use in the development, commercialization, marketing, sale and distribution of an inhalation solution pharmaceutical product
containing ciclesonide as its only active ingredient, or the Nebule Ciclesonide Product, and an inhalation solution pharmaceutical product containing both ciclesonide and arformoterol as its active
ingredients, or the Ciclesonide/arformoterol Combination Product. The agreement also includes rights to Arrow's "U-Bend" packaging technology, which allows increased accuracy in dosing
through a novel U-Bend ampule design. We paid Arrow $500,000 upon execution of this agreement, and we are also required to pay Arrow an additional $47.5 million as further
consideration under the agreement, provided Arrow is not in material breach of certain of its obligations under the agreement. Although these future payments are subject to Arrow's continued
compliance with the agreement, they have been recorded because we believe it is probable that Arrow will be entitled to these future payments. Arrow will also receive single-digit royalties on our
sales of the Nebule Ciclesonide Product and Ciclesonide/arformoterol Combination Product, subject to Arrow's one-time options exercisable in the fourth quarter of 2009 to receive an
aggregate lump sum discounted amount of up to $37.9 million in lieu of ongoing royalty payments.

The
total of $117.5 million of future payments due to Arrow, pursuant to the Levalbuterol/ipratropium Product Agreement ($70 million) and the Ciclesonide Agreement
($47.5 million), which we refer to collectively as the Future Payments to Arrow, were recorded at their present value of $78.0 million as other liabilities on our condensed consolidated
balance sheet as of September 30, 2008. We impute interest expense associated with these liabilities using a 13% interest rate, which are amortized over the expected term of the payments and
are recorded as interest expense in our condensed consolidated statements of operations.

Of
the $78.0 million of Future Payments to Arrow initially recorded, and the $1.0 million previously paid to Arrow pursuant to the two agreements, $50.8 million was
assigned to IPR&D. IPR&D is defined by
FASB Interpretation No. 4,Applicability of SFAS Statement No. 2 to Business Combinations Accounted for by the Purchase Method, or
FIN 4, as being a development project that has been initiated and achieved material progress but: (i) has not yet reached technological feasibility or has not yet reached the appropriate
regulatory approval; (ii) has no alternative future use; and (iii) the fair value is estimable with reasonable certainty. As required by FIN 4, the portion of the purchase price
under the Levalbuterol/ipratropium Product Agreement and the Ciclesonide Agreement allocated to IPR&D was immediately charged to operations following the consummation of the transaction and is
reflected in our condensed consolidated statement of operations.

A
project-by-project valuation using the guidance in SFAS No. 141,Business Combinations, or
SFAS 141, has been conducted to determine the fair value of our research and development projects that were in-process, but not yet completed, as of the date we entered into the
Levalbuterol/ipratropium Product Agreement and the Ciclesonide Agreement. The Levalbuterol/ipratropium Product candidate, an inhalation solution with the potential to treat chronic obstructive
pulmonary disease, or COPD, was the only project in development under the Levalbuterol/ipratropium Product Agreement as of the valuation date. We have targeted commercial introduction of this product
for 2011. The two projects in development pursuant to the Ciclesonide Agreement as of the valuation date were the

12

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

7. Goodwill and Intangible Assets (Continued)

(i) Nebule
Ciclesonide Product candidate and (ii) Ciclesonide/arformoterol Combination Product candidate. The Nebule Ciclesonide Product candidate is an inhalation solution formulation
of ciclesonide, which is an inhaled corticosteroid that is intended for the treatment of asthma symptoms, regardless of asthma severity. We have targeted commercial introduction of this product for
2013 or early 2014. The Ciclesonide/arformoterol Combination Product candidate will be comprised of a nebulized version of ciclesonide with arformoterol inhalation solution, which is a
long-acting maintenance treatment of bronchoconstriction in patients suffering from COPD. The Ciclesonide/arformoterol Combination Product is targeted for commercial introduction in 2014.
Successful development of our products is highly uncertain. Completion costs can be significant, vary for each product and are difficult to predict.

The
fair value of IPR&D has been determined by the income approach using the excess cash flow method. The value of the projects has been based on the present value of probability
adjusted incremental cash flows, after the deduction of contributory asset charges for other assets employed (including working capital, trade names and acquired workforce). The probability weightings
used to determine IPR&D cash flows ranged from 25% to 80%. The discount rates used to determine the present value of IPR&D cash flows ranged from 15% to 25%.

The
remaining $28.2 million of acquired intangible assets represent core technology product rights.

During
the first quarter of 2008, we entered into an agreement with Nycomed GmbH, or Nycomed, for the exclusive distribution, development and commercialization in the United
States, its territories and possessions, of Nycomed's compound ciclesonide, and products incorporating such compound, including
ALVESCO® HFA (ciclesonide) Inhalation Aerosol metered-dose inhaler, or MDI, for use in the treatment of asthma, OMNARIS (ciclesonide) Nasal Spray for use in the
treatment of allergic rhinitis and three development projects for line extensions. Under the agreement, we paid Nycomed an upfront payment of $150.0 million in February 2008 and may be required
to make subsequent payments of up to $280.0 million over the life of the agreement upon accomplishment of various development and sales milestones. The transaction was accounted for under the
purchase method of accounting and the purchase price was allocated to identifiable intangible assets based on their estimated fair values.

Of
the $150.0 million of intangible assets related to the Nycomed transaction, $39.2 million was assigned to IPR&D. As required by FIN 4, the portion of the purchase
price allocated to IPR&D was immediately charged to operations following the consummation of the transaction and is reflected in our condensed consolidated statement of operations.

A
project-by-project valuation using the guidance in SFAS No. 141 has been conducted to determine the fair value of Nycomed's research and development
projects that were in-process, but not yet completed, as of the consummation of the Nycomed transaction. The three projects in development as of the valuation date were a
hydrofluoroalkane, or HFA, MDI and two other respiratory-related candidates. We have targeted commercial introduction of the HFA MDI for 2012. One of the respiratory candidates is a combination
therapy that is comprised of ciclesonide and a long-acting beta-agonist (we have selected arformoterol), which we have targeted for commercial introduction for 2014. The second
respiratory candidate is an inhalation solution for which we have targeted commercial introduction at the end of 2013 or early 2014.

13

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

7. Goodwill and Intangible Assets (Continued)

The
fair value of IPR&D has been determined by the income approach using the excess cash flow method. The value of the Nycomed projects has been based on the present value of probability
adjusted incremental cash flows, after the deduction of contributory asset charges for other assets employed (including working capital, trade names and acquired workforce). The probability weightings
used to determine IPR&D cash flows ranged from 65% to 86%. The discount rate used to determine the present value of IPR&D cash flows was approximately 25%.

The
remaining $110.8 million of acquired intangible assets related to the Nycomed transaction include: OMNARIS Nasal Spray product rights for $21.2 million, ALVESCO HFA
Inhalation Aerosol product rights for $30.0 million, and core technology product rights for $59.6 million.

Our
intangible assets included in the condensed consolidated balance sheets are detailed as follows:

September 30, 2008

December 31, 2007(in thousands)Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amounts

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
AmountsOryx's intangible assets

$
32,545

$
(1,266
)
$
31,279

$


$


$
Arrow's intangible assets


28,238


(784
)

27,454








Nycomed's intangible assets


110,763


(6,694
)

104,069








Patents and other intangible assets


2,259


(1,857
)

402


2,259


(1,758
)

501Total intangible assets

$
173,805

$
(10,601
)
$
163,204

$
2,259

$
(1,758
)
$
501


Oryx
intangible assets are being amortized over 3-13 years; Arrow intangible assets are being amortized over 15 years; Nycomed intangible assets are being
amortized over 8-15 years; and patents are being amortized over 10 years.

The
net carrying value of intangible assets decreased by approximately $1.2 million for the three months ended September 30, 2008 due to the effect of foreign currency
translation.

8. Convertible Subordinated Debt

Convertible subordinated debt consists of the following:

September 30,
2008

December 31,
2007(in thousands)0% Series A convertible senior subordinated notes due December 2008

$
72,800

$
72,8000% Series B convertible senior subordinated notes due December 2010


148,020


148,0200% convertible senior subordinated notes due October 2024


468,700


500,000Total

$
689,520

$
720,820


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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

8. Convertible Subordinated Debt (Continued)

Our 0% notes due 2024 are convertible into cash and, if applicable, shares of our common stock under a conversion formula that becomes applicable if and when our common stock price
exceeds $67.20 per share on the NASDAQ Global Select Market. Prior to our stock exceeding such price, the notes are convertible to cash at the option of the holders in October 2009, 2014, 2019 and
2024, as well as under certain circumstances.

During
the third quarter of 2008, we repurchased and retired $31.3 million principal amount of our 0% notes due 2024 on the open market at prices ranging from 92% to 93% of par.
In connection with these transactions, we recorded a gain on the retirement of $2.5 million offset by non-cash charges of approximately $200,000 resulting from the
write-off
of debt issuance costs associated with the retired debt. The net gain of $2.3 million was recorded as a gain on extinguishment of debt on our condensed consolidated statements of operations.

9. Comprehensive Income

Total comprehensive income consists of net income, net foreign currency translation adjustments and net unrealized (loss) gain on available-for-sale securities.

Three Months Ended

Nine Months EndedSeptember 30,
2008

September 30,
2007

September 30,
2008

September 30,
2007(in thousands)Comprehensive income:Net income

$
19,438

$
39,708

$
426,710

$
63,334Net foreign currency translation adjustments


(3,090
)

1,294


(3,585
)

3,138Net unrealized (loss) gain on available-for-sale securities


(1,601
)

2,491


(11,137
)

11,357Total comprehensive income

$
14,747

$
43,493

$
411,988

$
77,829


The
net unrealized loss on available-for-sale securities for the three months ended September 30, 2008 primarily reflect the market loss on our investment
in ACADIA. As described in Note 6 "Business Investments" of these condensed consolidated interim financial statements, we reclassified the other-than-temporary impairment on our investment in
ACADIA to other expense in the condensed consolidated statements of operations during the second quarter of 2008.

10. Legal Proceedings

Litigation Related to Generic Competition and Patent Infringement

Patent litigation involves complex legal and factual questions. We can provide no assurance concerning the duration or outcome of any
patent related lawsuits. If we, third parties from whom we receive royalties, or third parties from whom we have licensed products or received other rights to commercialize products, are not
successful in enforcing our respective patents, the companies seeking to market generic versions of our marketed drugs and the drugs of our licensees will not be excluded, for the full term of the
respective patents, from marketing their generic versions of our marketed products or third-party products for which we have licensed rights to our patents. Introduction of generic equivalents of any
of our marketed products or third-party products for which we have licensed

15

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

10. Legal Proceedings (Continued)

rights
to our patents before the expiration of our or our collaborators' patents would have a material adverse effect on our business, financial condition and results of operations.



In September 2005, we received notification that the United States Food and Drug Administration, or FDA, had received an Abbreviated
New Drug Application, or ANDA,
from Breath Limited, or Breath, seeking approval of a generic version of our 1.25 mg/3 mL, 0.63 mg/3 mL and 0.31 mg/3 mL XOPENEX brand levalbuterol HCl
Inhalation Solution. Breath's submission includes a Paragraph IV certification alleging that our patents listed in the FDA publication entitledApproved Drug Products
With Therapeutic Equivalence Evaluations, commonly referred to as the "Orange Book," for these three dosages of XOPENEX Inhalation Solution are invalid, unenforceable or not
infringed by the generic version for which Breath sought approval. In October 2005, we filed a civil action against Breath for patent infringement in the United States District Court for the District
of Massachusetts, No. CV:06-10043.

In
April 2008, we entered into a settlement and license agreement with Breath to resolve this litigation. The agreement permits Breath to sell its generic versions of these XOPENEX
Inhalation Solution products in the United States under the terms of an exclusive 180-day license commencing on August 20, 2012 and a non-exclusive license thereafter.
Upon launch, Breath will pay us a double-digit royalty on gross profits generated from the sales of generic versions of these XOPENEX Inhalation Solution products. Under the agreement, Breath agrees
not to sell any of the products covered by our patents that are the subject of the license before the date on which the license commences. On May 1, 2008, the parties submitted to the court an
agreed order of dismissal without prejudice, which the court approved. The litigation is now concluded.

In
April 2008, we also entered into a supply agreement with Breath whereby, effective August 20, 2012, we will exclusively supply levalbuterol products (1.25 mg/3 mL, 0.63 mg/3 mL
and 0.31 mg/3 mL)to Breath, under our New Drug Application, or NDA, for a period of 180 days, which we refer to as the Initial Term, and on a
non-exclusive basis for two and one-half years thereafter. In addition to the royalties described above, Breath will pay us on a cost plus margin basis for supply of these
levalbuterol products. The supply agreement contains provisions regarding termination for cause and convenience, including either party's right to terminate the agreement at any time after the Initial
Term upon nine months written notice. Both the exclusive license under the settlement and license agreement and the exclusive supply obligations under the supply agreement could become effective prior
to August 20, 2012 if a third-party launches a generic version of these dosages of XOPENEX Inhalation Solution or if the parties otherwise mutually agree.

In
May 2008, we provided to the Federal Trade Commission and Department of Justice Antitrust Division the notifications of the settlement with Breath as required under
Section 1112(a) of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, or MMA. The settlement with Breath and the other agreements with Breath and its affiliates,
including the supply agreement, the agreement for the acquisition of Oryx and license agreements with Arrow, may be reviewed by antitrust enforcement agencies, such as the Federal Trade Commission and
Department of Justice Antitrust Division. There can be no assurances that governmental authorities will not seek to challenge the settlement with Breath or that a competitor, customer or other
third-party will not initiate a private action under antitrust or other laws challenging the settlement with Breath. We may not prevail in any

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

10. Legal Proceedings (Continued)

such
challenges or litigation and, in any event, may incur significant costs in the event of an investigation or in defending any action under antitrust laws.

In
January 2006, we received notification that the FDA had received an ANDA from Dey, L.P., seeking approval of a generic version of our 1.25 mg/3 mL, 0.63 mg/3 mL, and 0.31 mg/3
mL XOPENEX Inhalation Solution. Dey, L.P.'s submission includes a Paragraph IV certification alleging that our patents listed in the Orange Book for these three dosages of XOPENEX
Inhalation Solution are invalid, unenforceable, or not infringed by the generic version for which Dey, L.P. is seeking approval. In February 2006, we filed a civil action against
Dey, L.P. for patent infringement and the case is pending in the United States District Court for the District of Delaware, C.A. No. 06-113.

In
August 2006, we received notification that the FDA had received an ANDA from Dey, L.P. seeking approval of a generic version of our 1.25 mg/0.5 mL XOPENEX Inhalation Solution
concentrate. Dey, L.P.'s submission includes a Paragraph IV certification alleging that our patents listed in the Orange Book for 1.25 mg/0.5 mL XOPENEX Inhalation Solution concentrate
are invalid, unenforceable, or not infringed by the generic version for which Dey, L.P. is seeking approval. In September 2006, we filed a civil action against Dey, L.P. for patent
infringement in the United States District Court for the District of Delaware, C.A. No. 06-604. In September 2006, both civil actions we filed against Dey, L.P. were
consolidated into a single suit.

In
May 2007, we received notification that the FDA had received an ANDA from Barr Laboratories, Inc., or Barr, seeking approval of a generic version of our 1.25 mg/3 mL, 0.63 mg/3
mL and 0.31 mg/3 mL XOPENEX Inhalation Solution. Barr's submission includes a Paragraph IV certification alleging that our patents listed in the Orange Book for these three dosages of XOPENEX
Inhalation Solution are invalid, unenforceable or not infringed by the generic version for which Barr is seeking approval. In July 2007, we filed a civil action against Barr for patent infringement
and the case is pending in the United States District Court for the District of Delaware.

In
March 2008, the trial judge consolidated the Dey L.P. and Barr cases for all purposes, including discovery and trial, and the consolidated case is pending as C.A.
No. 06-113. The court held a Markman hearing on July 18, 2008, to address the parties' disputed issues of patent claim interpretation. The court has not yet issued its
decision regarding the disputed issues of patent claim interpretation nor has it formally set a trial date.

In
June 2008, Dey L.P. filed a Complaint against us in the United States District Court for the District of Delaware, C.A. No. 08-372. The Complaint is a
declaratory judgment action in which Dey L.P. seeks a declaration of non-infringement and invalidity of United States Patent 6,451,289 owned by us. Dey L.P. had previously
sent us notice that its ANDA contained a Paragraph IV certification against the 6,451,289 patent, and we did not commence litigation in response. We filed a Motion to Dismiss for lack of
subject matter jurisdiction in response to the Complaint and the court has not yet issued its decision.

The
filing of an action for patent infringement under the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the "Hatch-Waxman Act" results in an automatic
30-month stay of the FDA's authority to grant final marketing approval to those companies that filed an ANDA containing a Paragraph IV certification against one or more of our
XOPENEX Inhalation Solution patents. The first filer of an ANDA with a Paragraph IV certification is potentially entitled to a 180 day period of semi-exclusivity during which
the FDA cannot approve subsequently filed ANDAs.

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

10. Legal Proceedings (Continued)

The
180 day semi-exclusivity period would begin to run only upon first commercial marketing by the first filer. There are, however, also certain events that could cause the first
filer to forfeit the 180 day semi-exclusivity period, which we refer to as a forfeiture event.

For
our 1.25 mg/3 mL, 0.63 mg/3 mL, and 0.31 mg/3 mL dosages of XOPENEX Inhalation Solution, we believe that Breath is the sole first filer and potentially entitled to 180 days of
semi-exclusivity against subsequent ANDA filers for those three dosages. The 30-month stay against Breath's ANDA expired on March 7, 2008. On April 9, 2008, the
FDA granted final approval to Breath's ANDA for all three dosages. However, if a forfeiture event occurs and the FDA determines that Breath has forfeited the 180 day
semi-exclusivity period for those three dosages, other ANDA filers who have been granted final approval by the FDA could commence an "at risk" launch upon expiration of the
30-month stay. For those three dosages, the 30-month stay against Dey, L.P. expired on July 9, 2008 and the 30-month stay against Barr expires on or
about November 30, 2009.

For
our 1.25 mg/0.5 mL XOPENEX Inhalation Solution concentrate, we believe that Dey, L.P. is the sole first filer and potentially entitled to 180 days of
semi-exclusivity for that concentration. The 30-month stay against Dey, L.P.'s ANDA for that concentration expires on or about February 14, 2009.

Although
we could seek recovery of any damages sustained in connection with any activities conducted by a party that infringes a valid and enforceable claim in our patents, whether we
are ultimately entitled to such damages would be determined by the court in connection with our ongoing legal proceedings with each party desiring to launch generic levalbuterol hydrochloride
products. If any of these parties were to commence selling a generic alternative to our XOPENEX Inhalation Solution products prior to the resolution of these ongoing legal proceedings, or there is a
court determination that the products these companies wish to market do not infringe our patents, or that our patents are invalid or unenforceable, it would have a material adverse effect on our
business, financial condition and results of operations. In addition, our previously issued guidance regarding our projected financial results may no longer be accurate and we would have to revise
such guidance.



Certain of Schering-Plough Corporation's, or Schering-Plough's, CLARINEX® (desloratadine) products for which we receive
sales royalties are currently the subject of patent infringement litigation. Since June 2007, the FDA has received ANDAs relating to various dosage forms of CLARINEX from eleven different generic
pharmaceutical companies. These ANDA submissions include Paragraph IV certifications alleging that our patents, which Schering-Plough (as exclusive licensee of such patents) listed in the
Orange Book for these products, are invalid, unenforceable or not infringed by the submitter's proposed product. We and the University of Massachusetts, co-owners of certain patents listed
in the Orange Book, filed civil actions against these parties for patent infringement in the United States District Court for the District of New Jersey. In April 2008, the trial judge consolidated
these cases for all purposes including discovery and trial. The court has not set a trial date. We believe that all of these ANDAs are subject to a statutory stay of approval until at least
December 21, 2009 based on previous litigation commenced by Schering-Plough against these parties in separate civil actions involving another patent.

In
March 2008, we entered into a consent agreement with Glenmark Pharmaceuticals, Inc., or Glenmark, one of the eleven generic pharmaceutical companies that filed a
Paragraph IV certification against our patents, whereby Glenmark agreed not to pursue its case and to not market CLARINEX

18

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

10. Legal Proceedings (Continued)

5 mg
tablets until the expiration of our patents listed by Schering-Plough in the Orange Book or until these patents are found invalid or unenforceable.



Beginning in February 2008, we and UCB S.A., or UCB, received notices from Synthon Pharmaceuticals, Inc., or Synthon, Sun
Pharmaceutical Industries Limited of Andheri (East), or Sun, Sandoz Inc., or Sandoz, and Pliva Hrvatska D.O.O. and Barr, or Pliva/Barr, that each has filed an ANDA seeking approval to market a
generic version of XYZAL® 5 mg tablets, and that each ANDA contained a Paragraph IV certification alleging that United States Patent 5,698,558, owned by us and exclusively licensed
to UCB, is invalid, unenforceable or not infringed. Beginning in April 2008, UCB filed in its name and on our behalf civil actions in the United States District Court for the Eastern District of North
Carolina against Synthon, Sun, Sandoz, Pliva and Barr (Pliva's agent), an action against Synthon in the United States District Court for the District of Delaware, and actions against Sun and
Pliva/Barr in the United States District Court for the District of New Jersey. The actions in Delaware and New Jersey have been voluntarily dismissed. We believe that
all of these ANDAs are subject to a 30-month statutory stay of approval, the earliest of which, against Synthon, is scheduled to expire on or about August 29, 2010.

BROVANA Patent Infringement Claim

In April 2007, we were served with a Complaint filed in the United States District Court for the Southern District of New York, C.A.
No. 1:07-cv-2353, by Dey, L.P. and Dey, Inc., referred to collectively as Dey, alleging that the manufacture and sale of BROVANA® (arformoterol
tartrate) Inhalation Solution infringes or will induce infringement of a single United States patent for which Dey owns all rights, title and interest. In April 2007, we filed an Answer and
Counterclaims to this Complaint seeking to invalidate the originally asserted patent and a second related patent. In May 2007, Dey filed a reply asserting infringement of the second patent. Under the
current trial scheduling order, the trial will begin no earlier than October 2, 2009. It is too early to make a reasonable assessment as to the likely outcome or impact of this litigation. We
are unable to reasonably estimate any possible range of loss or liability related to this lawsuit due to its uncertain resolution.

In
March 2008, United States Patent 7,348,362, or the '362 patent, entitled "Bronchodilation b-agonist compositions and Methods" issued and Dey, L.P. is the assignee
of the patent. In August 2008, the court granted our Motion to Amend our Answer and Counterclaims to seek declaratory judgment that the '362 patent is invalid and unenforceable and to add
Mylan Inc. as a party.

XOPENEX Inhalation Solution Least Costly Alternative Matter

In March 2006, the parties responsible for administrating the Medicare Part B prescription drug benefit for respiratory products
on behalf of the Centers for Medicare and Medicaid Services, or CMS, which we refer to collectively as the Medicare Administration Subcontractors, announced their intention to implement a Least Costly
Alternative, or LCA, reimbursement action for XOPENEX Inhalation Solution. If implemented, the LCA would reduce the Medicare Part B reimbursement paid for XOPENEX Inhalation Solution to the
level of generic racemic albuterol.

The
LCA announcement in March 2006 was subsequently stayed by the Medicare Administration Subcontractors pending a National Coverage Analysis by CMS that we expected would determine the

19

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

10. Legal Proceedings (Continued)

criteria
for when XOPENEX Inhalation Solution would be appropriate for use by the Medicare population. CMS ultimately did not establish any national coverage criteria for short-acting
beta-agonists and instead deferred any such action to the Medicare Administration Subcontractors. On April 10, 2008, the Medicare Administration Subcontractors announced their
intention to implement the previously announced LCA, effective July 1, 2008.

In
June 2008, a preliminary injunction motion seeking to block the implementation of the LCA policy in advance of its July 1, 2008 effective date was filed in the District Court
for the District of Columbia against certain of the Medicare Administration Subcontractors, among others, by four Medicare beneficiaries utilizing XOPENEX Inhalation Solution. These Medicare
beneficiaries stated in the motion that they would be denied access to this drug if the LCA was implemented and as a result would suffer irreparable injury. Shortly following the filing of the motion,
the Medicare Administration Subcontractors announced they would suspend the LCA and not reinstate it at any time prior to December 31, 2008. CMS filed a motion to dismiss the Medicare
beneficiary lawsuit on the grounds that the case is moot since, as given their decision to suspend the LCA, no LCA is in effect or pending that could cause irreparable injury to the beneficiaries.

The
reimbursement paid by CMS for XOPENEX Inhalation Solution has fallen significantly since July 1, 2007 as a result of the implementation of the blended Medicare Part B
reimbursement rate for XOPENEX Inhalation Solution and generic racemic albuterol. Due to the decrease in the reimbursement rate, we have decided to no longer contract with home health care providers
for XOPENEX Inhalation Solution beginning January 1, 2009. Accordingly, the Medicare beneficiaries have withdrawn the case as it is now moot and no further action is expected from the court.

Class Action Litigation Settlement

Litigation settlement expense was $0 and $34.0 million for the nine months ended September 30, 2008 and 2007,
respectively. In June 2007, we filed in the United States District Court for the District of Massachusetts, or the Court, a Stipulation of Settlement regarding two securities class action lawsuits, or
class actions, then pending in the Court naming Sepracor and certain of our current and former officers and one director as defendants. The class actions, which were filed on behalf of certain
purchasers of our equity and debt securities, or the plaintiffs, alleged that the defendants violated the Federal securities laws by making false and misleading statements relating to the testing,
safety and likelihood of approval of tecastemizole by the FDA. Under the terms of the Stipulation of Settlement, in June 2007 we paid into escrow $52.5 million in settlement of the class
actions and, in July 2007, received an $18.5 million reimbursement from our insurance carriers. We
recorded the litigation settlement expense of $34.0 million, relating to this matter, during the quarter ended March 31, 2007. In September 2007, the Court granted final approval of the
Stipulation of Settlement and entered a final judgment consistent with the Stipulation of Settlement. The settlement is now final and the total settlement amount has been released from escrow.

Other Legal Proceedings

We have been named as the defendant in two separate lawsuits filed in the United States District Court for the Middle District of
Florida (Sharp, et al., filed July 17, 2008) and the United States District Court for the District of Arizona (Greaves, et al., served September 9, 2008) claiming that our pharmaceutical
sales representatives should have been categorized as "non-exempt" rather than

20

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

10. Legal Proceedings (Continued)

"exempt"
employees under the Fair Labor Standards Act. Both lawsuits claim that we owe damages, overtime wages, interest, costs and attorneys' fees for periods preceding the filing of the respective
actions. Other companies in the pharmaceutical industry face substantially similar lawsuits. Based upon the facts as presently known, we do not believe that it is likely that either collective action
will result in a liability that would be material to our financial position. We believe these lawsuits are without merit and we are prepared to defend against them vigorously.

From
time to time we are party to other legal proceedings in the course of our business. We do not, however, expect such other legal proceedings to have a material adverse effect on our
business, financial condition or results of operations.

11. Commitments and Contingencies

See Note 7 "Goodwill and Intangible Assets" regarding commitments for future payments under the Arrow Levalbuterol/ipratoropium Product Agreement, Arrow Ciclesonide Agreement and
Nycomed agreement.

We
have committed to make potential future milestone payments to third parties as part of licensing, distribution and development agreements. Payments under these agreements generally
become due and payable only upon achievement of certain development, regulatory and/or commercial milestones. We may also be required to make additional payments to Nycomed,
BialPortela & Ca, S.A., or Bial, and Oryx, of up to $280.0 million, $90.0 million and $20.0 million, respectively, if all remaining
milestones under the agreements with these parties are met. Because the achievement of these milestones is neither probable nor reasonably estimable, such contingent amounts have not been recorded on
our condensed consolidated balance sheets.

12. Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable
to tax benefit carryforwards and for differences between the financial statement amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established if, based on management's review of both positive and negative
evidence, it is more likely than not that all or a portion of the deferred tax asset will not be realized. Based upon our settlement with Breath during the second quarter of 2008, our operating
results over recent years and through September 30, 2008 and an assessment of our expected future results of operations, we have determined that it is more likely than not that we will realize
a substantial portion of our deferred tax assets in the United States and a foreign jurisdiction. As a result, during the second and third quarters of 2008, we released $452.0 million and
$11.9 million, respectively, of our valuation allowance, which was recorded as an income tax benefit.

We
have a remaining valuation allowance recorded against United States net deferred tax assets of $203.5 million which consists of $145.9 million for stock-based
compensation deductions and $6.9 million of stock-based compensation research and development credits that will be credited to additional paid-in-capital when realized;
$6.1 million for certain state operating loss carryforwards and $19.4 million of research and development credits that will likely expire without being utilized; and $25.2 million
which will be released in the fourth quarter of 2008 to offset our expected tax expense for

21

---



NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

12. Income Taxes (Continued)

the
remainder of 2008. Additionally, there is a non-U.S. valuation allowance of $2.0 million for non-U.S. operating losses and tax credit carryforwards that will likely
expire without being utilized.

Our
income tax provisions for the three and nine months ended September 30, 2008 include a tax benefit of $11.9 million and $463.9 million, respectively, recorded
upon our decision to release a substantial portion of the valuation allowance recorded against net deferred tax assets in the United States and a foreign jurisdiction. Excluding the effect of this tax
benefit, our income tax provision in the three and nine months ended September 30, 2008 consisted primarily of income taxes owed on income generated by a foreign subsidiary and certain state
income taxes in the United States.

We
account for uncertain tax positions in accordance with FIN 48,Accounting for Uncertainty in Income Taxes,which prescribes a
recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on
various related matters such as derecognition, interest, penalties, and disclosure. At December 31, 2007, approximately $18.4 million of unrecognized tax benefits were identified related
to certain temporary differences, which had been reduced to $11.3 million at June 30, 2008 for certain temporary differences that meet the recognition threshold. An additional
$10.7 million of unrecognized tax benefits had been identified and recorded as of March 31, 2008 related to certain tax credit carryforwards, which resulted in a reduction of the related
deferred tax asset. There were no changes to our unrecognized tax benefits in the third quarter of 2008.

We
file tax returns in the United States Federal jurisdiction and in various state, local and foreign jurisdictions. We are no longer subject to Internal Revenue Service, or IRS,
examination for years prior to 2005, although carryforward attributes that were generated prior to 2005 may still be adjusted upon examination by the IRS if they either have been or will be used in a
future period. We receive inquiries from various states during the year, some of which include an audit of state returns previously filed. With limited exceptions, we are no longer subject to state or
local examinations for years prior to 2005; however, carryforward attributes that were generated prior to 2005 may still be adjusted upon examination by state or local tax authorities if they either
have been or will be used in a future period.

The
foreign jurisdictions where we currently file income tax returns are Canada and the Netherlands Antilles. We are currently under examination by Canada Revenue Agency, or CRA, for our
scientific research and experimental development claims for the years ended December 31, 2005, 2004 and 2003. There are currently no examinations being conducted by the tax authorities in the
Netherlands Antilles. With limited exceptions, we are no longer subject to examination in Canada and the Netherlands Antilles for years prior to 2003 and 1999, respectively, although carryforward
attributes that were generated prior to these respective periods may still be adjusted upon examination if they either have been or will be used in a future period.

We
recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. For the three and nine months ended September 30, 2008, the amount
of accrued interest related to unrecognized tax benefits was not significant and no amount has been accrued for penalties.

13. Fair Value Measurements

In September 2006, the FASB issued SFAS 157. SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value and
expands

22

---



NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

13. Fair Value Measurements (Continued)

disclosures
about fair value measurements. We partially adopted this statement effective January 1, 2008. In February 2008, the FASB released FSP No. 157-2, Effective Date of FASB Statement No. 157,or FSP 157-2, which delays the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

In
accordance with FSP 157-2, we have not applied the provisions of SFAS 157 to the following nonfinancial assets and nonfinancial
liabilities:



We
have not yet determined the impact on our financial statements from our expected adoption of SFAS 157 as it pertains to non-financial assets and liabilities in the
first quarter of 2009. The partial adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our condensed consolidated financial position, results of
operations or cash flows.

Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
Fair value is based upon quoted market prices, where available. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value.
SFAS 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The three levels of the hierarchy are defined as follows:

Level 1Inputs
to the valuation methodology are quoted market prices for identical assets or liabilities in active markets. The types of assets measured at fair value
using Level 1 inputs include our publicly traded equity investments with quoted market prices and money market funds.

Level 2Inputs
include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that
are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.) and inputs that are derived principally from or
corroborated by observable market data by correlation or other means (market corroborated inputs). The types of assets measured at fair value using Level 2 inputs include our publicly traded
debt securities and other marketable securities with quoted market prices, which are in markets that are considered less active.

Level 3Inputs
to the valuation methodology are unobservable inputs based on management's best estimate of inputs market participants would use in pricing the asset or
liability at the measurement date, including assumptions about risk. The types of assets measured at fair value using Level 3 inputs include auction-rate securities where the
auctions have failed.

23

---



NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

13. Fair Value Measurements (Continued)

In
accordance with the fair value hierarchy described above, the following table shows the fair value of our financial assets and liabilities that are measured at fair value on a
recurring basis as of September 30, 2008:

Quoted Prices
in Active
Markets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

Carrying
Value at
September 30,
2008Level 1

Level 2

Level 3

Total(in thousands)Money market funds

$
508,458

$


$


$
508,458Asset-backed securities





1,063





1,063Equity securities(1)


8,239








8,239Auction-rate securities








77,054


77,054Total

$
516,697

$
1,063

$
77,054

$
594,814


---

Auction-rate
securities are long-term variable rate bonds tied to short-term interest rates. After the initial issuance of the securities, the
interest rate on the securities is reset periodically, at intervals established at the time of issuance (primarily every twenty-eight days), based on market demand for a reset period.
Auction-rate securities are bought and sold in the marketplace through a competitive bidding process referred to as an auction. If there is insufficient interest in the securities at the
time of an auction, the auction may not be completed and the rates may be reset to predetermined "penalty" or "maximum" rates.

Substantially
all of our auction-rate investments, approximately $77.1 million at September 30, 2008, are backed by pools of student loans guaranteed by the
Federal Family Education Loan Program, or FFELP, and we continue to believe that the credit quality of these securities is high based on this guarantee and other collateral. Auctions for these
securities began failing in the first quarter of 2008 and continued to fail throughout the second and third quarters, which we believe is a result of the recent uncertainties in the credit markets.
Consequently, the investments are not currently liquid, and we will not be able to access these funds until a future auction of these investments is successful, a buyer is found outside of the auction
process, the security is called, or the underlying securities have matured. At the time of the initial investment and through the date of this report, all of these auction-rate securities
remain AAA rated. We believe we have the ability to hold these investments until the lack of liquidity in these markets is resolved. As a result, we continue to classify the entire balance of our
auction-rate securities as non-current available-for-sale investments at fair value on our condensed consolidated balance sheets.

Because
of the temporary declines in fair value for the auction-rate securities, which we attribute to liquidity matters rather than credit issues as discussed above, we have
recorded an unrealized loss of $3.8 million to accumulated other comprehensive income. Any future fluctuation in fair value related to these instruments that we deem to be temporary, including
any recoveries of previous write-downs, would be recorded to other comprehensive income. If current market conditions deteriorate further, we

24

---



NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

13. Fair Value Measurements (Continued)

may
be required to record additional unrealized losses in other comprehensive income. If the credit ratings of the security issuers deteriorate, the anticipated recovery in market values does not
occur or we need funds from the auction-rate securities to meet working capital needs, we may be required to adjust the carrying value of these investments through impairment charges
recorded to earnings, as appropriate.

The
fair values of these auction-rate securities are estimated utilizing a trinomial discounted cash flow valuation model as of September 30, 2008. This analysis
considers, among other items, the maximum interest rate, the probability of passing, failing or default at each auction, the severity of default and the discount rate. These securities were also
compared, when possible, to other observable market data or inputs with similar characteristics to the securities that we held, including credit default swaps spreads on securities with similar
credit, implied volatility rates on exchange traded options and spreads on corporate credit. The analysis assumes that a successful auction would occur, at par, at some point in time for each
security.

All
of our assets measured at fair value on a recurring basis using significant Level 3 inputs as of September 30, 2008 were auction-rate securities. The
following table summarizes the change in balances for the nine month period ended September 30, 2008:

Level 3
Auction-Rate
Securities(in thousands)Balance at December 31, 2007

$
99,900Unrealized loss included in other comprehensive income


(3,509
)Net settlements


(16,150
)Balance at March 31, 2008

$
80,241Unrealized loss included in other comprehensive income


(447
)Net settlements


(1,600
)Balance at June 30, 2008

$
78,194Unrealized gain included in other comprehensive income


110Net settlements


(1,250
)Balance at September 30, 2008

$
77,054


14. Business Segments

With the addition of Oryx, we now operate in two segments distinguished by strategic business units that offer different products: (i) Sepracor Inc. and its subsidiaries
other than Oryx, or the Sepracor segment, which currently engage in the discovery, research and development and commercialization of pharmaceutical products and (ii) Oryx, which currently
engages in the licensing and commercialization of unique pharmaceutical products.

Following
the acquisition of Oryx in June 2008, in accordance with SFAS No. 131,Disclosures about Segments of an Enterprise and Related
Information,we began to separately report information for the Oryx segment. The accounting policies of both segments are the same as those described in the

25

---



NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

14. Business Segments (Continued)

summary
of significant accounting policies, which are contained in our annual report on Form 10-K and filed with the SEC.

The
table below represents segment information for the periods identified and provides a reconciliation of segment information to total consolidated information. Reconciliations of
segment information for the three and nine months ended September 30, 2007 are not presented as Sepracor had only one segment during those periods. For the Sepracor segment and Oryx, segment
income (loss) from operations represents segment gross profit less direct research and development expenses, acquired IPR&D, direct selling, general and administrative expenses and amortization of
intangible assets. There are no inter-segment revenues and we do not report capital expenditures by segment as such information is not used by our chief operating decision maker.

Three Months Ended September 30, 2008(in thousands)Sepracor

Oryx

ConsolidatedTotal revenues

$
302,673

$
5,000

$
307,673Income (loss) from operations

$
3,803

$
(394
)
$
3,409Total assets

$
1,768,286

$
116,985

$
1,885,271Depreciation and amortization

$
8,305

$
940

$
9,245




Nine Months Ended September 30, 2008(in thousands)Sepracor

Oryx

ConsolidatedTotal revenues

$
915,949

$
6,648

$
922,597Loss from operations

$
(43,436
)
$
(671
)
$
(44,107
)Total assets

$
1,768,286

$
116,985

$
1,885,271Depreciation and amortization

$
24,273

$
1,278

$
25,551


Reconciling
information between reportable segments and consolidated totals is shown in the following table:

Three Months
Ended
September 30, 2008

Nine Months
Ended
September 30, 2008(in thousands)Income (loss) from operations

$
3,409

$
(44,107
)Interest income


5,312


19,910Interest expense


(3,173
)

(5,343
)Gain on extinguishment of debt


2,260


2,260Equity in investee losses


(293
)

(768
)Other income (expense)


38


(9,394
)Income (loss) before income taxes

$
7,553

$
(37,442
)


26

---



NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

15. Restructuring Charges

During the year ended December 31, 2007, we completed an evaluation of our sales force structure, size and allocation in an attempt to maximize efficiency of our sales force. This
evaluation resulted in a decision to restructure and re-align our sales force. The restructuring program was completed by December 31, 2007, approximately 300 positions were
eliminated and we recorded a charge of $6.9 million. This charge was primarily comprised of severance costs for terminated employees and contract termination costs for excess leased computer
equipment and company cars.

During
the second quarter of 2008, we reversed $566,000 of our restructure reserve as the result of a change in estimate associated with employee severance costs and contract
terminations that were not realized. All amounts associated with the restructuring program were paid by the end of the second quarter of 2008 and we do not expect to incur any additional charges in
connection with this restructuring.

27

---





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

Cautionary Statement Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning
our business, operations and financial condition, including statements with respect to the safety, efficacy and potential benefits of our products and products under development, expectations with
respect to the timing and success of the development and commercialization of our products and product candidates, expectations with respect to acquisitions of technologies, product candidates,
approved products and/or businesses, the timing and success of the submission, acceptance and approval of regulatory filings, the scope of patent protection with respect to our products and product
candidates, our review of government pricing and the related restatement of certain historical financial statements and information with respect to the other plans and strategies for our business and
the business of our subsidiaries. All statements other than statements of historical facts included in this report regarding our strategy, future operations, timetables for product testing,
development, regulatory approvals and commercialization, acquisitions, financial position, costs, prospects, plans and objectives of management are forward-looking statements. When used in this report
the words "expect," "anticipate," "intend," "plan," "believe," "seek," "will," "estimate," and similar expressions are intended to identify forward-looking statements, although not all forward-looking
statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or
implied by these forward-looking statements for a number of important reasons, including those discussed under "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere in this report.

You
should read these forward-looking statements carefully because they discuss our expectations about our future performance, contain projections of our future operating results or our
future financial condition or state other "forward-looking" information. You should be aware that the occurrence of any of the events described under "Risk Factors" and elsewhere in this report could
substantially harm our business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common stock could decline.

We
cannot guarantee any future results, levels of activity, performance or achievements. The forward-looking statements contained in this quarterly report on Form 10-Q
represent our expectations as of the date of this quarterly report on Form 10-Q and should not be relied upon as representing our expectations as of any other date. Subsequent
events and developments will cause our expectations to change. However, while we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so, even if our
expectations change.

Executive Overview

We are a research-based pharmaceutical company dedicated to discovering, developing and commercializing innovative pharmaceutical
products targeted to address large and growing markets and unmet medical needs.

Our
currently marketed products are:



28

---





In
January 2008, we obtained from Nycomed GmbH, or Nycomed, the exclusive United States distribution rights to OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol. We
commercially introduced OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol in April 2008 and September 2008, respectively.

In
June 2008, in order to establish a Canadian commercial presence, we acquired the outstanding capital stock of Oryx Pharmaceuticals, Inc., or Oryx, a specialty pharmaceutical
company that markets branded prescription pharmaceutical products to physician specialists and hospitals within Canada and is focused in the cardiovascular, central nervous system disorder, pain and
infectious disease therapeutic areas. Following the acquisition of Oryx, in accordance with SFAS No. 131,Disclosures about Segments of an Enterprise and Related
Information,we began operating in two segments distinguished by strategic business units that offer different products. Sepracor Inc., which consists of Sepracor and
our subsidiaries other than Oryx, which currently engage in the discovery, research and development and
commercialization of pharmaceutical products, represents one segment and Oryx, which currently engages in the licensing and commercialization of unique pharmaceutical products is the other segment.
Since there are no differences among our operating segments that are material to an understanding of our business as a whole, we present the discussion in this Management's Discussion and Analysis of
Financial Condition and Results of Operations on a consolidated basis. The accounting policies of both segments are the same as those described in the summary of significant accounting policies, which
are contained in our annual report on Form 10-K and filed with the Securities and Exchange Commission, or SEC.

We
market our products in the United States to primary care physicians, allergists, pulmonologists, pediatricians, hospitals, psychiatrists and sleep specialists, as appropriate,
primarily through our sales organization currently comprised of approximately 1,700 sales professionals (although the actual number of sales representatives varies from time to time due to attrition
in the ordinary course of business). In May 2008, in an effort to maximize the commercial opportunity of OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol, we entered into an agreement with a
contract sales organization for the services of additional sales professionals. In September 2008, approximately 400 sales professionals commenced selling certain of our products pursuant to this
agreement. In addition, we have entered into out-licensing arrangements with respect to the sale of eszopiclone outside of the United States, Canada and Mexico and with respect to several
other compounds. We expect to commercialize any additional products that we may successfully develop or acquire through our own or a contract sales force, co-promotion agreements and/or
out-licensing partnerships. Factors that will be critical for us in achieving near-term success include our ability to:



29

---





We
believe that success in each of these areas should allow us to continue to be profitable in the near term and provide us the ability to repay our outstanding convertible debt of
$689.5 million if and when it comes due. If not converted, repurchased at the noteholders' or our option, or otherwise refinanced earlier, the principal amount of this debt becomes due as
follows:

Principal Amount of Convertible Debt Outstanding

Maturity Date$72,800,000

December 2008$148,020,000

December 2010$468,700,000(1)

2024
(2)


---

Our
long-term success depends in part on our ability to continue to sell our commercialized products, including successful commercialization of OMNARIS Nasal Spray and
ALVESCO HFA Inhalation Aerosol, our ability to build upon our current business and our ability to successfully develop or acquire and commercialize new products and product candidates.

We
expect that sales of LUNESTA and XOPENEX Inhalation Solution will represent the majority of our total revenues in 2008. We do not have long-term sales contracts with our
customers, and we rely on purchase orders for sales of our products. Reductions, delays or cancellations of orders for our marketed products could adversely affect our operating results. If sales of
our marketed products do not meet our expectations, we may not have sufficient revenue to achieve our business plan and our business will not be successful.

In
2008, we expect to be profitable for the year on an operating and net income basis. We expect sales and marketing expenses to continue to decrease as compared to 2007 as we have
reduced marketing programs related to LUNESTA, partially offset by costs incurred related to the commercial introductions of OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol in April 2008 and
September 2008, respectively. Research and development expenses for fiscal year 2008 are expected to increase as compared to fiscal year 2007 as we continue to invest in research and development
activities relating to LUNESTA and our earlier-stage drug candidates, as well as increased drug discovery efforts and development activities for ciclesonide and eslicarbazepine acetate, an
anti-epileptic compound that we licensed in late 2007 from BialPortela & Ca, S.A., or Bial. As part of our business strategy, we

30

---



have
and expect to continue considering and, as appropriate, consummating acquisitions of other technologies, product candidates, approved products and/or businesses. We can provide no assurance that
we will be successful in completing any such future acquisitions.

Significant 2008 Developments and Recent Corporate Development and Licensing Transactions



31

---





32

---





33

---





Three Month Periods ended September 30, 2008 and 2007

Revenues

Product Sales Revenue

Product sales were $289.3 million and $271.8 million for the three months ended September 30, 2008 and 2007,
respectively, an increase of approximately 6%.

Sales
of LUNESTA were $154.7 million and $160.7 million for the three months ended September 30, 2008 and 2007, respectively, a decrease of approximately 4%. The
decrease is primarily the result of a 9% decrease in the number of units sold, which we believe is primarily the result of the April 2007 commercial introduction of zolpidem tartrate, the generic
equivalent to AMBIEN®, and a reduction in selling and marketing resources. Partially offsetting this decrease was an increase in gross selling price of approximately 21%, which resulted in
a net selling price increase of approximately 6%. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of XOPENEX Inhalation Solution were $77.9 million and $91.6 million for the three months ended September 30, 2008 and 2007, respectively, a decrease of
approximately 15%. The decrease was primarily due to a decrease in number of units sold of approximately 21%, which we believe is partially the result of a decline in units sold in the home health
care market, which are subject to reimbursement under Medicare Part B. The reimbursement paid by CMS for XOPENEX Inhalation Solution has fallen significantly since July 1, 2007 as a
result of the implementation of the blended Medicare Part B reimbursement rate for XOPENEX Inhalation Solution and generic albuterol. Due to the decrease in the reimbursement rate, we have
decided to no longer contract with home health care providers for XOPENEX Inhalation Solution. Accordingly, we expect that our sales to Medicare Part B providers will decrease and, as a result,
our aggregate unit sales and revenues will decrease. However, we expect the decrease in revenues will be proportionately less than the decrease in unit sales due to a reduction in the Medicaid rebate
liability associated with sales of XOPENEX Inhalation Solution in the home health care market. The decrease in the number of units sold is also partially attributed to a decrease in market share. We
believe that the re-allocation of sales resources in an effort to support the commercial introductions of OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol may have contributed to this decrease
in market share. The decrease in number of units sold was partially offset by a gross selling price increase of approximately 21%, which resulted in a net selling price

34

---



increase
of approximately 7%. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of XOPENEX HFA were $18.5 million and $17.1 million for the three months ended September 30, 2008 and 2007, respectively, an increase of approximately 9%. The
increase is primarily the result of a gross selling price increase of approximately 10%, which resulted in a net selling price increase of approximately 7%, as well as an increase in the number of
units sold of approximately 2%. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of BROVANA were $14.8 million and $2.4 million for the three months ended September 30, 2008 and 2007, respectively. The increase is primarily the result of an
increase in the number of units sold of approximately 552%. Partially offsetting the increase in the number of units sold was a net selling price decrease of approximately 6%, which was the result of
a gross selling price increase of approximately 7%. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of OMNARIS Nasal Spray were $1.3 million and $0 for the three months ended September 30, 2008 and 2007, respectively. We introduced OMNARIS Nasal Spray commercially
in April 2008. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of ALVESCO HFA Inhalation Aerosol were $17.1 million and $0 for the three months ended September 30, 2008 and 2007, respectively. We introduced ALVESCO HFA Inhalation
Aerosol
commercially in September 2008. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Analysis of gross sales to net salesWe record product sales net of the following significant categories of product sales allowances: payment term discounts,
wholesaler fee-for-service discounts, government rebates and contractual discounts, returns and other discounts. We recompute these amounts each quarter and, with the exception
of the Medicaid best price matters described in more detail in Part I, Item 4, "Controls and Procedures," of this Form 10-Q, historically our estimates have not
materially differed from actual results. Calculating each of these items involves significant estimates and judgments and requires us to use information from external sources. The following table
presents the adjustments deducted from gross sales to arrive at total net sales:

For the Three Months Ended September 30,2008

% of
Sales

2007

% of
Sales

$ Change

% Change(dollars in thousands)Gross sales

$
434,516


100
%
$
372,412


100.0
%
$
62,104


17
%Adjustments to gross sales:Payment term discounts


8,424


1.9
%

7,474


2.0
%

950


13
%Wholesaler fee-for-service


13,622


3.1
%

7,012


1.9
%

6,610


94
%Government rebates and contractual discounts


113,150


26.1
%

71,817


19.3
%

41,333


58
%Returns


6,689


1.5
%

8,231


2.2
%

(1,542
)

(19
)%Other (includes product introduction discounts)


3,382


0.8
%

6,041


1.6
%

(2,659
)

(44
)%Sub-total adjustments


145,267


33.4
%

100,575


27.0
%

44,692


44
%Net sales

$
289,249


66.6
%
$
271,837


73.0
%
$
17,412


6
%


35

---



The
increase in adjustments to gross sales as a percentage of gross sales for the three months ended September 30, 2008, as compared to the three months ended September 30,
2007, primarily reflects an increase in government rebates and contractual discounts as a result of:



In
addition, wholesaler fee-for-service discounts increased during the three months ended September 30, 2008 primarily related to the credits earned in the three months ended
September 30, 2007 as a result of a XOPENEX Inhalation Solution gross price increase in that period. Partially offsetting the increase in government rebates, contractual discounts and
wholesaler fee-for-service discounts was a net decrease in:



Royalties and License Fees Revenue

Royalties and license fees were $18.4 million and $8.9 million for the three months ended September 30, 2008 and
2007, respectively.

Royalties
earned on the sales of ALLEGRA® (fexofenadine HCl) under our agreement with sanofi-aventis were $4.6 million and $3.7 million for the three months
ended September 30, 2008 and 2007, respectively, an increase of approximately 26%. The increase is primarily the result of increased sales in Japan.

Royalties
earned on sales of CLARINEX® (desloratadine) under our agreement with Schering-Plough Corporation, or Schering-Plough, were $5.3 million and
$2.5 million for the three months ended September 30, 2008 and 2007, respectively, an increase of approximately 108%. The increase is primarily the result of a contractual royalty rate
increase that took effect in October 2007.

Royalties
received on sales of XYZAL®/XUSAL (levocetirizine) under our agreements with UCB S.A. and UCB Farchim S.A., which we refer to
collectively as the UCB entities, were $6.6 million and $2.5 million for the three months ended September 30, 2008 and 2007, respectively, an increase of approximately 162%. The
increase is the result of the commercialization of XYZAL in the United States in the fourth quarter of 2007.

A
number of the patents we own and license to third parties and for which we receive these royalties are the subject of patent invalidation or revocation claims by companies seeking to
introduce generic equivalents of the products covered by such patents. We can provide no assurance concerning

36

---



the
duration or outcome of any patent related lawsuits. If we, or third parties from whom we receive royalties, are not successful in enforcing our respective patents, the companies seeking to market
generic versions will not be excluded from marketing their generic versions of these products. Introduction of generic equivalents of any of these products before the expiration of our patents or the
patents of our licensees could have a material adverse effect on our business.

Costs of Revenues

Cost of Product Sold

Cost of products sold was $35.0 million and $26.2 million for the three months ended September 30, 2008 and 2007,
respectively.

Cost
of LUNESTA sold as a percentage of LUNESTA gross sales was approximately 5% and 6% for the three months ended September 30, 2008 and 2007, respectively. The decrease in the
cost as a percentage of gross sales is primarily due to an increase in our gross selling price.

Cost
of XOPENEX Inhalation Solution sold as a percentage of XOPENEX Inhalation Solution gross sales was approximately 6% and 7% for the three months ended September 30, 2008 and
2007, respectively. The decrease in the cost as a percentage of gross sales is primarily due to an increase in our gross selling price.

Cost
of XOPENEX HFA sold as a percentage of XOPENEX HFA gross sales was approximately 14% for both the three months ended September 30, 2008 and 2007.

Cost
of BROVANA sold as a percentage of BROVANA gross sales was approximately 10% and 14% for the three months ended September 30, 2008 and 2007, respectively. The decrease in the
cost as a percentage of gross sales is primarily due to lower manufacturing costs during the three months ended September 30, 2008 as compared to the same period in 2007, and an increase in our
gross selling price. The decrease in the cost to manufacture BROVANA is the result of increased production of the 60-count package, which has a lower manufacturing cost than the
30-count package, during the three months ended September 30, 2008 as compared to the same period in 2007.

Cost
of OMNARIS Nasal Spray sold as a percentage of OMNARIS Nasal Spray gross sales was approximately 78% for the three months ended September 30, 2008, which was the result of a
minimal number of units sold and the recognition of the amortization of intangible expense associated with the acquisition of rights to OMNARIS Nasal Spray. We commercially introduced OMNARIS Nasal
Spray in April 2008.

Cost
of ALVESCO HFA Inhalation Aerosol sold as a percentage of ALVESCO HFA Inhalation Aerosol gross sales was approximately 23% for the three months ended September 30, 2008. We
commercially introduced ALVESCO HFA Inhalation Aerosol in September 2008.

Cost of Royalty Revenue

Cost of royalties earned was $590,000 and $194,000 for the three months ended September 30, 2008 and 2007, respectively, an
increase of approximately 204%. The cost of royalties in both periods relates to an obligation to a third-party as a result of royalties we earn from Schering-Plough based on its sales of CLARINEX.
This increase in third-party obligations is due to the increase in royalties we earned in the three months ended September 30, 2008 as compared with the same period in 2007.

37

---



Research and Development

Research and development expenses were $63.0 million and $49.0 million for the three months ended September 30,
2008 and 2007, respectively, an increase of approximately 29%. The increase is primarily due to increased spending on SEP-225441, SEP-225289, the ciclesonide franchise and
increased drug discovery efforts, as well as increased salary and other compensation related expenses for research and development personnel.

Drug
development and approval in the United States is a multi-step process regulated by the FDA. The process begins with the filing of an investigational new drug
application, or IND, which, if successful, allows the opportunity for study in humans, or clinical study, of the potential new drug. Clinical development typically involves three phases of study:
Phase I, II and III. The most significant costs in clinical development are in Phase III clinical trials, as they tend to be the longest and largest studies in the drug development
process. Following successful completion of Phase III clinical trials, an NDA must be submitted to, and accepted by, the FDA, and the FDA must approve the NDA, prior to commercialization of the
drug. We may elect either on our own, or at the request of the FDA, to conduct further studies that are referred to as Phase IIIB and IV studies, which if conducted, could cause us to incur
substantial costs. Phase IIIB studies are initiated and either completed or substantially completed while the NDA is under FDA review. These studies are conducted under an IND. Phase IV
studies, also referred to as post-marketing studies, are studies that are initiated and conducted after the FDA has approved a product for marketing. Phase IV studies may be
requested by the FDA either before or after the FDA has approved an NDA. These studies may also be independently initiated by the company for which an NDA has been approved. The FDA and the companies
conducting post-marketing studies use them to gather additional information about a product's safety, efficacy or optimal use.

Successful
development of our product candidates is highly uncertain. Completion dates and completion costs can vary significantly for each product candidate and are difficult to
predict. The
lengthy process of seeking FDA approvals, and subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to obtain, or delay in
obtaining, regulatory approvals could materially adversely affect our business. We cannot provide assurance that we will obtain any approval required by the FDA on a timely basis, if at all.

For
additional discussion of the risks and uncertainties associated with completing development of potential product candidates, see "Risk Factors."

Below
is a summary of development of our products and product candidates that represent approximately 10% or more of our direct project research and development spending for the three
months ended September 30, 2008. The "Estimate of Completion of Phase" column contains forward-looking statements regarding expected timing of completion of product development phases.
Completion of product development, if successful, culminates in the submission of an NDA to the FDA; however, there can be no assurance that the FDA will accept for filing, or approve, any NDA. The
actual timing of completion of phases could differ materially from the estimates provided in the table. In the table below, the FDA approved product and the three product candidates listed accounted
for approximately 64% of our direct project research and development spending for the three months

38

---



ended
September 30, 2008. No other product candidate accounted for more than 6% of our direct research and development spending in this period.

Product or Product Candidate

Indication

Phase of
Development

Estimate of
Completion of PhaseLUNESTA (eszopiclone)

Insomnia

*

*SEP-225441

Anxiety

Phase II

2009SEP-227162

Depression

Phase I

2009SEP-225289

Depression

Phase II

2009


---

Below
is a summary of expenditure information related to our products and product candidates representing approximately 10% or more of our direct project research and development
spending during the three months ended September 30, 2008 or 2007, as well as the costs incurred to date on these projects. The costs in this analysis include only direct costs and do not
include certain indirect labor, overhead, share-based compensation or other costs that benefit multiple projects. As a result, fully-loaded research and development cost summaries by project are not
presented.

Project costs
for the three
months ended
September 30, 2008

Project costs to
date through
September 30, 2008

Project costs
for the three
months ended
September 30, 2007

Project costs to
date through
September 30, 2007(in thousands)LUNESTA (eszopiclone)

$
5,325

$
265,064

$
4,890

$
236,439BROVANA (arformoterol tartrate)

$
920

$
193,520

$
3,605

$
184,948SEP-225289

$
4,692

$
33,157

$
3,278

$
20,843SEP-225441

$
5,149

$
19,789

$
1,796

$
3,521SEP-227162

$
4,613

$
30,089

$
4,344

$
16,495


Due
to the length of time necessary to develop a product, uncertainties related to the ability to obtain governmental approval for commercialization, and difficulty in estimating costs
of projects, we do not believe it is possible to make accurate and meaningful estimates, with any degree of accuracy, of the ultimate cost to bring our product candidates that have not entered into
Phase III clinical trials to FDA approved status. We recently commenced a Phase III clinical trial for OMNARIS HFA MDI. To date, the costs associated with this project approximate
$2.3 million. We estimate the cost range to bring OMNARIS HFA MDI from its current state to an NDA submission is an additional $40.0 to $50.0 million based on a targeted NDA submission
during 2011, provided that no significant delays are imposed by internal resource constraints or unanticipated FDA requirements.

Selling, Marketing and Distribution

Selling, marketing and distribution expenses were $176.6 million and $154.6 million for the three months ended
September 30, 2008 and 2007, respectively, an increase of approximately 14%. The increase was largely due to the addition of services of a contract sales organization and associated training,
and OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol commercial launch activities in 2008.

General and Administrative

General and administrative costs were $27.3 million and $20.4 million for the three months ended September 30,
2008 and 2007, respectively, an increase of approximately 34%. The increase primarily relates to a $2.9 million increase in salary and other compensation related expenses, a $2.2 million

39

---



increase
in legal fees largely related to patent litigation and a $1.8 million increase in costs related to the additional work required for our remediation plan to address a material weakness
in internal control and financial reporting as discussed in Part I, Item 4 "Controls and Procedures" of this quarterly report on Form 10-Q as well as other internal
company initiatives.

Amortization of Intangible Assets

Amortization of intangible assets were $1.7 million and $35,000 for the three months ended September 30, 2008 and 2007,
respectively. The increase primarily relates to the amortization of the intangible assets acquired from Nycomed and Arrow during the first and second quarters of 2008, respectively.

Other Income (Expense)

Interest income was $5.3 million and $11.2 million for the three months ended September 30, 2008 and 2007,
respectively, a decrease of approximately 53%. The decrease is due to lower average balances of cash and short- and long-term investments and lower interest rates earned on investments for
the three months ended September 30, 2008 compared to the same period in 2007. For the three months ended September 30, 2008 and 2007, the average annualized interest rate that we earned
on our investments was 2.55% and 5.10%, respectively.

Gain
on extinguishment of debt was $2.3 million and $0 for the three months ended September 30, 2008 and 2007, respectively. During the third quarter of 2008, we
repurchased and retired an aggregate of $31.3 million principal amount of our 0% notes due 2024. In connection with these transactions, we recorded a gain on the retirement of
$2.5 million offset by non-cash charges of approximately $200,000 resulting from the write-off of debt issuance costs associated with the retired debt.

Interest
expense was $3.2 million and $88,000 for the three months ended September 30, 2008 and 2007, respectively. The expense in the three months ended
September 30, 2008 is primarily related to imputed interest on the contingent liabilities associated with the assets licensed from Arrow.

Equity
in investee losses was $293,000 and $37,000 for the three months ended September 30, 2008 and 2007, respectively. The loss represents our portion of BioSphere
Medical, Inc., or BioSphere, losses.

Other
income (expense) was $38,000 and ($621,000), respectively, for the three months ended September 30, 2008 and 2007, respectively. For the three months ended
September 30, 2008, we have had minimal gains related to foreign currency transactions and a slight increase in the value of BioSphere warrants.

Income Taxes

For the three months ended September 30, 2008, our effective tax rate was a benefit of 157% on pre-tax income of
$7.6 million compared to an income tax expense of 2.2% for the three months ended September 30, 2007, on pre-tax income of $40.6 million. The net tax benefit recorded
for the three months ended September 30, 2008 was principally due to a tax benefit of $11.9 million recorded upon our decision in the third quarter of 2008 to release an additional
valuation allowance that had been recorded against net deferred tax assets in
the United States. Excluding the effect of these tax benefits, our income tax provision in the three months ended September 30, 2008 consisted primarily of income taxes owed on income generated
by a foreign subsidiary and certain state income taxes in the United States. The tax provision for the three months ended September 30, 2007 is primarily due to foreign income taxes as well as
United States Federal and state alternative minimum taxes.

As
of the end of the first quarter of 2008, a full valuation allowance was recorded against our net deferred tax assets in the United States and foreign jurisdictions. Based upon our
settlement with

40

---



Breath
during the second quarter of 2008, our operating results over recent years and through June 30, 2008 and an assessment of our expected future results of operations, we determined that it
is more likely than not that we will realize a substantial portion of our deferred tax assets in the United States and a foreign jurisdiction. As a result, during the second quarter, we released a
total of $452.0 million of our valuation allowance, which was recorded as an income tax benefit.

We
have a remaining valuation allowance recorded against United States net deferred tax assets of $203.5 million, which consists of $145.9 million for stock-based
compensation deductions and $6.9 million of stock-based compensation research and development credits that will be credited to additional paid-in-capital when realized;
$6.1 million for certain state operating loss carryforwards, and $19.4 million of research and development credits that will likely expire without being utilized; and
$25.2 million that will be released in the fourth quarter of 2008 to offset our expected tax expense for the remainder of 2008. Additionally, there is a non-U.S. valuation allowance
of $2.0 million for non-U.S. operating loss and tax credit carryforwards that will likely expire without being utilized.

We
account for uncertain tax positions in accordance with the Financial Accounting Standards Board, or FASB, Interpretation No. 48,Accounting for
Uncertainty in Income Taxes,or FIN 48, which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return and also provides guidance on various related matters such as derecognition, interest, penalties and disclosure. At December 31, 2007,
approximately $18.4 million of unrecognized tax benefits were identified related to certain temporary differences, which had been reduced to $11.3 million at June 30, 2008 for
certain temporary differences that meet the recognition threshold. In the first quarter of 2008, an additional $10.7 million of unrecognized tax benefits had been identified and recorded as of
March 31, 2008 related to certain tax credit carryforwards, which resulted in a reduction of the related deferred tax asset. There were no changes to our unrecognized tax benefits in the third
quarter of 2008.

Nine Month Periods ended September 30, 2008 and 2007

Revenues

Product Sales Revenue

Product sales were $864.8 million and $853.7 million for the nine months ended September 30, 2008 and 2007,
respectively, an increase of approximately 1%.

Sales
of LUNESTA were $438.4 million and $451.1 million for the nine months ended September 30, 2008 and 2007, respectively, a decrease of approximately 3%. The
decrease is primarily the result of a 7% decrease in the number of units sold, which we believe is primarily the result of the April 2007 commercial introduction of zolpidem tartrate, the generic
equivalent to AMBIEN, and a reduction in selling and marketing resources. Partially offsetting this decrease was an increase in gross selling price of approximately 20%, which resulted in a net
selling price increase of approximately 5%. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of XOPENEX Inhalation Solution were $303.3 million and $344.7 million for the nine months ended September 30, 2008 and 2007, respectively, a decrease of
approximately 12%. The decrease in sales was primarily due to a decrease in number of units sold of approximately 12%, which we believe is partially the result of a decline in units sold in the home
health care market, which are subject to reimbursement under Medicare Part B. The reimbursement paid by CMS for XOPENEX Inhalation Solution has fallen significantly since July 1, 2007 as
a result of the implementation of the blended Medicare Part B reimbursement rate for XOPENEX Inhalation Solution and generic albuterol. Due to the decrease in the reimbursement rate, we have
decided to no longer contract with home health care providers for XOPENEX Inhalation Solution. Accordingly, we expect that our sales to

41

---



Medicare
Part B providers will decrease and, as a result, our aggregate units sales and revenues will decrease. However, we expect the decrease in revenues will be proportionately less than the
decrease in unit sales due to a reduction in the Medicaid rebate liability associated with sales of XOPENEX Inhalation Solution in the home health care market. The decrease in the number of units sold
is also partially attributed to a decrease in market share. We believe that the re-allocation of sales resources in an effort to support the commercial introductions of OMNARIS Nasal Spray and ALVESCO
HFA Inhalation Aerosol may have contributed to this decrease in market share. The decrease in number of units sold is partially offset by a gross selling price increase of approximately 20%, which
resulted in a net selling price increase of less than 1%. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of XOPENEX HFA were $52.7 million and $50.0 million for the nine months ended September 30, 2008 and 2007, respectively, an increase of approximately 5%. The
increase is primarily the result of a net selling price increase of approximately 11%, which was primarily the result of a gross selling price increase of approximately 10%, partially offset by a
decrease in the number of units sold of approximately 5%. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of BROVANA were $38.0 million and $7.9 million for the nine months ended September 30, 2008 and 2007, respectively. We commercially introduced BROVANA in April
2007. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of OMNARIS Nasal Spray were $8.7 million and $0 for the nine months ended September 30, 2008 and 2007, respectively. We commercially introduced OMNARIS Nasal Spray in
April 2008. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of ALVESCO HFA Inhalation Aerosol were $17.1 million and $0 for the nine months ended September 30, 2008 and 2007, respectively. We commercially introduced ALVESCO
HFA Inhalation Aerosol in September 2008. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Analysis of gross sales to net salesThe following table presents the adjustments deducted from gross sales to arrive at net sales:

For the Nine Months Ended September 30,2008

% of sales

2007

% of sales

$ Change

% Change(dollars in thousands) (as restated)Gross sales

$
1,283,138


100.0
%
$
1,121,158


100.0
%
$
161,980


14
%Adjustments to gross sales:Payment term discounts


25,384


2.0
%

22,440


2.0
%

2,944


13
%Wholesaler fee-for-service


18,228


1.4
%

20,874


1.9
%

(2,646
)

(13
)%Government and commercial rebates and discounts


348,660


27.2
%

194,521


17.4
%

154,139


79
%Returns


17,329


1.3
%

17,181


1.5
%

148


1
%Other (includes product introduction discounts)


8,798


0.7
%

12,416


1.1
%

(3,618
)

(29
)%Sub-total adjustments


418,399


32.6
%

267,432


23.9
%

150,967


56
%Net sales

$
864,739


67.4
%
$
853,726


76.1
%
$
11,013


1
%


42

---



The
increase in adjustments to gross sales as a percentage of gross sales for the nine months ended September 30, 2008, as compared to the nine months ended September 30,
2007, primarily reflects an increase in government rebates and contractual discounts as a result of:



In
addition, the increase in government rebates and contractual discounts was partially offset by:



Royalties and License Fees Revenue

Royalties and license fees were $57.8 million and $31.5 million for the nine months ended September 30, 2008 and
2007, respectively, an increase of approximately 84%.

Royalties
earned on the sales of ALLEGRA under our agreement with sanofi-aventis were $20.2 million and $15.8 million for the nine months ended September 30, 2008
and 2007, respectively, an increase of approximately 28%. The increase is primarily the result of increased sales in Japan.

Royalties
earned on sales of CLARINEX under our agreement with Schering-Plough were $18.7 million and $10.6 million for the nine months ended September 30, 2008 and
2007, respectively, an increase of approximately 75%. The increase is primarily the result of a contractual royalty rate increase that took effect in October 2007.

Royalties
received on sales of XYZAL/XUSAL under our agreements with the UCB entities were $14.6 million and $4.9 million for the nine months ended September 30,
2008 and 2007, respectively, an increase of approximately 198%. The increase is the result of the commercialization of XYZAL in the United States in the fourth quarter of 2007.

A
number of the patents we own and license to third parties for which we receive these royalties are the subject of patent invalidation or revocation claims by companies seeking to
introduce generic equivalents of the products covered by such patents. We can provide no assurance concerning the duration or outcome of any patent related lawsuits. If we, or third parties from whom
we receive royalties, are not successful in enforcing our respective patents, the companies seeking to market generic versions will not be excluded from marketing their generic versions of these
products. Introduction of generic equivalents of any of these products before the expiration of our patents or the patents of our licensees could have a material adverse effect on our business.

43

---



Costs of Revenues

Cost of Product Sold

Cost of products sold was $91.6 million and $82.7 million for the nine months ended September 30, 2008 and 2007,
respectively.

Cost
of LUNESTA sold as a percentage of LUNESTA gross sales was approximately 5% and 6% for the nine months ended September 30, 2008 and 2007, respectively. The decrease in the
cost as a percentage of gross sales is primarily due to an increase in our gross selling price.

Cost
of XOPENEX Inhalation Solution sold as a percentage of XOPENEX Inhalation Solution gross sales was approximately 6% and 7% for the nine months ended September 30, 2008 and
2007, respectively. The decrease in the cost as a percentage of gross sales is primarily due to an increase in our gross selling price.

Cost
of XOPENEX HFA sold as a percentage of XOPENEX HFA gross sales was approximately 13% and 15% for the nine months ended September 30, 2008 and 2007, respectively. The decrease
in the cost as a percentage of gross sales is primarily due to an increase in our gross selling price in addition to lower manufacturing costs per-unit as a result of an increase in the
number of units manufactured during the nine months ended September 30, 2008 as compared to the same period in 2007.

Cost
of BROVANA sold as a percentage of BROVANA gross sales was approximately 12% and 18% for the nine months ended September 30, 2008 and 2007, respectively. The decrease in the
cost as a percentage of gross sales is primarily due to lower manufacturing costs during the nine months ended September 30, 2008 as compared to the same period in 2007, in addition to an
increase in our gross selling price. The decrease in the cost to manufacture BROVANA is the result of increased production of the 60-count package, which has a lower manufacturing cost
than the 30-count package, during the nine months ended September 30, 2008 as compared to the same period in 2007.

Cost
of OMNARIS Nasal Spray sold as a percentage of OMNARIS Nasal Spray gross sales was approximately 33% for the nine months ended September 30, 2008. We commercially introduced
OMNARIS Nasal Spray in April 2008.

Cost
of ALVESCO HFA Inhalation Aerosol sold as a percentage of ALVESCO HFA Inhalation Aerosol gross sales was approximately 23% for the nine months ended September 30, 2008. We
commercially introduced ALVESCO HFA Inhalation Aerosol in September 2008.

Cost of Royalty Revenue

Cost of royalties earned was $1.7 million and $849,000 for the nine months ended September 30, 2008 and 2007,
respectively, an increase of approximately 95%. The cost of royalties in both periods relates to an obligation to a third-party as a result of royalties we earn from Schering-Plough based upon its
sales of CLARINEX. This increase in third-party obligations is due to the increase in royalties we earned during the nine months ended September 30, 2008 as compared with the same period in
2007.

Research and Development

Research and development expenses were $187.5 million and $135.2 million for the nine months ended September 30,
2008 and 2007, respectively, an increase of approximately 39%. The increase is primarily due to the $10.0 million milestone payment to Bial pursuant to the license agreement for
SEP-0002093, referred to by Bial as BIA 2-093, as a result of the outcome of a pre-NDA meeting with the FDA, increased spending on LUNESTA Phase IV and pediatric
programs, increased spending on the ciclesonide franchise, drug discovery efforts and early-stage programs (SEP-225441, SEP-225289,

44

---



SEP-228425
and SEP-228432), as well as an increase in salary and other compensation related expenses. These increases were offset by a decrease in research and development
spending on BROVANA.

Research
and development in-process upon acquisition expenses were $90.0 million and $0 for the nine months ended September 30, 2008 and 2007, respectively.
These expenses represent the cost of acquiring rights to branded pharmaceutical products in development from third parties, which we expense at the time of acquisition. For the nine months ended
September 30, 2008, research and development in-process upon acquisition expenses included costs associated with our Nycomed and Arrow transactions.

Below
is a summary of development of our products and product candidates that represent approximately 10% or more of our direct project research and development spending for the nine
months ended September 30, 2008. The "Estimate of Completion of Phase" column contains forward-looking statements regarding expected timing of completion of product development phases.
Completion of product development, if successful, culminates in the submission of an NDA to the
FDA; however, there can be no assurance that the FDA will accept for filing, or approve, any NDA. The actual timing of completion of phases could differ materially from the estimates provided in the
table. In the table below, the FDA approved product and the three product candidates listed accounted for approximately 62% of our direct project research and development spending for the nine months
ended September 30, 2008. No other product candidate accounted for more than 7% of our direct research and development spending in this period.

Product or Product Candidate

Indication

Phase of
Development

Estimate of
Completion of PhaseLUNESTA (eszopiclone)

Insomnia

*

*SEP-225441

Anxiety

Phase II

2009SEP-227162

Depression

Phase I

2009SEP-225289

Depression

Phase II

2009


---

Below
is a summary of expenditure information related to our products and product candidates representing approximately 10% or more of our direct project research and development
spending during the nine months ended September 30, 2008 or 2007, as well as the costs incurred to date on these projects. The costs in this analysis include only direct costs and do not
include certain indirect labor, overhead, share-based compensation or other costs which benefit multiple projects. As a result, fully loaded research and development cost summaries by project are not
presented.

Project costs
for the nine
months ended
September 30, 2008

Project costs
to date through
September 30, 2008

Project costs
for the nine
months ended
September 30, 2007

Project costs
to date through
September 30, 2007(in thousands)LUNESTA (eszopiclone)

$
19,965

$
265,064

$
16,416

$
236,439BROVANA (arformoterol tartrate)

$
4,752

$
193,520

$
11,017

$
184,948SEP-225289

$
8,964

$
33,157

$
7,733

$
20,843SEP-227162

$
9,105

$
30,089

$
8,354

$
16,495SEP-225441

$
12,556

$
19,789

$
3,521

$
3,521


45

---



Selling, Marketing and Distribution

Selling, marketing and distribution expenses were $511.3 million and $538.3 million for the nine months ended
September 30, 2008 and 2007, respectively, a decrease of approximately 5%. The decrease was largely due to a $71.0 million reduction in marketing, advertising and promotional expenses
related to LUNESTA, XOPENEX and BROVANA, partially offset by a $41.3 million increase in marketing and promotional expenses related to OMNARIS Nasal Spray, commercially introduced in April
2008, and ALVESCO HFA Inhalation Aerosol, commercially introduced in September 2008, as well as costs associated with the addition of services of a contract sales organization.

General and Administrative

General and administrative costs were $79.3 million and $58.5 million for the nine months ended September 30, 2008
and 2007, respectively, an increase of approximately 36%. The increase is primarily the result of a $10.9 million increase in salary and other compensation related expenses, a
$5.1 million increase in legal fees largely related to patent litigation, and a $5.6 million increase in costs related to the additional work required for our remediation plan to address
a material weakness in internal control and financial reporting as discussed in Part I, Item 4 "Controls and Procedures" of this quarterly report on Form 10-Q as well
as other internal company initiatives.

Amortization of Intangible Assets

Amortization of intangible assets were $5.9 million and $120,000 for the nine months ended September 30, 2008 and 2007,
respectively. The increase primarily relates to the amortization of the intangible assets acquired from Nycomed and Arrow in the first and second quarters of 2008, respectively.

Litigation Settlement

Litigation settlement expense was $0 and $34.0 million for the nine months ended September 30, 2008 and 2007,
respectively. In June 2007, we filed in the United States District Court for the District of Massachusetts, or the Court, a Stipulation of Settlement regarding two securities class action lawsuits, or
class actions, then pending in the Court naming Sepracor and certain of our current and former officers and one director as defendants. The class actions, which were filed on behalf of certain
purchasers of our equity and debt securities, or the plaintiffs, alleged that the defendants violated the Federal securities laws by making false and misleading statements relating to the testing,
safety and likelihood of approval of tecastemizole by the FDA. Under the terms of the Stipulation of Settlement, in June 2007 we paid into escrow $52.5 million in settlement of the class
actions and, in July 2007, received an $18.5 million reimbursement from our insurance carriers. We recorded the litigation settlement expense of $34.0 million, relating to this matter,
during the quarter ended March 31, 2007. In September 2007, the Court granted final approval of the Stipulation of Settlement and entered a final judgment consistent with the Stipulation of
Settlement. The settlement is now final and the total settlement amount has been released from escrow.

Other Income (Expense)

Interest income was $19.9 million and $34.9 million for the nine months ended September 30, 2008 and 2007,
respectively, a decrease of approximately 43%. The decrease is primarily due to lower average balances of cash and short- and long-term investments and lower interest rates earned on
investments in the nine months ended September 30, 2008 compared to the same period in 2007. For the nine months ended September 30, 2008 and 2007, the average annualized interest rate
that we earned on our investments was 3.08% and 5.20%, respectively.

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Gain
on extinguishment of debt was $2.3 million and $0 for the nine months ended September 30, 2008 and 2007, respectively. During the third quarter of 2008, we repurchased
and retired an aggregate of $31.3 million principal amount of our 0% notes due 2024. In connection with these transactions, we recorded a gain on the retirement of $2.5 million offset by
non-cash charges of approximately $200,000 resulting from the write-off of debt issuance costs associated with the retired debt.

Interest
expense was $5.3 million and $3.0 million for the nine months ended September 30, 2008 and 2007, respectively. The expense for the nine months ended 2008 is
primarily related to imputed interest on the contingent liabilities associated with the assets licensed from Arrow. The expense for the nine months ended 2007 is primarily related to the interest we
paid on our 5% convertible subordinated debentures, which we repaid in full upon their maturity on February 15, 2007.

Equity
in investee losses were $768,000 and $441,000 for the nine months ended September 30, 2008 and 2007, respectively, an increase of approximately 74%. The loss represents our
portion of BioSphere losses.

Other
expense was $9.4 million and $907,000 for the nine months ended September 30, 2008 and 2007, respectively. The expense in the nine months ended September 30,
2008 primarily represents an other-than-temporary impairment recorded related to our investment in ACADIA.

Income Taxes

For the nine months ended September 30, 2008, our effective tax rate was a benefit of 1,240% on pre-tax losses of
$37.4 million compared to an income tax expense of 4.2% for the nine months ended September 30, 2007, on pre-tax income of $66.1 million. The net tax benefit recorded
for the nine months ended September 30, 2008 was principally due to a tax benefit of $463.9 million recorded upon our decision in the second and third quarter of 2008 to release a
valuation allowance recorded against net deferred tax assets in the United States and a foreign jurisdiction. Excluding the effect of these tax benefits, our income tax provisions for the nine months
ended September 30, 2008 consisted primarily of income taxes owed on income generated by a foreign subsidiary and certain state income taxes in the United States. The tax provision for the nine
months ended September 30, 2007 is primarily due to foreign income taxes as well as U.S. Federal and state alternative minimum taxes.

As
of the end of the first quarter of 2008, a full valuation allowance was recorded against our net deferred tax assets in the United States and foreign jurisdictions. Based upon our
settlement with Breath during the second quarter of 2008, our operating results over recent years and through June 30, 2008 and an assessment of our expected future results of operations, we
determined that it is more likely than not that we will realize a substantial portion of our deferred tax assets in the United States and a foreign jurisdiction. As a result, during the second
quarter, we released a total of $452.0 million of our valuation allowance, which was recorded as an income tax benefit.

We
have a remaining valuation allowance recorded against United States net deferred tax assets of $203.5 million, which consists of $145.9 million for stock-based
compensation deductions and $6.9 million of stock-based compensation research and development credits that will be credited to additional paid-in-capital when realized;
$6.1 million for certain state operating loss carryforwards, and $19.4 million of research and development credits that will likely expire without being utilized; and
$25.2 million, which will be released in the fourth quarter of 2008 to offset our expected tax expense for the remainder of 2008. Additionally, there is a non-U.S. valuation
allowance of $2.0 million for non-U.S. operating loss and tax credit carryforwards that will likely expire without being utilized.

Liquidity and Capital Resources

Our liquidity requirements have historically consisted of research and development expenses, sales and marketing expenses,
in-licensing fees, capital expenditures, working capital, debt service and general corporate expenses. Historically, we have funded these requirements and the growth of our

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business
primarily through convertible subordinated debt offerings, the issuance of common stock, including the exercise of stock options, sales of our products and license agreements for our drug
compounds. We now expect to fund our liquidity requirements primarily with revenue generated from product sales. We also believe we have the ability to meet our short-term liquidity needs
through the use of our cash and short-term investments on hand at September 30, 2008.

At
September 30, 2008, $77.1 million of our investment portfolio was invested in AAA rated investments in auction-rate securities. Auction-rate
securities are long-term variable rate bonds tied to short-term interest rates. After the initial issuance of the securities, the interest rate on the securities is reset
periodically, at intervals established at the time of issuance (primarily every 28 days), based on market demand for a reset period. Auction-rate securities are bought and sold in
the marketplace through a competitive bidding process often referred to as an auction. If there is insufficient interest in the
securities at the time of an auction, the auction may not be completed and the rates may be reset to predetermined "penalty" or "maximum" rates.

Substantially
all of our auction-rate securities are backed by pools of student loans guaranteed by the Federal Family Education Loan Program, or FFELP, and we continue to
believe that the credit quality of these securities is high based on this guarantee and other collateral. Auctions for these securities began failing in the first quarter of 2008 and continued to fail
throughout the second and third quarters, which we believe is a result of the recent uncertainties in the credit markets. Consequently, the investments are not currently liquid, and we will not be
able to access these funds until a future auction of these investments is successful, a buyer is found outside of the auction process, the security is called, or the underlying securities have
matured. At the time of our initial investment and through the date of this report, all of our auction-rate securities remain AAA rated. We believe we have the ability to hold these
investments until the lack of liquidity in these markets is resolved. As a result, we continue to classify the entire balance of auction-rate securities as non-current
available-for-sale investments at fair value on our condensed consolidated balance sheet.

Typically,
the fair value of auction-rate securities investments approximates par value due to the frequent resets through the auction process. While we continue to earn
interest on our auction-rate securities investments at the contractual rate, these investments are not currently trading and therefore do not have a readily determinable market value.
Accordingly, the estimated fair value of the auction-rate securities no longer approximates par value.

At
September 30, 2008, because of the temporary declines in fair value for the auction-rate securities, which we attribute to liquidity matters rather than credit
issues as discussed above, we have classified our auction-rate securities at Level 3, as defined under the Statement of Financial Accounting Standards, or SFAS, No. 157, Fair Value Measurement,
 or SFAS 157, framework and described in Note 13, "Fair Value Measurements", of our condensed consolidated
financial statements included in this quarterly report on Form 10-Q, with a fair value of $77.1 million. The fair value of these auction-rate securities is
estimated utilizing a trinomial discounted cash flow analysis, which was compared, when possible, to other observable market data or inputs with similar characteristics. The assumptions used in
preparing the discounted cash flow analysis include estimates for the maximum interest rate, the probability of passing, failing or default at each auction, the severity of default and the discount
rate. Based on this assessment of fair value, as of September 30, 2008, we determined there was a decline in fair value of our auction-rate securities investments of
$3.8 million, which was deemed temporary. If current market conditions deteriorate further, we may be required to record additional unrealized losses in other comprehensive income. If the
credit ratings of the security issuers deteriorate, the anticipated recovery in market values does not occur, or we need funds from the auction-rate securities to meet working capital
needs, we may be required to adjust the carrying value of these investments through impairment charges recorded to earnings, as appropriate, which could be material.

48

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Cash,
cash equivalents and short- and long-term investments totaled $787.4 million, or 42% of total assets, at September 30, 2008, compared to
$1.1 billion, or 76% of total assets, at December 31, 2007.

Net
cash provided by operating activities for the nine months ended September 30, 2008 was $5.6 million, which includes net income of $426.7 million. Our net income
includes non-cash adjustments of $305.3 million, consisting primarily of the release of the tax valuation allowance, research and development in-process upon
acquisition, share-based compensation, impairment on investments, gain on extinguishment of debt and depreciation and amortization expense. Accounts receivable increased by $42.3 million
primarily due to the timing of our sales. Inventory on hand increased by $17.0 million primarily due to timing of deliveries and replenishment of depleted stock. Other assets increased by
$20.9 million, which is primarily a result of an increase in prepaid expenses and a change in our deferred tax asset. Accrued expenses decreased by $62.3 million primarily due to the
$75.0 million upfront payment we paid to Bial in January 2008. Product sales allowances and reserves increased by $17.4 million primarily due to product revenue rebates related to
LUNESTA and XOPENEX Inhalation Solution product sales.

Net
cash used in investing activities for the nine months ended September 30, 2008 was $22.6 million, which is primarily attributable to the purchase of intangible assets
from Nycomed for $150.0 million, the acquisition of Oryx for $49.8 million net of cash acquired, and the purchases of property and equipment of $34.5 million, partially offset by
the cash provided by net sales of short- and long-term investments of $212.7 million.

Net
cash used in financing activities for the nine months ended September 30, 2008 was $25.1 million. We used $29.4 million to repurchase and retire an aggregate of
$31.3 million principal amount of our 0% notes due 2024 and we used $268,000 for capital lease obligations. These amounts were partially offset by receipts of $4.6 million from issuing
common stock upon the exercise of stock options issued under our stock option plans.

We
believe our existing cash and the cash flow that we anticipate from operations and current strategic alliances will be sufficient to support existing operations through at least 2009.
However, if some or all of our significant contingent payments become due and payable under our collaboration agreements and the holders of our 0% notes due 2024 exercise their right to require us to
convert their notes into cash in October 2009, we may need to raise additional capital to meet these obligations. In the longer term, we expect to continue to fund our existing operations with revenue
generated from product sales. Our actual future cash requirements and our ability to generate revenue, however, will depend on many factors, including:



49

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If
our assumptions underlying our beliefs regarding future revenues and expenses change, or if opportunities or needs arise, we may seek to raise additional cash by selling debt or
equity securities or otherwise borrowing money. However, we may not be able to raise such funds on favorable terms, if at all.

Based
on our current operating plan, we believe that we will not be required to raise additional capital to fund the repayment of our outstanding convertible debt when due, although we
may choose to do so. However, if some or all of our significant contingent payments become due and payable under our collaboration agreements and the holders of our 0% notes due 2024 exercise
their right to require us to convert their notes into cash in October 2009, we may need to raise additional capital to meet these obligations. If we are not able to successfully continue to
grow our revenue and properly manage our expenses, it is likely that our business would be materially and adversely affected and that we would be required to raise additional funds in order to repay
our outstanding convertible debt. We cannot assure that, if required, we would be able to raise the additional funds on favorable terms, if at all.

Critical Accounting Policies and Estimates

We identified critical accounting policies and estimates in our annual report on Form 10-K for the year ended
December 31, 2007. These critical accounting policies relate to product revenue recognition, revenue recognition related to multiple element arrangements, royalty revenue recognition, product
sales allowance and reserves, cash and cash equivalents, short- and long-term investments, accounts receivable and bad debt, amortization, depreciation and certain long-lived
assets, income taxes, inventory write-downs, stock-based compensation, and research and development expense. These policies require us to make estimates in the preparation of our financial statements
as of a given date. Because of the uncertainty inherent in these matters, our actual results could differ from the estimates we use in applying the critical accounting policies.

A
summary of accounting policies that are considered critical may be found in Part II, Item 7 of our annual report on Form 10-K for the year ended
December 31, 2007 in the "Critical Accounting Policies" section. Other than as described below, our critical accounting policies and estimates are as set forth in the
Form 10-K.

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Product sales allowances and reserves:The following table summarizes activity in each of our product sales allowances and reserve categories for the nine months
ended September 30, 2008:

Payment
Term
Discount

Wholesaler
Fee
for Service

Government
Rebates and
Contractual
Discounts

Returns

Other
Discounts

Total(in thousands)Balance at December 31, 2007

$
(4,139
)
$
(12,112
)
$
(206,733
)
$
(24,351
)
$
(2,643
)
$
(249,978
)Current provision:Current year


(25,384
)

(18,228
)

(339,216
)

(17,329
)

(8,798
)

(408,955
)Prior year








(9,444
)







(9,444
)Total


(25,384
)

(18,228
)

(348,660
)

(17,329
)

(8,798
)

(418,399
)Actual:Current year


20,866


5,216


215,731


4,527


7,035


253,375Prior year


3,912


11,046


116,557


13,369


2,169


147,053Total


24,778


16,262


332,288


17,896


9,204


400,428Balance at September 30, 2008

$
(4,745
)
$
(14,078
)
$
(223,105
)
$
(23,784
)
$
(2,237
)
$
(267,949
)


Calculating
each of these product sales allowances and reserves involves significant estimates and judgments and requires us to use information from external sources. Based on known
market events and trends, internal and external historical trends, third-party data, customer buying patterns and current knowledge of contractual and statutory requirements, we believe that we are
able to make reasonable estimates of sales discounts.

Fair Value Measurement:Effective January 1, 2008, we partially adopted SFAS 157. SFAS 157 defines fair value, establishes a framework and
gives guidance regarding the methods used for measuring fair value and expands disclosures about fair value measurements. In February 2008, the FASB released a FASB Staff Position, or FSP,
No. 157-2,Effective Date of FASB Statement No. 157, or FSP 157-2, which delays the effective date of
SFAS 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

In
accordance with FSP 157-2, we have not applied the provisions of SFAS 157 to the following nonfinancial assets and nonfinancial
liabilities:



We
have not yet determined the impact on our financial statements from adoption of SFAS 157 as it pertains to non-financial assets and liabilities for our first
quarter of 2009. The partial adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our condensed consolidated financial position, results of operations or
cash flows.

Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
Fair value is based upon quoted market prices, where available. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value.
SFAS 157 establishes a

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three-level
valuation hierarchy for disclosure of fair value measurements. The three levels of the hierarchy are defined as follows:

Level 1Inputs
to the valuation methodology are quoted market prices for identical assets or liabilities in active markets. The types of assets measured at fair value
using Level 1 inputs include our publicly traded equity investments with quoted market prices and money market funds.

Level 2Inputs
include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that
are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.) and inputs that are derived principally from or
corroborated by observable market data by correlation or other means (market corroborated inputs). The types of assets measured at fair value using Level 2 inputs include our publicly traded
debt securities and other marketable securities with quoted market prices, which are in markets that are considered less active.

Level 3Inputs
to the valuation methodology are unobservable inputs based on management's best estimate of inputs market participants would use in pricing the asset or
liability at the measurement date, including assumptions about risk. The types of assets measured at fair value using Level 3 inputs include auction-rate securities where the
auctions have failed.

Short- and Long-Term Investments:We estimated the fair values of our auction-rate securities utilizing a trinomial discounted cash flow
valuation model. This analysis considers, among other items, the maximum interest rate, the probability of passing, failing or default at each auction, the severity of default and the discount rate.
These securities were also compared, when possible, to other observable market data or inputs with similar characteristics to the securities that we held including credit default swaps spreads on
securities with similar credit, implied volatility rates on exchange traded options and spreads on corporate credit. The analysis assumes that a successful auction would occur, at par, at some point
in time for each security.

Contractual Obligations

Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent
liabilities for which we cannot reasonably predict future payment, including contingencies related to potential future development, financing and/or commercial milestone payments on collaboration
agreements. The following chart summarizes our material contractual obligations as of September 30, 2008:

Contractual Obligations

Total

2008

2009

2010

2011

2012

2013 and
beyond(In Thousands)Convertible subordinated debtprincipal(1)

$
689,520

$
72,800

$


$
148,020

$


$


$
468,700ArrowLevalbuterol/ipratropium(2)


70,000





25,000


25,000





20,000


ArrowCiclesonide(3)


47,500





12,500


15,000








20,000Capital lease obligations


1,864


311


1,242


311








Operating leases(4)


4,953


473


1,471


1,312


1,208


489


Purchase obligations(5)


235,401


178,898


44,659


9,099


1,985


760


Total material contractual cash obligations(6)

$
1,049,238

$
252,482

$
84,872

$
198,742

$
3,193

$
21,249

$
488,700


---

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This
table also excludes any liabilities pertaining to uncertain tax positions as we cannot make a reliable estimate of the period of cash settlement with the respective taxing
authorities.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

We are exposed to market risk from changes in interest rates and equity prices, which could affect our future results of operations and
financial condition. These risks are described in Part II, Item 7A of our annual report on Form 10-K for the year ended December 31, 2007. As of November 7,
2008, there have been no material changes to the market risks described in our annual report on Form 10-K for the year ended December 31, 2007. Additionally, we do not
anticipate any near-term changes in the nature of our market risk exposures or in our management's objectives and strategies with respect to managing such exposures.

We
hold auction-rate security investments, which are AAA rated and the underlying assets are backed by pools of student loans guaranteed by FFELP. Due to the recent
uncertainties in the credit market, these securities have been rendered temporarily illiquid, and the fair value of those investments as of September 30, 2008 is estimated to be
$3.8 million below par value. We continue to classify our entire balance of auction-rate securities as non-current available-for-sale investments
at fair value on our unaudited condensed
consolidated balance sheets. We believe we have the ability to hold these investments until the lack of liquidity in these markets is resolved. If current market conditions deteriorate further, we may
be required to record additional unrealized losses in other comprehensive income. If the credit ratings of the security issuers deteriorate, the anticipated recovery in market values does not occur,
or we need funds from the auction-rate securities to meet working capital needs, we may be required to adjust the carrying value of these investments through impairment charges recorded to
earnings, as appropriate, which could be material.

ITEM 4.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management has carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2008. The term "disclosure controls and procedures," as defined
in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or Exchange Act, means controls and other procedures of a company that are designed to ensure
that information required to be disclosed in the reports that the company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal financial officers, as appropriate, to allow timely
decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the
circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives
and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation and the identification of the
material weakness in internal control over financial reporting described below, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2008, our
disclosure controls and procedures were not effective.

A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.

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Our
management has identified the following material weakness in our internal control over financial reporting:

We
did not establish and/or maintain effective controls over the process to identify transactions with the potential to establish a new Medicaid best price which affected the accuracy of
the net revenue and product sales allowances and reserve accounts. Specifically, our controls over the calculation of Medicaid rebates were not designed to effectively monitor whether certain entities
were appropriately exempt from the Medicaid best price calculation. This control deficiency resulted in the restatement of our consolidated financial statements for the years ended December 31,
2006 and 2005 and each quarter in 2006 and the first three quarters of 2007. Additionally, this control deficiency, if not addressed, could result in misstatements of Medicaid rebate liability and
corresponding revenues that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected.

In
light of the material weakness referred to above, we performed additional analyses and procedures in order to conclude that our condensed consolidated financial statements included in
this quarterly report on Form 10-Q are fairly presented, in all material respects, in accordance with generally accepted accounting principles in the United States.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during our quarter ended September 30, 2008 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Remediation Plan

The material weakness noted above was identified by year end 2007. During the nine months ended September 30, 2008, we have
engaged in substantial efforts to address this material weakness and will continue to do so throughout 2008 and into 2009. All of these efforts have been or will be commenced in 2008 and concluded
thereafter in as timely a fashion as is
reasonably possible. Our ongoing improvements to the internal controls designed to address this material weakness have or will include the following, with the assistance of qualified outside legal
counsel:

I)     Measures
have been and will continue to be taken to identify the cause of the material weakness in internal controls over financial reporting, through the following
procedures:



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II)   The
following remediation efforts were and will continue to be implemented by management to remediate the material weakness of internal control over financial
reporting:



We
anticipate that these remediation actions represent ongoing improvement measures, and we expect that they will be fully implemented by the end of the second quarter of 2009. Although
we have devoted, and intend to continue to devote, significant resources to remediating the material weakness, the effectiveness of our remediation efforts will not be known until management next
performs its test of internal controls.

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PART II    OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

Litigation Related to Generic Competition and Patent Infringement

Patent litigation involves complex legal and factual questions. We can provide no assurance concerning the duration or outcome of any
patent related lawsuits. If we, third parties from whom we receive royalties, or third parties from whom we have licensed products or received other rights to commercialize products, are not
successful in enforcing our respective patents, the companies seeking to market generic versions of our marketed drugs and the drugs of our licensees will not be excluded, for the full term of the
respective patents, from marketing their generic versions of our marketed products or third-party products for which we have licensed rights to our patents. Introduction of generic equivalents of any
of our marketed products or third-party products for which
we have licensed rights to our patents before the expiration of our or our collaborators' patents would have a material adverse effect on our business, financial condition and results of operations.



In September 2005, we received notification that the FDA had received an ANDA from Breath, seeking approval of a generic version of our
1.25 mg/3 mL, 0.63 mg/3 mL and 0.31 mg/3 mL XOPENEX Inhalation Solution. Breath's submission includes a Paragraph IV certification alleging that our patents listed in the FDA publication
entitledApproved Drug Products With Therapeutic Equivalence Evaluations,commonly referred to as the "Orange Book," for these three dosages of XOPENEX
Inhalation Solution are invalid, unenforceable or not infringed by the generic version for which Breath sought approval. In October 2005, we filed a civil action against Breath for patent infringement
in the United States District Court for the District of Massachusetts, No. CV:06-10043.

In
April 2008, we entered into a settlement and license agreement with Breath to resolve this litigation. The agreement permits Breath to sell its generic versions of these XOPENEX
Inhalation Solution products in the United States under the terms of an exclusive 180-day license commencing on August 20, 2012 and a non-exclusive license thereafter.
Upon launch, Breath will pay us a double-digit royalty on gross profits generated from the sales of generic versions of these XOPENEX Inhalation Solution products. Under the agreement, Breath agrees
not to sell any of the products covered by our patents that are the subject of the license before the date on which the license commences. On May 1, 2008, the parties submitted to the court an
agreed order of dismissal without prejudice, which the court approved. The litigation is now concluded.

In
April 2008, we also entered into a supply agreement with Breath whereby, effective August 20, 2012, we will exclusively supply levalbuterol products (1.25 mg/3 mL, 0.63 mg/3 mL
and 0.31 mg/3 mL)to Breath, under our NDA for a period of 180 days, which we refer to as the Initial Term, and on a non-exclusive
basis for two and one-half years thereafter. In addition to the royalties described above, Breath will pay us on a cost plus margin basis for supply of these levalbuterol products. The
supply agreement contains provisions regarding termination for cause and convenience, including either party's right to terminate the agreement at any time after the Initial Term upon nine months
written notice. Both the exclusive license under the settlement and license agreement and the exclusive supply obligations under the supply agreement could become effective prior to August 20,
2012 if a third-party launches a generic version of those dosages of XOPENEX Inhalation Solution or if the parties otherwise mutually agree.

In
May 2008, we provided to the Federal Trade Commission and Department of Justice Antitrust Division the notifications of the settlement with Breath as required under
Section 1112(a) of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, or MMA. The settlement

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with
Breath and the other agreements with Breath and its affiliates, including the supply agreement, the agreement for the acquisition of Oryx and license agreements with Arrow, may be reviewed by
antitrust enforcement agencies, such as the Federal Trade Commission and Department of Justice Antitrust Division. There can be no assurances that governmental authorities will not seek to challenge
the settlement with Breath or that a competitor, customer or other third-party will not initiate a private action under antitrust or other laws challenging the settlement with Breath. We may not
prevail in any such challenges or litigation and, in any event, may incur significant costs in the event of an investigation or in defending any action under antitrust laws.

In
January 2006, we received notification that the FDA had received an ANDA from Dey, L.P., seeking approval of a generic version of our 1.25 mg/3 mL, 0.63 mg/3 mL, and 0.31 mg/3
mL XOPENEX Inhalation Solution. Dey, L.P.'s submission includes a Paragraph IV certification alleging that our patents listed in the Orange Book for these three dosages of XOPENEX
Inhalation Solution are invalid, unenforceable, or not infringed by the generic version for which Dey, L.P. is seeking approval. In February 2006, we filed a civil action against
Dey, L.P. for patent infringement and the case is pending in the United States District Court for the District of Delaware, C.A. No. 06-113.

In
August 2006, we received notification that the FDA had received an ANDA from Dey, L.P. seeking approval of a generic version of our 1.25 mg/0.5 mL XOPENEX Inhalation Solution
concentrate. Dey, L.P.'s submission includes a Paragraph IV certification alleging that our patents listed in the Orange Book for 1.25 mg/0.5 mL XOPENEX Inhalation Solution concentrate
are invalid, unenforceable, or not infringed by the generic version for which Dey, L.P. is seeking approval. In September 2006, we filed a civil action against Dey, L.P. for patent
infringement in the United States District Court for the District of Delaware, C.A. No. 06-604. In September 2006, both civil actions we filed against Dey, L.P. were
consolidated into a single suit.

In
May 2007, we received notification that the FDA had received an ANDA from Barr Laboratories, Inc., or Barr, seeking approval of a generic version of our 1.25 mg/3 mL, 0.63 mg/3
mL and 0.31 mg/3 mL XOPENEX Inhalation Solution. Barr's submission includes a Paragraph IV certification alleging that our patents listed in the Orange Book for these three dosages of XOPENEX
Inhalation Solution are invalid, unenforceable or not infringed by the generic version for which Barr is seeking approval. In July 2007, we filed a civil action against Barr for patent infringement
and the case is pending in the United States District Court for the District of Delaware.

In
March 2008, the trial judge consolidated the Dey L.P. and Barr cases for all purposes, including discovery and trial, and the consolidated case is pending as C.A.
No. 06-113. The court held a Markman hearing on July 18, 2008, to address the parties' disputed issues of patent claim
interpretation. The court has not yet issued its decision regarding the disputed issues of patent claim interpretation nor has it formally set a trial date.

In
June 2008, Dey L.P. filed a Complaint against us in the United States District Court for the District of Delaware, C.A. No. 08-372. The Complaint is a
declaratory judgment action in which Dey L.P. seeks a declaration of non-infringement and invalidity of United States Patent 6,451,289 owned by us. Dey L.P. had previously
sent us notice that its ANDA contained a Paragraph IV certification against the 6,451,289 patent, and we did not commence litigation in response. We filed a Motion to Dismiss for lack of
subject matter jurisdiction in response to the Complaint and the court has not yet issued its decision.

The
filing of an action for patent infringement under the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the "Hatch-Waxman Act" results in an automatic
30-month stay of the FDA's authority to grant final marketing approval to those companies that filed an ANDA containing a Paragraph IV certification against one or more of our
XOPENEX Inhalation Solution patents. The first filer of an ANDA with a Paragraph IV certification is potentially entitled to a 180 day period of semi-exclusivity during which
the FDA cannot approve subsequently filed ANDAs.

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The
180 day semi-exclusivity period would begin to run only upon first commercial marketing by the first filer. There are, however, also certain events that could cause the first
filer to forfeit the 180-day semi-exclusivity period, which we refer to as a forfeiture event.

For
our 1.25 mg/3 mL, 0.63 mg/3 mL, and 0.31 mg/3 mL dosages of XOPENEX Inhalation Solution, we believe that Breath is the sole first filer and potentially entitled to 180 days of
semi-exclusivity against subsequent ANDA filers for those three dosages. The 30-month stay against Breath's ANDA expired on March 7, 2008. On April 9, 2008, the
FDA granted final approval to Breath's ANDA for all three dosages. However, if a forfeiture event occurs and the FDA determines that Breath has forfeited the 180 day
semi-exclusivity period for those three dosages, other ANDA filers who have been granted final approval by the FDA could commence an "at risk" launch upon expiration of the
30-month stay. For those three dosages, the 30-month stay against Dey, L.P. expired on July 9, 2008 and the 30-month stay against Barr expires on or
about November 30, 2009.

For
our 1.25 mg/0.5 mL XOPENEX Inhalation Solution concentrate, we believe that Dey, L.P. is the sole first filer and potentially entitled to 180 days of
semi-exclusivity for that concentration. The 30-month stay against Dey, L.P.'s ANDA for that concentration expires on or about February 14, 2009.

Although
we could seek recovery of any damages sustained in connection with any activities conducted by a party that infringes a valid and enforceable claim in our patents, whether we
are ultimately entitled to such damages would be determined by the court in connection with our ongoing legal proceedings with each party desiring to launch generic levalbuterol hydrochloride
products. If any of these parties were to commence selling a generic alternative to our XOPENEX Inhalation Solution products prior to the resolution of these ongoing legal proceedings, or there is a
court determination that the products these companies wish to market do not infringe our patents, or that our patents are invalid or unenforceable, it would have a material adverse effect on our
business, financial condition and results of operations. In addition, our previously issued guidance regarding our projected financial results may no longer be accurate, and we would have to revise
such guidance.



Certain of Schering-Plough's CLARINEX products for which we receive sales royalties are currently the subject of patent infringement
litigation. Since June 2007, the FDA has received ANDAs relating to various dosage forms of CLARINEX from eleven different generic pharmaceutical companies. These ANDA submissions include
Paragraph IV certifications alleging that our patents, which Schering-Plough (as exclusive licensee of such patents) listed in the Orange Book for these products, are invalid, unenforceable or
not infringed by the submitter's proposed product. We and the University of Massachusetts, co-owners of certain patents listed in the Orange Book, filed civil actions against these parties
for patent infringement in the United States District Court for the District of New Jersey. In April 2008, the trial judge consolidated these cases for all purposes including discovery and trial. The
court has not set a trial date. We believe that all of these ANDAs are subject to a statutory stay of approval until at least December 21, 2009 based on previous litigation commenced by
Schering-Plough against these parties in separate civil actions involving another patent.

In
March 2008, we entered into a consent agreement with Glenmark Pharmaceuticals, Inc., or Glenmark, one of the eleven generic pharmaceutical companies that filed a
Paragraph IV certification against our patents, whereby Glenmark agreed not to pursue its case and to not market CLARINEX 5mg tablets until the expiration of our patents listed by
Schering-Plough in the Orange Book or until these patents are found invalid or unenforceable.



Beginning in February 2008, we and UCB, S.A., or UCB, received notices from Synthon Pharmaceuticals, Inc., or Synthon,
Sun Pharmaceutical Industries Limited of Andheri (East), or Sun,

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Sandoz Inc.,
or Sandoz and Pliva Hrvatska D.O.O. and Barr, or Pliva/Barr, that each has filed an ANDA seeking approval to market a generic version of XYZAL 5 mg tablets, and that each ANDA
contained a Paragraph IV certification alleging that United States Patent 5,698,558, owned by us and exclusively licensed to UCB, is invalid, unenforceable or not infringed. Beginning in April
2008, UCB filed in its name and on our behalf civil actions in the United States District Court for the Eastern District of North Carolina against Synthon, Sun, Sandoz, Pliva and Barr (Pliva's agent),
an action against Synthon in the United States District Court for the District of Delaware, and actions against Sun and Pliva/Barr in the United States District Court for the District of New Jersey.
The actions in Delaware and New Jersey have been voluntarily dismissed. We believe that all of these ANDAs are subject to a 30-month statutory stay of approval, the earliest of which,
against Synthon, is scheduled to expire on or about August 29, 2010.

BROVANA Patent Infringement Claim

In April 2007, we were served with a Complaint filed in the United States District Court for the Southern District of New York, C.A.
No. 1:07-cv-2353, by Dey, L.P. and Dey, Inc., referred to collectively as Dey, alleging that the manufacture and sale of BROVANA infringes or will induce
infringement of a single United States patent for which Dey owns all rights, title and interest. In April 2007, we filed an Answer and Counterclaims to this Complaint seeking to invalidate the
originally asserted patent and a second related patent. In May 2007, Dey filed a reply asserting infringement of the second patent. Under the current trial scheduling order, the trial will begin no
earlier than October 2, 2009. It is too early to make a reasonable assessment as to the likely outcome or impact of this litigation. We are unable to reasonably estimate any possible range of
loss or liability related to this lawsuit due to its uncertain resolution.

In
March 2008, United States Patent 7,348,362, or the '362 patent, entitled "Bronchodilation b-agonist compositions and Methods" issued and Dey, L.P. is the assignee
of the patent. In August 2008, the court granted our Motion to Amend our Answer and Counterclaims to seek declaratory judgment that the '362 patent is invalid and unenforceable and to add
Mylan Inc. as a party.

XOPENEX Inhalation Solution LCA Matter

In March 2006, the parties responsible for administrating the Medicare Part B prescription drug benefit for respiratory products
on behalf of the CMS, which we refer to collectively as the Medicare Administration Subcontractors, announced their intention to implement a Least Costly Alternative, or LCA, reimbursement action for
XOPENEX Inhalation Solution. If implemented, the LCA would reduce the Medicare Part B reimbursement paid for XOPENEX Inhalation Solution to the level of generic racemic albuterol.

The
LCA announcement in March 2006 was subsequently stayed by the Medicare Administration Subcontractors pending a National Coverage Analysis by CMS that we expected would determine the
criteria for when XOPENEX Inhalation Solution would be appropriate for use by the Medicare population. CMS ultimately did not establish any national coverage criteria for short-acting
beta-agonists and instead deferred any such action to the Medicare Administration Subcontractors. On April 10, 2008, the Medicare Administration Subcontractors announced their
intention to implement the previously announced LCA, effective July 1, 2008.

In
June 2008, a preliminary injunction motion seeking to block the implementation of the LCA policy in advance of its July 1, 2008 effective date was filed in the District Court
for the District of Columbia against certain of the Medicare Administration Subcontractors, among others, by four Medicare beneficiaries utilizing XOPENEX Inhalation Solution. These Medicare
beneficiaries stated in the motion that they would be denied access to this drug if the LCA was implemented and as a result would suffer irreparable injury. Shortly following the filing of the motion,
the Medicare Administration

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Subcontractors
announced they would suspend the LCA and not reinstate it at any time prior to December 31, 2008. CMS filed a motion to dismiss the Medicare beneficiary lawsuit on the grounds
that the case is moot since, as given their decision to suspend the LCA, no LCA is in effect or pending that could cause irreparable injury to the beneficiaries.

The
reimbursement paid by CMS for XOPENEX Inhalation Solution has fallen significantly since July 1, 2007 as a result of the implementation of the blended Medicare Part B
reimbursement rate for XOPENEX Inhalation Solution and generic racemic albuterol. Due to the decrease in the reimbursement rate, we have decided to no longer contract with home health care providers
for XOPENEX Inhalation Solution beginning January 1, 2009. Accordingly, the Medicare beneficiaries have withdrawn the case as it is now moot and no further action is expected from the court.

Class Action Litigation Settlement

In June 2007, we filed in the United States District Court for the District of Massachusetts, or the Court, a Stipulation of Settlement
regarding two securities class action lawsuits, or class actions, then pending in the Court naming Sepracor and certain of our current and former officers and one director as defendants. The class
actions, which were filed on behalf of certain purchasers of our equity and debt securities, or the plaintiffs, alleged that the defendants violated the Federal securities laws by making false and
misleading statements relating to the testing, safety and likelihood of approval of tecastemizole by the FDA. Under the terms of the Stipulation of Settlement, in June 2007 we paid into escrow
$52.5 million in settlement of the class actions and, in July 2007, received an $18.5 million reimbursement from our insurance carriers. We recorded the litigation settlement expense of
$34.0 million, relating to this matter, during the quarter ended March 31, 2007. In September 2007, the Court granted final approval of the Stipulation of Settlement and entered a final
judgment consistent with the Stipulation of Settlement. The settlement is now final and the total settlement amount has been released from escrow.

Other Legal Proceedings

We have been named as the defendant in two separate lawsuits filed in the United States District Court for the Middle District of
Florida (Sharp, et al., filed July 17, 2008) and the United States District Court for the District of Arizona (Greaves, et al., served September 9, 2008) claiming that our pharmaceutical
sales representatives should have been categorized as "non-exempt" rather than "exempt" employees under the Fair Labor Standards Act. Both lawsuits claim that we owe damages, overtime
wages, interest, costs and attorneys' fees for periods preceding the filing of the respective actions. Other companies in the pharmaceutical industry face substantially similar lawsuits. Based upon
the facts as presently known, we do not believe that it is likely that either collective action will result in liability that would be material to our financial position. We believe these lawsuits are
without merit and we are prepared to defend against them vigorously.

From
time to time we are party to other legal proceedings in the course of our business. We do not, however, expect such other legal proceedings to have a material adverse effect on our
business, financial condition or results of operations.

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ITEM 1A.    RISK FACTORS

You should carefully consider the risks described below in addition to the other information contained in this report, before making an
investment decision. Our business, financial condition or results of operations could be harmed by any of these risks. The risks and uncertainties described below are not the only ones we face.
Additional risks not currently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations, financial condition
or results from operations.

Risks Related to Our Financial Results and Our Common Stock

We have a history of net losses and we may not be able to generate revenues sufficient to achieve and maintain profitability on a quarterly and annual basis.

Until the year ended December 31, 2006, we had incurred net losses each year since our inception. It is possible we will not be
able to maintain profitability on a quarterly or annual basis. We expect to continue to incur significant operating expenditures to further develop and
commercialize our products and product candidates and in order to allow us to otherwise expand our product portfolio through drug discovery and business development efforts. As a result, we will need
to generate significant revenues in future periods to achieve and maintain profitability. We cannot provide assurance that we will be able to maintain profitability for any substantial period of time.
If revenues grow more slowly than we anticipate or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be
materially and adversely affected. In addition, if we are unable to achieve, maintain or increase profitability on a quarterly or annual basis, the market price of our common stock may decline.

Almost all of our revenues are derived from sales of LUNESTA and XOPENEX Inhalation Solution, and our future success depends on the continued commercial success of these
products as well as our other products.

Approximately 80% of our total revenues for the nine months ended September 30, 2008 and approximately 89% of our total revenues
for the year ended December 31, 2007 resulted from sales of LUNESTA and XOPENEX Inhalation Solution, and we expect that sales from these two products will continue to represent a significant
majority of our revenues for the coming year. However, unit sales for both LUNESTA and XOPENEX Inhalation Solution decreased during the nine months ended September 30, 2008, as compared to the
same period during the prior year, and may continue to decrease. As a result of the introduction of zolpidem tartrate, the generic equivalent to AMBIEN®, and other competitive products
being marketed or developed by others, LUNESTA's market share and unit sales may continue to decrease. In addition to the decrease in XOPENEX Inhalation Solution unit sales, revenues from the sale of
XOPENEX Inhalation Solution have been, and we expect will continue to be, adversely affected on a comparable basis as a result of changes in the Medicare Part B reimbursement rate. Moreover,
the growth of the overall non-generic pharmaceutical market, which includes branded drugs such as LUNESTA and XOPENEX Inhalation Solution, has been declining, and may continue to decline,
as a result of economic conditions and managed care trends. If sales of LUNESTA do not increase and if sales of XOPENEX Inhalation Solution in other markets do not offset the reduction in revenues
resulting from the changes in Medicare Part B reimbursement for the product, we may not have sufficient revenues to achieve our business plan or repay our outstanding debt, and our business
will not be successful.

We
do not have long-term sales contracts with our customers, and we rely primarily on purchase orders for sales of LUNESTA, XOPENEX Inhalation Solution and our other marketed
products. Reductions, delays or cancellations of orders for LUNESTA, XOPENEX Inhalation Solution or our other marketed products could adversely affect our operating results. Any other adverse
developments with respect to the sale of LUNESTA or XOPENEX Inhalation Solution could significantly reduce

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revenues
and have a material adverse effect on our ability to maintain profitability and achieve our business plan.

We
cannot be certain that we will be able to continue to successfully commercialize LUNESTA and/or XOPENEX Inhalation Solution, that we will be able to successfully commercialize
BROVANA, XOPENEX HFA, OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol, or that any of our products will be accepted in their markets. Specifically, the following factors, among others, could
affect the level of success and market acceptance of our products:



In
addition, a number of the patents we own and/or license to third parties and for which we receive sales revenue or royalties are the subject of patent invalidation or revocation
claims by companies seeking to introduce generic equivalents of the products covered by such patents. We can provide no assurance concerning the duration or outcome of any patent-related lawsuits. If
we, or third parties from whom we receive royalties, are not successful in enforcing our respective patents, the companies seeking to market generic versions will not be excluded from marketing their
generic versions of these products. Introduction of generic equivalents of any of these products before the expiration of our patents or the patents of our licensees could have a material adverse
effect on our business.

Sales of XOPENEX Inhalation Solution have been adversely affected as a result of the changes in the Medicare Part B reimbursement rate, and our revenue may be further
adversely affected as a result these changes.

In May 2007, CMS announced that based on its interpretation of the statutory language of the MMA, it was required to discontinue the
stand-alone reimbursement for XOPENEX Inhalation Solution and generic albuterol, which had been in place since January 2005, and instead calculate the reimbursement for XOPENEX Inhalation Solution and
generic albuterol based on the blended weighted average selling price, or ASP, for the two products. This new reimbursement became effective on July 1, 2007. Using a blended weighted ASP for
XOPENEX Inhalation Solution results in reimbursement for the product that is considerably lower than the published selling price for the product in the wholesaler distribution channel. The new
reimbursement rate is subject to change

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quarterly
based upon the respective contribution of commercial sales of XOPENEX Inhalation Solution and generic albuterol to the quarterly blended weighted ASP calculation. This quarterly ASP
calculation is mandated by the MMA. Revenues from the sale of XOPENEX Inhalation Solution have
been, and we expect will continue to be, adversely affected on a comparable basis as a result of this change.

On
December 29, 2007, President Bush signed into law legislation, the effect of which is two-fold with respect to XOPENEX Inhalation Solution. First, the legislation
mandates that XOPENEX Inhalation Solution and generic albuterol be reimbursed at the lower of their stand-alone weighted ASP and the blended weighted ASP for XOPENEX Inhalation Solution and generic
albuterol. Since the bundling action described above resulted in an unintended increase in Medicare Part B reimbursement for generic albuterol, significantly higher than the product's ASP (as
publicly reported by the Medicare Part B program), the legislation eliminated the potential for inappropriate reimbursement incentives to influence the dispensing decisions of providers.
Second, the legislation passed by Congress, and signed into law by President Bush, included a change in the methodology CMS uses to calculate quarterly ASP. This change has resulted in further
downward pressure on the Medicare Part B reimbursement for XOPENEX Inhalation Solution, particularly when applied to the blended albuterol/XOPENEX Inhalation Solution ASP calculation.

We
estimate that as much as 15% of our XOPENEX Inhalation Solution units sold are subject to reimbursement under Medicare Part B. The reimbursement paid by CMS for XOPENEX
Inhalation Solution has fallen significantly since July 1, 2007 as a result of the implementation of the blended Medicare Part B reimbursement rate for XOPENEX Inhalation Solution and
generic albuterol. Due to the decrease in the reimbursement rate, we have decided to no longer contract with home health care providers for XOPENEX Inhalation Solution beginning January 1,
2009. Accordingly, we expect that our sales to Medicare Part B providers will decrease and, as a result, our aggregate unit sales and revenues will decrease. However, we expect the decrease in
revenues will be proportionately less than the decrease in unit sales due to a reduction in the Medicaid rebate liability associated with sales of XOPENEX Inhalation Solution in the home health care
market.

We have significant debt and we may not be able to make principal payments when due.

As of September 30, 2008, our total debt was approximately $689.5 million. None of our 0% Series A notes due
December 2008, our 0% Series B notes due December 2010 or our 0% notes due October 2024 restricts us or our subsidiaries' ability to incur additional indebtedness, including debt that ranks
senior to the notes. The 0% notes due 2024 are senior to the Series A notes due 2008 and Series B notes due 2010. Additional indebtedness that we incur may in certain circumstances rank
senior to or on parity with this debt. Our ability to satisfy our obligations will depend upon our future performance, which is subject to many factors, including factors beyond our control. The
conversion prices for the 0% Series A notes due 2008 and 0% Series B notes due 2010 are $31.89 and $29.84, respectively. In December 2008, $72.8 million will be due on our 0%
Series A notes. On October 31, 2008, the closing sale price of our common stock was $13.32. If the market price for our common stock does not exceed the conversion price, the holders of
our outstanding convertible debt may decide not to convert their securities into common stock. For example, the holders of our 5% debentures did not convert such debentures into common stock, and on
February 15, 2007, the maturity date for the 5% debentures, we repaid in cash the entire principal amount of $440.0 million, plus $11.0 million of accrued interest. Our 0% notes
due 2024 are convertible into cash and, if applicable,
shares of our common stock at a conversion price of approximately $67.20, at the option of the holders in October 2009, 2014, 2019 and 2024, as well as under certain circumstances. We may not be able
to make the required cash payments upon maturity of our 0% Series B notes due 2010 or upon conversion of our 0% notes due 2024.

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Historically,
we have had negative cash flow from operations, and in 2006, we experienced our first full year of positive cash flow from operating activities. Unless we have sufficient
cash or are able to generate sufficient operating cash flow to pay off the principal of our outstanding debt, we will be required to raise additional funds or default on our obligations under the
debentures and notes. If revenue generated from sales of our products do not meet expected levels, it is unlikely that we would have sufficient cash flow to repay our outstanding convertible debt
and/or make cash payments upon maturity of the 0% Series B notes due 2010 or upon conversion of the 0% notes due 2024. There can be no assurance that, if required, we would be able to raise the
additional funds on favorable terms, if at all.

If we exchange debt for shares of common stock, there will be additional dilution to holders of our common stock.

As of September 30, 2008, we had approximately $220.8 million of outstanding debt that could be converted into common
stock and an additional $468.7 million of outstanding debt that could be converted into cash and, if applicable, shares of our common stock. In order to reduce future payments due at maturity,
we may, from time to time, depending on market conditions, repurchase additional outstanding convertible debt for cash; exchange debt for shares of our common stock, warrants, preferred stock, debt or
other consideration; or a combination of any of the foregoing. The amounts involved in any such transactions, individually or in the aggregate, could be material. If we exchange shares of our capital
stock, or securities convertible into or exercisable for our capital stock, for outstanding convertible debt or use proceeds from the issuance of convertible debt to fund redemption of outstanding
convertible debt with a higher conversion ratio, the number of shares that we might issue as a result of such exchanges would significantly exceed the number of shares originally issuable upon
conversion of such debt and, accordingly, such exchanges would result in material dilution to holders of our common stock. Repurchase of the notes could also adversely affect the trading market for
such notes if the public float in such notes is materially reduced. We cannot provide assurance that we will repurchase or exchange any additional outstanding convertible debt.

We have identified a material weakness in our internal control over financial reporting that could adversely affect our ability to meet reporting obligations and negatively
affect the trading price of our stock.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is
a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. Accordingly, a material weakness
increases the risk that the financial information we report contains material errors. As more fully described in Part I, Item 4, "Controls and Procedures" of this quarterly report on
Form 10-Q, we have determined that we did not establish and/or maintain effective controls over the process to identify transactions with the potential to establish a new Medicaid
best price, which affected the accuracy of the net revenue and product sales allowance and return accounts. Specifically, our controls over the calculation of Medicaid rebates were not designed to
effectively monitor whether certain entities were appropriately exempt from the Medicaid best price calculation. Our management has determined that this control deficiency constitutes a material
weakness, which resulted in the restatement of our consolidated financial statements as of and for the years ended December 31, 2006 and 2005 and selected financial data as of and for the years
ended December 31, 2006, 2005, 2004 and 2003, as set forth in our Form 10-K filed on February 29, 2008, and the restatement of our unaudited quarterly information for
the fiscal quarters ended March 31, June 30 and September 30, 2007 and 2006, as set forth in our amended and restated quarterly reports for these periods filed on
Form 10-Q/A on May 7, 2008.

While
we have taken, and will continue to take, steps to remediate the identified material weakness, these steps may not be adequate to fully remediate the material weakness. In
addition, we

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may
identify additional control deficiencies in the future that individually or in the aggregate constitute a material weakness. If we fail to adequately remediate the identified material weakness or
there are other undetected or uncorrected deficiencies in our internal controls, we could fail to meet our reporting obligations, we could have material misstatements in our financial statements and,
under certain circumstances, could be subject to legal liability. In addition, inferior controls could cause investors to lose confidence in our reported financial information, which could have a
negative effect on the trading price of our common stock.

If the estimates we make, or the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may vary from those reflected in
our projections and accruals.

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets,
liabilities, net revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances. We cannot provide assurance, however, that our estimates, or the assumptions underlying them, will not be materially
different from actual results. For example, our royalty revenue is recognized based upon our estimates of our collaboration partners' sales during the period and, if these sales estimates are greater
than the actual sales that occur during the period, our net income would be reduced. In addition, we estimate product sales allowances, including payment term discounts, government and commercial
rebates and returns and other discounts. If actual amounts differ from these estimates, net income could be adversely affected. Each, in turn, could adversely affect our financial condition, results
from operations and stock price.

If sufficient funds to finance our business are not available to us when needed or on acceptable terms, then we may be required to delay, scale back, eliminate or alter our
strategy for our programs.

We may require additional funds for our research and product development programs, operating expenses, repayment of debt, the pursuit
of regulatory approvals, license or acquisition opportunities and the expansion of our production, sales and marketing capabilities. Historically, we have satisfied our funding needs through
collaboration arrangements with corporate partners, sales of products, and equity and debt financings. These funding sources may not be available to us when needed in the future, and, if available,
they may not be on terms acceptable to us. Insufficient funds could require us to delay, scale back, eliminate or alter certain of our research and product development programs and/or
commercialization efforts or to enter into license agreements with third parties to commercialize products or technologies that we would otherwise develop or commercialize ourselves. Our cash
requirements may vary materially from those now planned because of factors including:



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Our effective tax rate may increase or fluctuate, which could increase our income tax expense and reduce our net income.

Our effective tax rate could be adversely affected by several factors, many of which are outside of our control,
including:



Our long-term investments include auction-rate securities that may not be accessible within the next 12 months and may experience a decline in
value, which may adversely affect our liquidity and income.

At September 30, 2008, $77.1 million of our investment portfolio was invested in AAA rated investments in
auction-rate securities. Auction-rate securities are long-term variable rate bonds tied to short-term interest rates. After the initial issuance of the
securities, the interest rate on the securities is reset periodically, at intervals established at the time of issuance (primarily every 28 days), based on market demand for a reset period.
Auction-rate securities are bought and sold in the marketplace through a competitive bidding process often referred to as an auction. If there is insufficient interest in the securities at
the time of an auction, the auction may not be completed and the rates may be reset to predetermined "penalty" or "maximum" rates.

Substantially
all of our auction-rate securities are backed by pools of student loans guaranteed by FFELP, and we continue to believe that the credit quality of these
securities is high based on this guarantee and other collateral. Auctions for these securities began failing in the first quarter of 2008 and continued to fail throughout the second and third
quarters, which we believe is a result of the recent uncertainties in the credit markets. Consequently, the investments are not currently liquid, and we will not be able to access these funds until a
future auction of these investments is successful, a buyer is found outside of the auction process, the security is called or the underlying securities have matured. At the time of our initial
investment and through the date of this report, all of our auction-rate securities remain AAA rated. We believe we have the ability to hold these investments until the lack of liquidity in
these markets is resolved. As a result, we continue to classify the entire

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balance
of auction-rate securities as non-current available-for-sale investments at fair value on our unaudited condensed consolidated balance sheet.

Typically,
the fair value of auction-rate securities investments approximates par value due to the frequent resets through the auction process. While we continue to earn
interest on our auction-rate securities investments at the contractual rate, these investments are not currently trading and therefore do not have a readily determinable market value.
Accordingly, the estimated fair value of the auction-rate securities no longer approximates par value.

At
September 30, 2008, because of the temporary declines in fair value for the auction-rate securities, which we attribute to liquidity matters rather than credit
issues as discussed above, we have classified our auction-rate securities at Level 3, as defined under SFAS 157 framework and described in Note 13 "Fair Value
Measurements", of our condensed consolidated financial statements included in this quarterly report on Form 10-Q, with a fair value of $77.1 million. The fair value of these
auction-rate securities are estimated utilizing a trinomial discounted cash flow analysis, which was compared, when possible, to other observable market data or inputs with similar
characteristics. The assumptions used in preparing the discounted cash flow analysis include estimates for the maximum interest rate, the probability of passing, failing or default at each auction,
the severity of default and the discount rate. Based on this assessment of fair value, as of September 30, 2008, we determined there was a decline in fair value of our auction-rate
securities investments of $3.8 million, which we deem temporary. If current market conditions deteriorate further, we may be required to record additional unrealized losses in other
comprehensive income. If the credit ratings of the security issuers deteriorate, the anticipated recovery in market values does not occur, or we need funds from the auction-rate securities
to meet working capital needs, we may be required to adjust the carrying value of these investments through impairment charges recorded to earnings, as appropriate, which could be material.

Fluctuations in the demand for our products, the success and timing of clinical trials, regulatory approvals, product introductions, collaboration and licensing
arrangements, any termination of development efforts and other material events will cause fluctuations in our quarterly operating results, which could cause volatility in our stock price.

Our quarterly operating results are likely to fluctuate significantly, which could cause our stock price to be volatile. These
fluctuations will depend on many factors, including:



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We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate our stockholders' ability to sell their shares for a premium in a change
of control transaction.

Various provisions of our certificate of incorporation and by-laws and of Delaware corporate law may discourage, delay or
prevent a change of control or takeover attempt of our company by a third-party that is opposed by our management and board of directors. Public stockholders who might desire to participate in such a
transaction may not have the opportunity to do so. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change of control or
change in our management and board of directors. These provisions include:



In
addition, in June 2002, our board of directors adopted a shareholder rights plan, the provisions of which could make it more difficult for a potential acquirer of Sepracor to
consummate an acquisition transaction.

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The price of our common stock historically has been volatile, which could cause the loss of part or all of an investment in Sepracor.

The market price of our common stock, like that of the common stock of many other pharmaceutical and biotechnology companies, has been
highly volatile. In addition, the stock market has experienced extreme price and volume fluctuations. The volatility and market prices of securities of many pharmaceutical and biotechnology companies
have been significantly affected for reasons frequently unrelated to or disproportionate to the operating performance of the specific companies. These broad market fluctuations may adversely affect
the market price of our common stock. Prices for our common stock are determined in the marketplace and may be influenced by many factors, including variations in our financial results and investors'
perceptions of us, and changes in recommendations by securities analysts as well as their perceptions of general economic, industry and market conditions.

Risks Related to Commercialization

We face intense competition and many of our competitors have greater resources and capabilities than we have.

We face intense competition in the sale of our current products, and expect to face intense competition in the sale of any future
products we sell. If we are unable to compete effectively, our financial condition and results of operations could be materially adversely affected because we may not achieve our product revenue
objectives and because we may use our financial resources to seek to differentiate ourselves from our competition. Large and small companies, academic institutions, governmental agencies and other
public and private organizations conduct research, seek patent protection, develop and acquire products, establish collaborative arrangements for product development and sell or license products in
competition with us. Many of our competitors and potential competitors have substantially greater resources, manufacturing and sales and marketing capabilities, research and development staff and
production facilities than we have. The fields in which we compete are subject to rapid and substantial technological change. Our competitors may be able to respond more quickly to new or emerging
technologies or to devote greater resources to the development, manufacture and marketing of new products and/or technologies than we can. As a result, any products and/or technologies that we develop
may become obsolete or noncompetitive before we can recover expenses incurred in connection with their development.



For insomnia treatments, LUNESTA faces intense competition from established branded and generic products in several drug classes
including benzodiazepines, non-benzodiazepines, melatonin agonists, select antidepressants, and others. We estimate that our existing LUNESTA prescriptions account for less than 10% of the
total, annual prescriptions currently being written in the United States for insomnia pharmaceutical therapies. Furthermore, LUNESTA faces substantial competition from non-prescription,
over-the-counter and dietary supplement insomnia product options. During the nine months ended September 30, 2008, partially as a result of increasing competition,
LUNESTA unit sales and market share have been decreasing. We expect that LUNESTA will face increasing competition from a generic version of AMBIEN, which was introduced in April 2007, a generic
version of AMBIEN CR® (zolpidem tartrate extended release), which we believe could be introduced as early as March 2009, and therapies in clinical development and under FDA review for the
treatment of insomnia. We may also face additional competition in the event of commercial introduction of a generic version of LUNESTA. To continue to be successful with LUNESTA, we must continue to
demonstrate that LUNESTA's safety and efficacy features are superior to those of competing branded and generic products, some of which may be less expensive than LUNESTA.

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For asthma and COPD treatments, XOPENEX Inhalation Solution and XOPENEX HFA face intense competition from a variety of products.
Patients with asthma and COPD turn to numerous classes of drugs, including corticosteroids, long-acting beta-agonists, short-acting beta-agonists, leukotriene
modifiers, anticholingerics, and others, as well as certain combinations thereof. XOPENEX Inhalation Solution and XOPENEX HFA together account for approximately 3% of the total annual prescriptions
currently being written in the United States for asthma and COPD pharmaceutical therapies. XOPENEX Inhalation Solution and XOPENEX HFA also face intense competition specifically within the
beta-agonist classes of asthma and COPD treatments. We estimate that our existing XOPENEX prescriptions account for approximately 11% of the total annual prescriptions currently being
written in the United States for beta-agonist asthma and COPD pharmaceutical therapies.

Both
monotherapy and combination therapy beta-agonist treatments compete directly with our XOPENEX products for the treatment of asthma and COPD. Albuterol, a short-acting
beta-agonist, has been available generically for many years. Products containing albuterol as an active ingredient are well established and sell at prices substantially lower than XOPENEX
Inhalation Solution and XOPENEX HFA. XOPENEX HFA also faces direct competition from chlorofluorocarbon, or CFC, containing albuterol MDIs and branded HFA albuterol MDIs. With the phase-out
of CFC albuterol MDI products required by the end of December 2008, we expect that competition from branded HFA MDIs will increase substantially. Furthermore, as a consequence of the ongoing
commercialization of BROVANA, prescription levels for XOPENEX Inhalation Solution may be adversely affected to the extent that a significant number of physicians prescribe BROVANA, which could reduce
the need for concomitant XOPENEX products. We may also face additional competition in the event of the commercial introduction of generic versions of our XOPENEX products.

To
be successful with our XOPENEX products, we must demonstrate that the efficacy and safety features of these drugs outweigh the higher price as compared to generic albuterol and other
competing products and that these attributes differentiate these products from other asthma and COPD treatments, including beta-agonist asthma and COPD treatments.



For COPD treatments solely, BROVANA faces competition from a variety of products. Competitive products include all products used in the
treatment of COPD. Patients with COPD turn to numerous classes of drugs including anticholingerics, corticosteroids, mukolytics, long-acting beta-agonists, short-acting
beta-agonists, theophyllines, and others to treat their condition. We estimate that our existing BROVANA prescriptions account for less than 1% of the total annual prescriptions currently
being written in the United States for COPD pharmaceutical therapies, and less than 1% of beta-agonist COPD pharmaceutical therapies specifically. Even though BROVANA is a nebulized
product, it also faces competition from long-acting beta-agonists and anticholinergics delivered by MDI and dry-powder inhaler. BROVANA also competes with
combination therapy products used for COPD. In the fourth quarter of 2007, PERFOROMIST (formoterol fumarate) Inhalation Solution, a direct competitor with BROVANA, was launched, which we
anticipate may impact adversely BROVANA's prescription levels. To be successful with BROVANA, we must demonstrate that patients with COPD will benefit by using BROVANA.

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OMNARIS Nasal Spray, a corticosteroid nasal spray, competes with perennial and seasonal allergic rhinitis treatments, and faces
competition from oral antihistamines, intranasal antihistamines, intranasal decongestants, other intranasal corticosteroids, intranasal mast cell stabilizers, and antileukotrienes. We estimate that
our existing OMNARIS Nasal Spray prescriptions account for less than 1% of the total annual prescriptions currently being written in the United States for allergic rhinitis pharmaceutical therapies,
and less and 1% of inhaled nasal corticosteroid allergic rhinitis pharmaceutical therapies, specifically. To be successful with OMNARIS Nasal Spray, we must demonstrate that OMNARIS Nasal Spray's
safety and efficacy features are superior to those of competing branded and generic products, some of which may be less expensive than OMNARIS Nasal Spray and may be available without a prescription.
We may also face additional competition in the event of commercial introduction of a generic version of OMNARIS Nasal Spray.



ALVESCO HFA Inhalation Aerosol, an inhaled corticosteroid in a MDI, competes with other asthma therapies, including asthma controller
therapies, and faces competition from leukotriene receptor antagonists, inhaled corticosteroid/long-acting beta-agonist combinations, monotherapy long-acting
beta-agonists and other monotherapy inhaled corticosteroids. In addition, several of the aforementioned categories will have generic product entries in the future, which will likely result
in competitive products that are less expensive than ALVESCO HFA Inhalation Aerosol. To be successful with ALVESCO HFA Inhalation Aerosol, we must demonstrate that its safety and efficacy features are
superior to that of competing branded products and, upon the entry of generic competition, these features outweigh the higher price compared to such generic competition.

For
all of our products, we need to demonstrate to physicians, patients, and third-party payors that the cost of our product is reasonable and appropriate in light of its safety,
efficacy, and health care benefits, each as compared to other competing products. The growth of the overall market for branded pharmaceutical products, such as ours, has been decreasing, and we expect
it will continue to decrease, due to increased generic competition, economic conditions and managed care trends. In addition, if competitors introduce new products or develop new processes or new
information about existing products, then our products, even those protected by patents, may be replaced in the marketplace or we may be required to lower our prices.

We may be unable to successfully commercialize products for which we receive approval from the FDA or similar foreign agencies.

Commercialization of a product for which we have received an approval letter from the FDA or similar foreign agency could be delayed
for a number of reasons, some of which are outside of our control, including delays in delivery of the product due to importation regulations and/or problems with our distribution channels or delays
in the issuance of approvals from, or the completion of, required procedures by agencies other than the FDA, such as the United States Drug Enforcement Administration. In addition, commercialization
of approved products may be delayed by our failure to timely finalize distribution arrangements, manufacturing processes and arrangements, produce sufficient inventory and/or properly prepare our
sales force. If we are unable to successfully commercialize a product promptly after receipt of an approval letter, our business and financial position may be materially adversely affected due to
reduced revenue from product sales during the period or periods that commercialization is delayed and the shortening of any lead time to market we may have had over our competitors. In addition, the
exclusivity period, which is the time during which the FDA or similar foreign agency will prevent generic pharmaceutical companies from introducing a generic copy of the product, begins to run upon
approval and, therefore, to the extent we are unable to successfully

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commercialize
a product promptly after receipt of an approval letter, our long-term product sales and revenues could be adversely affected.

Even
if the FDA or similar foreign agencies grant us regulatory approval of a product, if we fail to comply with the applicable regulatory requirements, we may be forced to suspend
and/or cease commercialization of the product due to suspension or withdrawal of regulatory approvals, product recalls, seizures of products and/or operating restrictions and may be subject to fines
and criminal prosecution. In any such event, our ability to successfully commercialize the product would be impaired and sales and revenues could be materially adversely affected.

We may increase or decrease the size of our sales force in the future based on factors such as inaccurate assumptions. Such increases may be done in anticipation of
approvals and/or expected sales growth that are not realized. If such approvals and/or growth are not realized, we will have incurred unnecessary expense and may also be forced to reduce our sales
force. Future reductions in our sales force could prevent us from achieving anticipated revenues and attracting and retaining qualified sales personnel and could negatively impact our financial
condition and results of operations.

We sell our products primarily through our direct sales force. During the fourth quarter of 2007, we reduced our direct sales force by
approximately 300 positions. We recently increased our sales force capacity in order to accommodate the commercialization of OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol. The costs of the
increase in sales force capacity willoffset the decrease in sales and marketing expenses we expected to realize as a result of the December 2007 sales force reduction. Any future expansion of the
direct sales force will also require us to incur significant expenses. To the extent we expand our direct sales force in anticipation of receiving marketing approval for products under development,
commercially introducing newly developed or acquired products and/or expected sales growth, we may again be forced to reduce our sales force if our expectations are not realized. In addition, our
sales force reduction, and any future sales force reduction, may make it more difficult for us to attract the qualified sales people necessary to implement necessary sales force expansion, attract and
retain qualified sales people necessary to maintain sales levels and/or to support potential sales growth and sales of additional products we may commercialize in the future.

We sell our products primarily through a direct sales force, and if we are not successful in attracting and retaining qualified sales personnel, we may not be successful in
commercializing our products.

We have established a sales force to market our products. Our ability to realize significant revenues from direct marketing and sales
activities depends on our ability to attract and retain qualified sales personnel. Competition for qualified sales personnel is intense. Our sales force reduction in late 2007 could harm our ability
to attract and retain qualified sales personnel, which would prevent us from successfully expanding our marketing and direct sales force on a timely or cost effective basis and from successfully
commercializing our newly acquired products. In addition, any failure to attract and retain qualified sales personnel in the future, could impair our ability to maintain sales levels, successfully
commercialize new products and/or support expected future sales growth. Our sales force reduction in late 2007, and any future sales force reduction, could also result in temporary lack of focus and
reduced productivity among our sales personnel. If our sales organization does not devote the time and resources necessary to attain sales projections, we may not be able to achieve anticipated
revenues and our financial condition and operating results could be harmed.

We
increased our sales force capacity in order to accommodate the commercialization of OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol. This increase is being effectuated through
the services of a contract sales organization. We may also need to enter into additional co-promotion, contract sales force or other such arrangements with third parties, for example,
where our own direct sales force is not large enough or sufficiently well aligned to achieve maximum penetration in the market. We may not be successful in entering into any co-promotion,
contract sales

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force
or other such arrangements, and the terms of any co-promotion, contract sales force or other such arrangements may not be favorable to us.

We may not be able to meet the unique operational, legal and financial challenges that we will encounter in our international operations, which may limit the growth of our
business.

Our success will depend in part on our ability to obtain approval for and market and sell our products in foreign markets. We undertake
these activities both on our own and in conjunction with strategic partners. Expanding sales of our products and operations internationally could impose substantial burdens on our resources, divert
management's attention from domestic operations and otherwise adversely affect our business. Furthermore, international operations are subject to several inherent risks
including:



If
we are unable to meet and overcome these challenges, our international operations may not be successful, which would limit the growth of our business and could adversely impact our
results of operations.

If we, our collaboration partners or our third-party manufacturers do not comply with current GMP regulations, then the FDA or other regulatory authorities could refuse to
approve marketing applications or force us to recall or withdraw our marketed products.

The FDA and other regulatory authorities require that our products be manufactured according to their good manufacturing practices, or
GMP, regulations. The failure by us, our collaborative partners or our third-party manufacturers to comply with current GMP regulations could lead to delay in our development programs or refusal by
the FDA or other regulatory authorities to approve marketing applications. Following marketing approval of a product, failure in either respect could also impede commercial introduction or ongoing
distribution of the product and/or be the basis for action by the FDA or other regulatory authorities to withdraw approvals previously granted, to recall products and for other regulatory action.

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We could be exposed to significant liability claims that could prevent or interfere with our product commercialization efforts.

We may be subject to product liability claims that arise through clinical testing, manufacturing, marketing, sale and use of
pharmaceutical products. Product liability claims could distract our management and key personnel from our core business, require us to spend significant time and money in litigation or to pay
significant damages, which could prevent or interfere with our product commercialization efforts and could adversely affect our business. Claims of this nature could also subject us to product recalls
or adversely affect our reputation, which could damage our position in the market. Although we maintain product liability insurance coverage for our clinical trials and products we commercialize, it
is possible that we will not be able to obtain further product liability insurance on acceptable terms, if at all, and that our insurance coverage may not provide adequate coverage against all
potential claims.

Buying patterns of our wholesalers may vary from time to time, which could have a material impact on our financial condition, cash flows and results of operations.

Sales of our products to wholesalers represent a substantial portion of our total sales. Buying patterns of our wholesalers may vary
from time to time, in part as a result of pricing or seasonality. Wholesalers, or direct customers of wholesalers, may accumulate inventory in one quarter and limit product purchases in subsequent
quarters, which could have a material impact on our financial condition, cash flows and results of operations.

We
have entered into wholesaler fee-for-service agreements, or FFSAs, with several of our customers. Under the FFSAs, we pay a fee to maintain certain minimum
inventory levels. We believe it is beneficial to enter into FFSAs to establish specified levels of product inventory to be maintained and to obtain more precise information as to the level of our
product inventory available throughout the product distribution channel. We record the cost associated with the FFSAs as revenue deductions. We cannot be certain that the FFSAs will be effective in
limiting speculative purchasing activity, that there will not be a future drawdown of inventory as a result of minimum inventory requirements, or otherwise, or that the inventory level data provided
through our FFSAs are accurate. If speculative purchasing does occur, if these customers significantly decrease their inventory levels, or if inventory level data provided through FFSAs is inaccurate,
our business, financial condition, cash flows and results of operations may also be adversely affected.

Risks Related to the Regulatory Environment

If our products do not receive government approval, we will not be able to commercialize them.

The FDA and similar foreign agencies must approve for commercialization in the relevant jurisdiction any pharmaceutical products
developed by us or our development partners. These agencies impose substantial requirements on drug manufacturing and marketing. Any unanticipated preclinical and clinical studies we or our
collaboration development partners are required to undertake, could result in a significant increase in the cost of advancing our products to commercialization. In addition, failure by us or our
collaborative development partners to obtain regulatory approval on a timely basis, or at all, or the attempt by us or our collaborative development partners to receive regulatory approval to achieve
labeling objectives, could prevent or adversely affect the timing of commercial introduction of, or our ability to market and sell, our products.

If we fail to successfully develop and receive regulatory approval for product candidates, we will be unable to commercialize the product candidates and future sales and
earnings growth will be substantially hampered.

Our ability to maintain profitability will depend in large part on successful development and commercialization of additional products.
Most of our product candidates are in the early stages of

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development.
We cannot be assured that we will be able to develop or acquire and commercially introduce new products in a timely manner or that new products, if developed or acquired, will be approved
for the indications and/or with the labeling we expect, or that they will achieve market acceptance. Before we commercialize any other product candidate in the United States, we will need to
successfully develop the product candidate by completing successful clinical trials, submitting an NDA for the product candidate that is accepted for filing by the FDA and receiving FDA approval to
market the candidate. We must comply with similar requirements in foreign jurisdictions before commercializing any products in the jurisdiction. If we fail to successfully develop a product candidate
and/or the FDA or similar foreign agency delays or denies approval of any NDA, or foreign equivalent, that we have submitted or submit in the future, then commercialization of our products under
development may be delayed or terminated, which could have a material adverse effect on our business.

A
number of problems may arise during the development of our product candidates, including the following:



Even
if the FDA or similar foreign agencies grant us regulatory approval of a product, the approval may take longer than we anticipate and may be subject to limitations on the indicated
uses for which the product may be marketed or contain requirements for costly post-marketing follow up studies. Moreover, if we fail to comply with applicable regulatory requirements, we
may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

In
addition, our growth is dependent on our continued ability to penetrate new markets where we have limited experience and competition is intense. We cannot be certain that the markets
we serve will grow in the future, that our existing and new products will meet the requirements of these markets, that our products will achieve customer acceptance in these markets, that competitors
or regulators will not force prices to an unacceptably low level or take market share from us, or that we can achieve or maintain profits in these markets.

Our sales depend on payment and reimbursement from third-party payors, and limitations on coverage availability or a reduction in payment rate or reimbursement could result
in decreased use or sales of our products.

Sales of our products are dependent, in part, on the availability of reimbursement from third-party payors such as Federal, state and
foreign government agencies under programs such as Medicare and Medicaid, and private insurance plans. Third-party payors continually attempt to contain or reduce the cost of health care by
challenging the prices charged for medical
products and services. We may not be able to sell our products profitably if reimbursement is unavailable or coverage is limited in scope or amount.

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There
have been, there are, and we expect there will continue to be, state and Federal legislative and/or administrative proposals that could limit the amount that state or Federal
governments will pay to reimburse the cost of pharmaceutical products. Legislative or administrative acts including, but not limited to, bundling multiple products into the same reimbursement code,
imposing LCAs that reference the reimbursement for our products to that of lower priced alternative therapies, conducting comparative effectiveness evaluations, and changing the manner in which
reimbursement is calculated for prescription drugs, can reduce reimbursement for our products and could adversely affect our business. In addition, private insurers, such as MCOs, may adopt their own
coverage restrictions or demand price concessions in response to legislation or administrative action. Reduction in reimbursement for our products could have a material adverse effect on our results
of operations. Also, the increasing emphasis on managed care in the United States may put increasing pressure on the price and usage of our products, which may adversely affect product sales. Further,
when a new drug product is approved, governmental and/or private reimbursement for that product is uncertain, as is the amount for which that product will be reimbursed and the extent of coverage for
the product. We cannot predict availability or amount of reimbursement for our approved products or product candidates and current reimbursement policies for our marketed products may change at any
time.

The
MMA established a prescription drug benefit beginning in 2006 for all Medicare beneficiaries. We do not know the extent to which our marketed products will continue to be included in
the Medicare prescription drug benefit, and we may be required to provide significant discounts or rebates to drug plans participating in the Medicare drug benefit. Moreover, Congress may enact
legislation that permits the Federal government to directly negotiate price and demand discounts on pharmaceutical products that may implicitly create price controls on prescription drugs. In
addition, MCOs, Health Maintenance Organizations, or HMOs, Preferred Provider Organizations, or PPOs, health care institutions and other government agencies continue to seek price discounts. MCOs,
HMOs, PPOs and private health plans administer the Medicare drug benefit, leading to managed care and private health plans influencing prescription decisions for a larger segment of the population. In
addition, certain states have proposed, and certain other states have adopted, various programs to control prices for their seniors' and low-income drug programs, including price or
patient reimbursement constraints, restrictions on access to certain products, importation from other countries, such as Canada, and bulk purchasing of drugs.

As
we enter into agreements to license our products for commercialization outside of the United States, we may be subject to pricing decisions made by regulatory bodies and private
insurers around the world. Such pricing decisions may affect royalty rates and payments made to us under those agreements, or decisions whether or not to commercialize our products in the applicable
jurisdiction. Efforts to obtain pricing decisions are often the responsibility of the third-party licensee and we cannot predict the success of any third-party in obtaining desirable pricing, or how
the actions of such third-
party or any regulatory body or private insurer will affect the ultimate commercial benefits of those transactions.

If
reimbursement for our marketed products changes adversely or if we fail to obtain adequate reimbursement for our other current or future products, health care providers may limit how
much or under what circumstances they will prescribe or administer them, which could reduce use of our products or cause us to reduce the price of our products.

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We will spend considerable time and money complying with Federal, state and foreign laws and regulations and, if we are unable to fully comply with such laws and
regulations, we could face substantial penalties.

We are subject to extensive regulation by Federal and state governments. The laws that directly or indirectly affect our business
include, but are not limited to, the following:



If
our past, present or future operations are found to be in violation of any of the laws described above or other governmental regulations to which we or our customers are subject, we
may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines, exclusion from Medicare and Medicaid programs and curtailment or
restructuring of our operations. Similarly, if our customers are found non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on us.
In addition, if we are required to obtain permits or licenses under these laws that we do not already possess, we may become subject to substantial additional regulation or incur significant expense.
Any penalties, damages, fines, exclusion

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from
Medicare and Medicaid programs or curtailment or restructuring of our operations would adversely affect our ability to operate our business and our financial results. The risk of our being found
in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts and their provisions are open to a variety of
interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management's attention
from operating our business and damage our reputation.

Federal
and state government agencies also continue to promote efforts to reduce health care costs, including those associated with the Medicare and Medicaid programs. These efforts may
include supplemental rebates and restrictions on the amounts that agencies will reimburse for the use of products. In addition, both the Federal and state governments have initiated investigations and
lawsuits concerning the Medicaid price reporting practices of many pharmaceutical companies to ensure compliance with the Medicaid rebate program. For example, in April 2007, we were sued by the
County of Orange, New York in the Southern District of New York, along with over 70 other pharmaceutical companies, for allegedly inflating published average wholesale prices allegedly resulting in
the overpayments by the state of New York's Medicaid program. Although this case was dismissed in May 2008 without prejudice and this matter is now closed, we could face similar lawsuits in the future
and be subject to damages and penalties if we are found liable.

The approval of sale of certain medications without a prescription may adversely affect our business.

In May 2001, an advisory panel to the FDA recommended that the FDA allow certain popular allergy medications to be sold without a
prescription. In November 2002 and November 2007, the FDA approved CLARITIN® and ZYRTEC®, respectively, both allergy medications, to be sold without a prescription. In the
future, the FDA may allow the sale of additional allergy medications without a prescription. The sale of CLARITIN, ZYRTEC and/or, if allowed, other allergy medications without a prescription, may have
a material adverse effect on our business because the market for prescription drugs, including CLARINEX and XYZAL/XUSAL for which we receive royalties on sales, has been and may continue to be,
adversely affected.

We recently determined that we provided PHS discounts to non-PHS covered entities. This circumstance creates uncertainty as to whether a new Medicaid best price
was set in prior periods. If a new best price was set, we will be required to pay additional Medicaid rebates. In addition, we may face an increased risk of investigation or litigation concerning our
Medicaid price reporting or other price reporting obligations.

Under the Medicaid rebate program, we are obligated to pay a rebate to each participating state Medicaid program for each unit of
product reimbursed by Medicaid. The amount of the rebate for each product is set by law as the greater of (a) 15.1% of AMP or (b) the difference between AMP and the Medicaid best price,
which is the lowest price available from us to any customer not excluded by law from that determination. The rules related to determining AMP and best price are complicated. We compute best price and
the required rebate payments each quarter based on our knowledge of the statutory requirements, the current CMS guidance and our understanding of which customers are exempt from the best price
calculation.

In
January 2008, we notified CMS that we had identified potential errors in our determination of the best price used to calculate Medicaid rebate amounts in prior periods. As a follow up
to this disclosure to CMS, our management, with the oversight of our Audit Committee, is reviewing our government pricing activities affected by the material weakness on our internal controls related
to these potential errors. As a result of this matter, we restated our audited, consolidated financial statements as of and for the years ended December 31, 2006 and 2005 and selected financial
data as of and for the years ended December 31, 2006, 2005, 2004 and 2003, as set forth in our annual report on Form 10-K filed on February 29, 2008, and our unaudited
quarterly information for the fiscal quarters ended

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March 31,
June 30 and September 30, 2007 and 2006, as set forth in our amended and restated quarterly reports for these periods filed on Form 10-Q/A on
May 7, 2008. The amounts by which
we have reduced revenues for contingent rebates were based on management's best estimates and assumptions made prior to any concurrence by CMS. These amounts may change as a result of future
communications with CMS, and we cannot be certain that we have not overestimated the amount of additional rebates we may be required to pay, that the amount of any additional rebate payments or other
payments we may owe will not exceed our current estimates, or that we will not be subject to fines, penalties or interest.

Both
the federal government and state governments have initiated investigations and lawsuits concerning the Medicaid price reporting practices of many pharmaceutical companies to ensure
compliance with the Medicaid rebate program. As a result of the errors that we identified in our calculation of Medicaid rebate reserve amounts, we may face an increased risk of a government
investigation or lawsuits concerning our Medicaid or other price reporting. If any such investigation or lawsuit is initiated, we may be required to pay additional rebates or other amounts related to
sales made in prior periods, and we may be subject to fines, penalties or interest. In addition, an investigation or lawsuit concerning our Medicaid price reporting could be costly, could divert the
attention of our management from our core business and could damage our reputation.

If our drugs are not included on state Preferred Drug Lists, use of our drugs may be negatively affected.

Several state Medicaid programs have implemented Preferred Drug Lists, or PDLs, and more states may adopt this practice. Products
placed on a state Medicaid program's PDL are not subject to restrictions on their utilization by Medicaid patients, such as the need to obtain authorization prior to prescribing. If our drugs are not
included on Medicaid PDLs, use of our drugs in the Medicaid program may be adversely affected. In some states that have adopted PDLs, we have been, and may continue to be, required to provide
substantial supplemental rebates to state Medicaid authorities in order for our drugs to be included on the PDL.

Failure to comply with existing and future environmental, safety and health laws and regulations could adversely affect our results of operations and financial condition.

We are subject to numerous environmental, safety and health laws and regulations. These laws and regulations govern, among other
things, the generation, use and storage of hazardous materials as well as the health and safety of our employees. Our operations can involve the handling of hazardous and other highly regulated
materials which, if not properly handled or disposed of, could subject us to civil and criminal liabilities under these laws and regulations. We may have not been, and we may not at all times in the
future be, in compliance with such environmental, safety and health laws and regulations.

The
costs of complying with existing and future environmental, safety and health laws and regulations may be significant. In addition to these costs, the costs and expenses associated
with any future claims for personal injury or the clean-up of hazardous materials could adversely affect our results of operations and financial condition.

Risks Related to Our Intellectual Property

If we or our collaboration partners fail to adequately protect or enforce our respective intellectual property rights, then we could lose revenue under our licensing
agreements or lose sales to generic equivalents of our marketed products.

Our success depends in large part on our ability, and the ability of our collaboration partners, to obtain, maintain and successfully
enforce patents, and protect trade secrets. Our ability to commercialize any drug successfully will largely depend upon our ability, and the ability of our collaboration partners, to obtain and
maintain patents, including successful enforcement of those

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patents,
of sufficient scope to prevent third parties from developing the same or substantially equivalent products. In the absence of patent and trade secret protection, competitors may adversely
affect our business by independently developing and marketing the same or substantially equivalent products. It is also possible that we could incur substantial costs if we are required to initiate
litigation against others to protect or enforce our intellectual property rights.

We
have filed patent applications covering composition of, methods of making, and/or methods of using, our products and product candidates. Our revenues under collaboration agreements
with pharmaceutical companies depend in part on the existence and scope of issued patents. In addition, we may not be issued patents based on patent applications already filed or that we file in the
future and if patents are issued, they may be insufficient in scope to cover the products licensed under these collaboration agreements. Generally, we do not receive royalty revenue from sales of
products licensed under collaboration agreements in countries where we do not have a patent for such products. The issuance of a patent in one country does not ensure the issuance of a patent in any
other country. Furthermore, the patent position of companies in the pharmaceutical industry generally involves complex legal and factual questions, and has been and remains the subject of much
litigation. Legal standards relating to scope and validity of patent claims are evolving. Any patents we have obtained, or obtain in the future, may be challenged, invalidated or circumvented.
Moreover, the United States
Patent and Trademark Office may commence interference proceedings involving our patents or patent applications. Any challenge to, or invalidation or circumvention of, our patents or patent
applications would be costly, would require significant time and attention of our management and could have a material adverse effect on our business. In addition, if we are not successful in
obtaining patents of sufficient scope and enforcing our patents, we will not be able to prevent others from introducing generic versions of our products.

If we or our licensees do not prevail against those parties seeking to market generic versions of our products or products for which we receive royalties, our business will
be adversely affected and we may not have sufficient revenues to achieve our business plan or repay our outstanding debt.

With respect to XOPENEX Inhalation Solution, Breath, Dey, L.P., Barr, Teva Pharmaceuticals U.S.A., or Teva, Watson
Laboratories, Inc., or Watson, and Apotex Inc., or Apotex, have filed ANDAs including Paragraph IV certifications with the FDA seeking to market a generic version of levalbuterol
hydrochloride inhalation solution before our patents expire. Patent infringement litigation remains outstanding against Dey, L.P., and Barr, but we have decided not to commence litigation
against Watson, Teva and Apotex as their respective Paragraph IV certifications are limited to a single patent that expires in 2021.

In
April 2008, we entered into a settlement and license agreement with Breath to resolve our patent infringement litigation against Breath. The agreement permits Breath to sell its
generic versions of these XOPENEX Inhalation Solution products (1.25 mg/3 mL, 0.63 mg/3 mL and 0.31 mg/3 mL) in the United States under terms of an exclusive 180 day license commencing on
August 20, 2012 and a non-exclusive license thereafter. Upon launch, Breath will pay us a double-digit royalty on gross profits generated from the sales of generic versions of these
XOPENEX Inhalation Solution products. Under the agreement, Breath agrees not to sell any of the products covered by our patents that are the subject of the license before the date on which the license
commences. On May 1, 2008, the parties submitted to the court an agreed order of dismissal without prejudice, which the court approved. The litigation is now concluded.

In
April 2008, we also entered into a supply agreement with Breath whereby, effective August 20, 2012, we will exclusively supply levalbuterol products (1.25 mg/3 mL, 0.63 mg/3 mL
and 0.31 mg/3 mL) to Breath, under our NDA for a period of 180 days, which we refer to as the Initial Term, and on a non-exclusive basis for two and one-half years
thereafter. In addition to the royalties described above, Breath will pay us on a cost plus margin basis for supply of these levalbuterol products. The supply

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agreement
contains provisions regarding termination for cause and convenience, including either party's right to terminate the agreement at any time after the Initial Term upon nine months written
notice. Both the exclusive license under the settlement and license agreement and the exclusive supply obligations under the supply agreement could become effective prior to August 20, 2012 if
a third-party
launches a generic version of those dosages of XOPENEX Inhalation Solution or if the parties otherwise mutually agree.

On
May 9, 2008, we provided to the Federal Trade Commission and Department of Justice Antitrust Division the notifications of the settlement with Breath as required under
Section 1112(a) of the MMA. The settlement with Breath and the other agreements with Breath and its affiliates, including the supply agreement, the agreement for the acquisition of Oryx and
license agreements with Arrow, may be reviewed by antitrust enforcement agencies, such as the Federal Trade Commission and Department of Justice Antitrust Division. There can be no assurances that
governmental authorities will not seek to challenge the settlement with Breath or that a competitor, customer or other third-party will not initiate a private action under antitrust or other laws
challenging the settlement with Breath. We may not prevail in any such challenges or litigation and, in any event, may incur significant costs in the event of an investigation or in defending any
action under antitrust laws.

The
filing of a lawsuit for patent infringement under the Hatch-Waxman Act results in an automatic 30-month stay of the FDA's authority to grant marketing approval to these
companies. The 30-month stay against Breath's ANDA expired for our 1.25 mg/3 mL, 0.63 mg/3 mL and 0.31 mg/3 mL XOPENEX Inhalation Solution products on March 7, 2008. On
April 9, 2008, the FDA granted final approval to Breath's ANDA for all three dosages. If the FDA determines that Breath has forfeited the 180 day semi-exclusivity period for
those three dosages, other ANDA filers who have been granted final approval by the FDA could commence an "at risk" launch upon expiration of the 30-month stay. For those three dosages, the
30-month stay against Dey, L.P. expired on July 9, 2008 and the 30-month stay against Barr expires on or about November 30, 2009. If either of these
parties were to commence selling a generic alternative to our XOPENEX Inhalation Solution product prior to the resolution of these ongoing legal proceedings, or there is a court determination that the
products these companies wish to market do not infringe our patents, or that our patents are invalid or unenforceable, it would have a material adverse effect on our business, financial condition
and/or results of operations. In addition, our previously issued guidance regarding our projected financial results may no longer be accurate and we would have to revise such guidance.

Certain
of Schering-Plough's CLARINEX products for which we receive sales royalties are currently the subject of patent infringement litigation. Since June 2007, the FDA has received
ANDAs relating to various dosage forms of CLARINEX from eleven different generic pharmaceutical companies. These ANDA submissions include Paragraph IV certifications alleging that our patents,
which Schering-Plough (as exclusive licensee of such patents) listed in the Orange Book for these products, are invalid, unenforceable or not infringed by the submitter's proposed product. We and the
University of Massachusetts, co-owners of certain patents listed in the Orange Book, filed civil actions against these parties for patent infringement in the United States District Court
for the District of New Jersey. In April 2008, the trial judge consolidated these cases for all purposes including discovery and trial. The court has not set a trial date. We believe that all of these
ANDAs are subject to a statutory stay of approval until at least December 21, 2009 based on previous litigation commenced by Schering-Plough against these parties in separate civil actions
involving another patent.

UCB S.A.'s
XYZAL 5mg product, for which we receive royalties, is currently the subject of patent infringement litigation. The FDA has received ANDAs from four generic
pharmaceutical companies that include Paragraph IV certifications alleging that one of our patents which UCB (as NDA holder and licensee of the patent) listed in the Orange Book for this
product, is invalid and/or not infringed by the ANDA filer's product. UCB, on its own and on our behalf, commenced patent infringement

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litigation
against all of these parties. We believe that these ANDAs are subject to a statutory stay of approval until at least on or about August 29, 2010.

In
addition, a number of our foreign patents that we have out-licensed to Schering-Plough, sanofi-aventis and the UCB entities in connection with the sale of CLARINEX,
ALLEGRA and XYZAL/XUSAL, respectively, are subject to patent invalidity claims. If patent-based exclusivity is lost for one or more of these products in any foreign jurisdiction, our rights to receive
royalty revenue with respect to such product in the relevant jurisdiction will terminate, which may have a material adverse effect on our business, financial condition and results of operations.
Should the courts uphold our foreign patents, companies seeking to market generic versions of our drugs and the drugs of our licensees should be deterred from market entry until the expiration of the
applicable patent(s).

Patent
litigation involves complex legal and factual questions. We can provide no assurance concerning the duration or outcome of any patent related lawsuits. If we, third parties from
whom we receive royalties, or third parties from whom we have licensed products or received other rights to commercialize products, are not successful in enforcing our respective patents, the
companies seeking to market generic versions of our market drugs and the drugs of our licensees will not be excluded, for the full term of our patents, from marketing their generic versions of our
marketed products or third-party products for which we have licensed rights to our patents. Introduction of generic equivalents of any of our marketed products or third-party products for which we
have licensed rights to our patents before the expiration of our patents would have a material adverse effect on our business.

Additionally,
the costs to us of these proceedings, even if resolved in our favor, could be substantial. Such litigation could also substantially divert the attention of our management
and other key personnel from our core business and our resources in general. Uncertainties resulting from the initiation and continuation of this and any other litigation proceedings could harm our
ability to compete in the marketplace.

If we face a claim of intellectual property infringement by a third-party, then we could be liable for significant damages or be prevented from commercializing our products.

Our success depends in part on our ability to operate without infringing the proprietary rights of others, including patent and
trademark rights. Third parties, typically
pharmaceutical companies, may hold patents or patent applications covering compositions, methods of making and uses, covering the composition of matter for some of the drug candidates for which we
have patents or patent applications. Third parties may also hold patents relating to drug delivery technology that may be necessary for development or commercialization of some of our drug candidates.
In each of these cases, unless we have or obtain a license agreement, we generally may not commercialize the drug candidates until these third-party patents expire or are declared invalid or
unenforceable by the courts. Licenses may not be available to us on acceptable terms, if at all.

Others
may file suit against us alleging that our marketed products or product candidates infringe patents they hold. Even if resolved in our favor, any patent infringement litigation
would be costly, would require significant time and attention of our management, could prevent us from commercializing our products for a period of time, could require us to pay significant damages
and could have a material adverse effect on our business. If the matter is not resolved in our favor, we could be required to pay significant damages and/or be prevented from commercializing our
product and our business could be materially adversely affected. In April 2007, we were served with a Complaint filed by Dey, alleging that the manufacture and sale of BROVANA infringes or will induce
infringement of a single United States patent for which Dey owns all rights, title and interest. In April 2007, we filed an Answer and Counterclaims to this Complaint seeking to invalidate the
originally asserted patent and a second related patent. In May 2007, Dey filed a reply asserting infringement of the second patent. Under the current trial scheduling order, the trial will begin no
earlier than

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October 2,
2009. It is too early to make a reasonable assessment as to the likely outcome or impact of this litigation. We are unable to reasonably estimate any possible range of loss or
liability related to this lawsuit due to its uncertain resolution.

In
March 2008, United States Patent 7,348,362 entitled "Bronchodilation b-agonist compositions and Methods" issued and Dey, L.P. is the assignee of the patent. In
August 2008, the court granted our Motion to Amend our Answer and Counterclaims to seek declaratory judgment that the '362 patent is invalid and unenforceable and to add Mylan Inc. as a party.

If
any of our trademarks or the trademarks we license from our third-party collaborators, or our use of any of these trademarks in connection with products we commercialize, is
challenged, we or our third-party collaborators may be forced to rename the affected product or product candidate, which could be costly and time consuming, and would result in the loss of any brand
equity associated with the product name.

Risks Related to Our Dependence on Third Parties

If any third-party collaborator is not successful in development or commercialization of our products and product candidates, we may not realize the potential commercial
benefits of the arrangement and our results of operations could be adversely affected.

We have entered into a collaboration agreement with 3M Corporation, or 3M, for the manufacturing of XOPENEX HFA. Under this agreement,
we license certain proprietary technology from 3M, and it is responsible for manufacturing the MDI formulation of XOPENEX. We have also entered into agreements with Eisai and GSK for development and
commercialization of our eszopiclone product, marketed as LUNESTA in the United States. Under the Eisai agreement, Eisai will be responsible for completing remaining clinical trials necessary for
attaining marketing approval from the Japanese regulatory authorities and, contingent on regulatory approval, commercialization of the product in Japan. Under the GSK agreement, GSK is responsible for
the development and commercialization of the product for all markets worldwide, excluding the United States, Canada, Mexico and Japan. In addition, we have entered into a license agreement with Bial
for the development and commercialization in the United States and Canada of Bial's eslicarbazepine acetate anti-epileptic compound. Under this agreement, Bial is responsible for certain
development activities and prosecuting all patents and patent applications it licensed to us. We have also entered into a distribution and development agreement with Nycomed for the development,
commercialization and distribution in the United States, its territories and possessions of Nycomed's ciclesonide compound, and certain products incorporating such compound, including ALVESCO HFA
Inhalation Aerosol and OMNARIS Nasal Spray. Under this agreement, Nycomed is responsible for prosecuting all patents and patent applications with respect to these products. Most recently, we entered
into two license and development agreements with Arrow for the development and commercialization of Arrow's levalbuterol/ipratropium combination inhalation solution candidate and for the development
and commercialization of a ciclesonide standalone product and a ciclesonide/arformoterol combination product utilizing Arrow's know-how and intellectual property rights related to stable
sterile suspension formulations and other technology.

If
3M, Eisai, GSK, Bial, Nycomed, Arrow or any future development or commercialization collaborator does not devote sufficient time and resources to its collaboration arrangement with
us, breaches or terminates its agreement with us, fails to perform its obligations to us in a timely manner, is unsuccessful in its development and/or commercialization efforts, or is unsuccessful in
obtaining, maintaining or enforcing patents, and/or protecting trade secrets we license to or from such collaborator, we may not realize the potential commercial benefits of the arrangement and our
results of operations may be adversely affected. In addition, if regulatory approval or commercialization of any product candidate under development by or in collaboration with a partner is delayed or
limited, we

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may
not realize, or may be delayed in realizing, the potential commercial benefits of the arrangement. For example, in October 2008, the CHMP of the EMEA issued an opinion recommending the grant of a
marketing authorization for LUNIVIA brand eszopiclone in the EU for the treatment of insomnia; however, the opinion did not include a new active substance designation, which we believe would enable
more favorable commercialization of the product. While we have requested a re-examination of the opinion relative to the exclusion of the new active substance designation, if such
designation is not granted, we may not realize the expected commercial benefit of our LUNIVIA arrangement.

The royalties and other payments we receive under licensing arrangements could be delayed, reduced or terminated if our licensing partners terminate, or fail to perform
their obligations under, their agreements with us, or if our licensing partners are unsuccessful in their sales efforts.

We have entered into licensing arrangements pursuant to which we license patents to pharmaceutical companies and our revenues under
these licensing arrangements consist primarily of milestone payments, royalties on sales of products and supply payments. Payments and royalties under these arrangements depend in large part on the
efforts of our licensing partners in countries where we hold patents, including development and sales efforts and enforcement of patents, which we cannot control. If any of our licensing partners do
not devote sufficient time and resources to its licensing arrangement with us or focuses its efforts in countries where we do not hold patents, we may not realize the potential commercial benefits of
the arrangement, our revenues under these arrangements may be less than anticipated and our results of operations may be adversely affected. If any of our licensing partners was to breach or terminate
its agreement with us or fail to perform its obligations to us in a timely manner, the royalties and other payments we receive under the licensing agreement could decrease or cease. If we are unable
or fail to perform, or are in breach of our obligations under a licensing agreement, the royalties and other payments and benefits to which we are otherwise entitled under the agreement could be
reduced or eliminated. Any delay or termination of this type could have a material adverse effect on our financial condition and results of operations because we may lose technology rights and
milestone or royalty payments from licensing partners and/or revenues from product sales, if any, could be delayed, reduced or terminated.

We rely on third-party manufacturers, and this reliance could adversely affect our ability to meet our customers' demands.

We currently operate a manufacturing plant that we believe can meet our commercial requirements of the active pharmaceutical ingredient
for XOPENEX Inhalation Solution, XOPENEX HFA and BROVANA, partially fulfill our commercial requirements of the active pharmaceutical ingredient for LUNESTA, and support production of our internally
developed product candidates in amounts needed for our clinical trials. However, we do not have facilities for manufacturing pharmaceutical dosage forms or finished drug products. Developing and
obtaining this capability would be time consuming and expensive. Unless and until we develop this capability, we will rely substantially, and in some cases, entirely, on third-party manufacturers.
Catalent Pharma Solutions, LLC, or Catalent, formerly Cardinal Health, Inc., and Holopack International Corporation, or Holopack, are currently our only finished goods manufacturers of
our XOPENEX Inhalation Solution, and Catalent is currently the sole finished goods manufacturer of BROVANA. Patheon Inc., or Patheon, is the sole manufacturer of LUNESTA, and 3M is the sole
manufacturer and supplier of XOPENEX HFA. Certain components of XOPENEX HFA are available from only a single source. If Catalent, Holopack, Patheon, 3M, or any of our sole-source component
suppliers experiences delays or difficulties in producing, packaging or delivering XOPENEX Inhalation Solution, XOPENEX HFA or its components, BROVANA or LUNESTA, as the case may be, we could be
unable to meet our customers' demands for such products, which could lead to lost sales, customer dissatisfaction and damage to our reputation. Moreover, if we experience delays or difficulties
meeting our supply obligations to GSK and Eisai as a result of our third-party suppliers and manufacturers not meeting our demands, or for any other reason, we may not

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realize
the potential commercial benefits of our supply and/or licensing arrangements with these parties and our results of operations may be adversely affected. If we are required to change
manufacturers, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines,
including FDA guidelines. The delays associated with the verification of a new manufacturer for XOPENEX Inhalation Solution, XOPENEX HFA or its components, BROVANA or LUNESTA could adversely affect
our ability to produce such products in a timely manner or within budget.

Pursuant
to our distribution, development and commercialization agreement with Nycomed, Nycomed will be responsible for exclusively manufacturing and supplying us with our requirements
of ALVESCO HFA Inhalation Aerosol and OMNARIS Nasal Spray. Furthermore, in the event that we develop and commercialize any additional products containing the ciclesonide compound, including OMNARIS
HFA, we will rely on Nycomed and/or other third parties for the manufacture and supply of such products. If any manufacturer of a ciclesonide product experiences delays or difficulties in producing,
packaging or delivering ALVESCO HFA Inhalation Aerosol, OMNARIS Nasal Spray or other products containing the ciclesonide compound, we could be unable to meet our customers' demands for such products,
which could lead to lost sales, customer dissatisfaction and damage to our reputation.

We
license certain proprietary technology required to manufacture our XOPENEX HFA from 3M. If 3M is unable or unwilling to fulfill its obligations to us under our agreement, we may be
unable to manufacture XOPENEX HFA on terms that are acceptable to us, if at all. Our other current contract manufacturers, as well as any future contract manufacturers, may also independently own
technology related to manufacturing of our products. If so, we would be heavily dependent on such manufacturer and such manufacturer could require us to obtain a license in order to have another party
manufacture our products.

Risks Related to Growth of Our Business

If we fail to acquire and develop additional product candidates or approved products, our ability to grow will be impaired.

We are currently commercializing six products. In addition, we recently acquired from Nycomed the development rights to one
late-stage product candidate, OMNARIS HFA, and recently licensed two late-stage product candidates, eslicarbazepine acetate and a levalbuterol/ipratropium combination
inhalation solution, from Bial and Arrow, respectively. However, all of our other product candidates are in the early stages of development. In order to increase the likelihood that we will be able to
successfully develop and/or commercialize additional drugs, we intend to acquire and develop additional product candidates and/or approved products. The success of this growth strategy depends upon
our ability to correctly establish criteria for such acquisitions and successfully identify, select and acquire product candidates and/or products that meet such criteria. We will be required to
integrate any acquired product candidates, including the product candidates we recently licensed from Bial and Arrow and product candidates we are developing pursuant to our agreement with Nycomed,
into our research and development operations and any acquired products, including ALVESCO HFA Inhalation Aerosol and OMNARIS Nasal Spray into our sales and marketing operations. Managing the
development and/or commercialization of a new product involves numerous other financial and operational risks, including difficulties allocating resources between existing and acquired assets and
attracting and retaining qualified employees to develop and/or sell the product.

Any
product candidate we acquire may require additional research and development efforts prior to commercial sale, including extensive preclinical and/or clinical testing and approval by
the FDA and corresponding foreign regulatory authorities. All product candidates are prone to the risks of failure

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inherent
in pharmaceutical product development, including the possibility that the product candidate will not be safe and effective or approved by regulatory authorities.

In
addition, we cannot be assured that any products that we develop or acquire will be:



Proposing,
negotiating and implementing an economically viable acquisition is a lengthy and complex process. Other companies, including those with substantially greater financial,
marketing and sales resources, may compete with us for the acquisition of product candidates and approved products. We may not be able to acquire the rights to additional product candidates and
approved products on terms that we find acceptable, or at all.

We may undertake strategic acquisitions in the future and any difficulties from integrating acquired businesses, products and product candidates could adversely affect our
stock price, business operations, financial condition or results from operations.

We may acquire additional businesses, products or product candidates that complement or augment our existing business. We have limited
acquisition experience and may not be able to integrate any acquired business, product or product candidate successfully or operate any acquired business profitably. Integrating any newly acquired
business, product or product candidate could be expensive and time-consuming. Integration efforts often place a significant strain on managerial, operational and financial resources and
could prove to be more difficult or expensive than we predict. The diversion of our management's attention and any delay or difficulties encountered in connection with any future acquisitions we may
consummate could result in the disruption of our on-going business or inconsistencies in standards, controls, procedures and policies that could adversely affect our ability to maintain
relationships with customers, suppliers, collaborators, employees and others with whom we have business dealings. Moreover, we may need to raise additional funds through public or private debt or
equity financing to acquire any businesses, products or product candidates, which may result in dilution for stockholders or the incurrence of indebtedness.

As
part of our efforts to acquire businesses, products and product candidates or to enter into other significant transactions, we conduct business, legal and financial due diligence with
the goal of identifying and evaluating material risks involved in the transaction. Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result,
might not realize the intended advantages of the transaction. If we fail to realize the expected benefits from acquisitions we have consummated or may consummate in the future, whether as a result of
unidentified risks, integration difficulties, regulatory setbacks or other events, our business, results of operations and financial condition could be adversely affected. We will also need to make
certain assumptions regarding acquired product candidates, including, among other things, development costs, the likelihood of receiving regulatory approval and the market for such product candidates.
Our assumptions may prove to be incorrect, which could cause us to fail to realize the anticipated benefits of these transactions.

In
addition, we will likely experience significant charges to earnings in connection with our efforts, if any, to consummate acquisitions. These charges may include fees and expenses for
investment bankers, attorneys, accountants and other advisers in connection with our efforts, and may be incurred whether or not an acquisition is consummated. Even if our efforts are successful, we
may incur as part

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of
a transaction substantial charges for closure costs associated with elimination of duplicate operations and facilities and acquired in-process research and development charges. In
either case, the incurrence of these charges could adversely affect our results of operations for particular quarterly or annual periods.

Development and commercialization of our product candidates could be delayed or terminated if we are unable to enter into collaboration agreements in the future or if any
future collaboration agreement is subject to lengthy government review.

Development and commercialization of some of our product candidates may depend on our ability to enter into additional collaboration
agreements with pharmaceutical companies to fund all or part of the costs of development and commercialization of these product candidates. We may not be able to enter into collaboration agreements
and the terms of the collaboration agreements, if any, may not be favorable to us. Inability to enter into collaboration agreements could delay or preclude development, manufacture and/or
commercialization of some of our drugs and could have a material adverse effect on our financial condition and results of operations because:



We
are required to file a notice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or the HSR Act, for certain agreements containing
exclusive license grants and to delay the effectiveness of any such exclusive license until expiration or earlier termination of the notice and waiting period under the HSR Act. If expiration or
termination of the notice and waiting period under the HSR Act is delayed because of lengthy government review, or if the Federal Trade Commission or Department of Justice successfully challenges such
a license, development and commercialization could be delayed or precluded and our business could be adversely affected.

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ITEMS 2-5.    NONE

ITEM 6.    EXHIBITS

10.1

Amended and Restated Employment Agreement by and between the Registrant and Adrian Adams dated November 6, 200810.2

Amended and Restated Employment Agreement by and between the Registrant and Mark H.N. Corrigan, M.D. dated November 6, 200810.3

Amended and Restated Employment Agreement by and between the Registrant and Mark Iwicki dated November 6, 200810.4

Amended and Restated Employment Agreement by and between the Registrant and Andrew I. Koven dated November 6, 200810.5

Amended and Restated Employment Agreement by and between the Registrant and Richard Ranieri dated November 6, 200810.6

Amended and Restated Employment Agreement by and between the Registrant and Robert F. Scumaci dated November 6, 200831.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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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.

SEPRACOR INC.Date: November 7, 2008

By:

/s/ ADRIAN ADAMS Adrian Adams President and Chief Executive Officer
(Principal Executive Officer)Date: November 7, 2008

By:

/s/ ROBERT F. SCUMACI Robert F. Scumaci Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)


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Exhibit Index

Exhibit No.

Description10.1

Amended and Restated Employment Agreement by and between the Registrant and Adrian Adams dated November 6, 200810.2

Amended and Restated Employment Agreement by and between the Registrant and Mark H.N. Corrigan, M.D. dated November 6, 200810.3

Amended and Restated Employment Agreement by and between the Registrant and Mark Iwicki dated November 6, 200810.4

Amended and Restated Employment Agreement by and between the Registrant and Andrew I. Koven dated November 6, 200810.5

Amended and Restated Employment Agreement by and between the Registrant and Richard Ranieri dated November 6, 200810.6

Amended and Restated Employment Agreement by and between the Registrant and Robert F. Scumaci dated November 6, 200831.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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