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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the Quarterly Period Ended March 31, 2008                
|or                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission file number 0-19410

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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                    

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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 April 30, 2008 was 107,778,521 shares.



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SEPRACOR INC.
INDEX



|Part IFinancial Information |  |                                                                                                               
|---------------------------- |  | --------------------------------------------------------------------------------------------------------------
|Item 1.                      |  | Condensed Consolidated Interim Financial Statements (unaudited)                                               
|                             |  | Condensed Consolidated Balance Sheets as of March 31, 2008 (unaudited)
and December 31, 2007                  
|                             |  | Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 2008 and 2007 (unaudited)
|                             |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2008 and 2007 (unaudited)
|                             |  | Notes to Condensed Consolidated Interim Financial Statements (unaudited)                                      
|Item 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                         
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                                    
|Item 4.                      |  | Controls and Procedures                                                                                       
|Part IIOther Information    |  |                                                                                                               
|Item 1.                      |  | Legal Proceedings                                                                                             
|Item 1A.                     |  | Risk Factors                                                                                                  
|Item 6.                      |  | Exhibits                                                                                                      
|                             |  | Signatures                                                                                                    
|                             |  | Exhibit Index                                                                                                 

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PART 1FINANCIAL INFORMATION

Item 1.    Financial Statements

SEPRACOR INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)

|                                           |                                                                                                                                                                                                                                   | March 31,
2008 |           | December 31,
2007 |  
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | --------- | ----------------- | -
|
|Assets                                     |                                                                                                                                                                                                                                   |                |           |                   |  
|Current assets:                            |                                                                                                                                                                                                                                   |                |           |                   |  
|                                           | Cash and cash equivalents                                                                                                                                                                                                         |                | $         | 462,182           |  
|                                           | Short-term investments                                                                                                                                                                                                            |                |           | 242,507           |  
|                                           | Accounts receivable, net                                                                                                                                                                                                          |                |           | 216,846           |  
|                                           | Inventories                                                                                                                                                                                                                       |                |           | 58,066            |  
|                                           | Other current assets                                                                                                                                                                                                              |                |           | 40,227            |  
|                                           |                                                                                                                                                                                                                                   |                |           |                   |  
|Total current assets                       |                                                                                                                                                                                                                                   |                | 1,019,828 |                   |  
|                                           | Long-term investments                                                                                                                                                                                                             |                |           | 128,869           |  
|                                           | Property and equipment, net                                                                                                                                                                                                       |                |           | 91,192            |  
|                                           | Investment in affiliate                                                                                                                                                                                                           |                |           | 4,044             |  
|                                           | Deferred financing costs, net                                                                                                                                                                                                     |                |           | 6,112             |  
|                                           | Intangible assets, net                                                                                                                                                                                                            |                |           | 108,999           |  
|                                           | Other assets                                                                                                                                                                                                                      |                |           | 17,317            |  
|                                           |                                                                                                                                                                                                                                   |                |           |                   |  
|Total assets                               |                                                                                                                                                                                                                                   | $              | 1,376,361 |                   | $
|                                           |                                                                                                                                                                                                                                   |                |           |                   |  
|Liabilities and Stockholders' Equity       |                                                                                                                                                                                                                                   |                |           |                   |  
|Current liabilities:                       |                                                                                                                                                                                                                                   |                |           |                   |  
|                                           | Accounts payable                                                                                                                                                                                                                  |                | $         | 30,981            |  
|                                           | Accrued expenses                                                                                                                                                                                                                  |                |           | 133,988           |  
|                                           | Current portion of notes payable and capital lease obligation                                                                                                                                                                     |                |           | 1,124             |  
|                                           | Current portion of convertible subordinated debt                                                                                                                                                                                  |                |           | 72,800            |  
|                                           | Product sales allowances and reserves                                                                                                                                                                                             |                |           | 252,321           |  
|                                           | Other current liabilities                                                                                                                                                                                                         |                |           | 1,438             |  
|                                           |                                                                                                                                                                                                                                   |                |           |                   |  
|Total current liabilities                  |                                                                                                                                                                                                                                   |                | 492,652   |                   |  
|                                           | Notes payable and capital lease obligation                                                                                                                                                                                        |                |           | 1,187             |  
|                                           | Convertible subordinated debt                                                                                                                                                                                                     |                |           | 648,020           |  
|                                           | Other liabilities                                                                                                                                                                                                                 |                |           | 42,606            |  
|                                           |                                                                                                                                                                                                                                   |                |           |                   |  
|Total liabilities                          |                                                                                                                                                                                                                                   |                | 1,184,465 |                   |  
|                                           |                                                                                                                                                                                                                                   |                |           |                   |  
|Stockholders' equity:                      |                                                                                                                                                                                                                                   |                |           |                   |  
|                                           | Preferred stock, $1.00 par value, 1,000 shares authorized; none outstanding at March 31, 2008 and December 31, 2007                                                                                                               |                |           |                  |  
|                                           | Common stock, $.10 par value, 240,000 shares authorized at March 31, 2008 and December 31, 2007; 112,035 and 111,955 shares issued, 107,774 and 107,694 shares outstanding, at March 31, 2008 and
December 31, 2007, respectively |                |           | 11,203            |  
|                                           | Treasury stock, at cost (4,261 shares at March 31, 2008 and December 31, 2007)                                                                                                                                                    |                |           | (232,028          | )
|                                           | Additional paid-in capital                                                                                                                                                                                                        |                |           | 1,870,448         |  
|                                           | Accumulated deficit                                                                                                                                                                                                               |                |           | (1,459,524        | )
|                                           | Accumulated other comprehensive income                                                                                                                                                                                            |                |           | 1,797             |  
|                                           |                                                                                                                                                                                                                                   |                |           |                   |  
|Total stockholders' equity                 |                                                                                                                                                                                                                                   |                | 191,896   |                   |  
|                                           |                                                                                                                                                                                                                                   |                |           |                   |  
|Total liabilities and stockholders' equity |                                                                                                                                                                                                                                   | $              | 1,376,361 |                   | $
|                                           |                                                                                                                                                                                                                                   |                |           |                   |  

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       |  
|----------------------------------------------------------------------- | ---------------------------------------------------- | ------------------------ | -
|
|Revenues:                                                               |                                                      |                          |  
|                                                                        | Product sales                                        |                          | $
|                                                                        | Royalties and license fees                           |                          |  
|                                                                        |                                                      |                          |  
|                                                                        |                                                      | Total revenues           |  
|                                                                        |                                                      |                          |  
|Costs and expenses:                                                     |                                                      |                          |  
|                                                                        | Cost of product sold                                 |                          |  
|                                                                        | Cost of royalties                                    |                          |  
|                                                                        | Research and development                             |                          |  
|                                                                        | Research and developmentin process upon acquisition |                          |  
|                                                                        | Selling, marketing and distribution                  |                          |  
|                                                                        | General and administrative                           |                          |  
|                                                                        | Amortization of intangible assets                    |                          |  
|                                                                        | Litigation settlement, net                           |                          |  
|                                                                        | Restructuring                                        |                          |  
|                                                                        |                                                      |                          |  
|                                                                        |                                                      | Total costs and expenses |  
|                                                                        |                                                      |                          |  
|                                                                        | Income from operations                               |                          |  
|Other income (expense):                                                 |                                                      |                          |  
|                                                                        | Interest income                                      |                          |  
|                                                                        | Interest expense                                     |                          |  
|                                                                        | Equity in investee losses                            |                          |  
|                                                                        | Other income (expense)                               |                          |  
|                                                                        |                                                      |                          |  
|                                                                        | Income before income taxes                           |                          |  
|                                                                        | Income taxes                                         |                          |  
|                                                                        |                                                      |                          |  
|                                                                        | Net income                                           |                          | $
|                                                                        |                                                      |                          |  
|                                                                        | Basic net income per common share                    |                          | $
|                                                                        |                                                      |                          |  
|                                                                        | Diluted net income per common share                  |                          | $
|                                                                        |                                                      |                          |  
|Shares used in computing basic and diluted net income per common share: |                                                      |                          |  
|                                                                        |                                                      | Basic                    |  
|                                                                        |                                                      | Diluted                  |  

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

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

|                                                                                            |                                                         | Three Months Ended |         
|------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------ | --------
|
|Cash flows from operating activities:                                                       |                                                         |                    |         
|                                                                                            | Net income                                              |                    | $       
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                                         |                    |         
|                                                                                            | Depreciation and amortization                           |                    |         
|                                                                                            | Research and developmentin process upon acquisition    |                    |         
|                                                                                            | Equity in investee losses                               |                    |         
|                                                                                            | Stock compensation                                      |                    |         
|Changes in operating assets and liabilities:                                                |                                                         |                    |         
|                                                                                            | Accounts receivable                                     |                    |         
|                                                                                            | Inventories                                             |                    |         
|                                                                                            | Other assets                                            |                    |         
|                                                                                            | Accounts payable                                        |                    |         
|                                                                                            | Accrued expenses                                        |                    |         
|                                                                                            | Product sales allowances and reserves                   |                    |         
|                                                                                            | Other liabilities                                       |                    |         
|                                                                                            |                                                         |                    |         
|Net cash (used in) provided by operating activities                                         |                                                         |                    | (66,946 
|                                                                                            |                                                         |                    |         
|Cash flows from investing activities:                                                       |                                                         |                    |         
|                                                                                            | Purchases of short and long term investments            |                    |         
|                                                                                            | Sales and maturities of short and long term investments |                    |         
|                                                                                            | Additions to property and equipment                     |                    |         
|                                                                                            | Additions to purchased intangibles                      |                    |         
|                                                                                            |                                                         |                    |         
|Net cash (used in) provided by investing activities                                         |                                                         |                    | (70,720 
|                                                                                            |                                                         |                    |         
|Cash flows from financing activities:                                                       |                                                         |                    |         
|                                                                                            | Net proceeds from issuance of common stock              |                    |         
|                                                                                            | Repayments of long-term debt and capital leases         |                    |         
|                                                                                            |                                                         |                    |         
|Net cash provided by (used in) financing activities                                         |                                                         |                    | 1,018   
|                                                                                            |                                                         |                    |         
|Effect of exchange rate changes on cash and cash equivalents                                |                                                         |                    | (99     
|                                                                                            |                                                         |                    |         
|Net decrease in cash and cash equivalents                                                   |                                                         |                    | (136,747
|Cash and cash equivalents at beginning of period                                            |                                                         | $                  | 598,929 
|                                                                                            |                                                         |                    |         
|Cash and cash equivalents at end of period                                                  |                                                         | $                  | 462,182 
|                                                                                            |                                                         |                    |         
|Supplemental schedule of cash flow information:                                             |                                                         |                    |         
|                                                                                            | Cash paid during the period for interest                |                    | $       
|                                                                                            | Cash paid during the period for income taxes            |                    | $       
|Non cash activities:                                                                        |                                                         |                    |         
|                                                                                            | Additions to capital leases                             |                    | $       

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
March 31, 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. 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 March 2008, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or 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. 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 and either amortize it over the life of the product, or write it off if the project is abandoned or impaired.
SFAS 141(R) is effective for transactions occurring on or after January 1, 2009. We are evaluating the impact this standard will have 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

6

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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 beginning January 1, 2008. Currently, we have not expanded our eligible items
subject to the fair value option under SFAS 159. Accordingly, adoption of this statement had no impact on our financial results.

3.     Basic and Diluted Earnings Per Common 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. Diluted EPS is based upon the weighted-average number of common shares outstanding during the period plus the additional weighted-average potential common shares during the period. 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.

For
the three months ended March 31, 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
March 31, 2008

Three Months
Ended
March 31, 2007(in thousands, except price per share data)Number of options

7,304

6,188Price range per share

$22.71 to $87.50

$44.78 to $87.50


We
have issued 0% convertible subordinated notes due 2024, which were not convertible into equity as of March 31, 2008 or 2007, or at any time during the three months ended
March 31, 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.

4.     Inventories

Inventories consist of the following:

March 31,
2008

December 31,
2007(in thousands)Raw materials

$
28,589

$
26,811Finished goods


29,477


26,314Total

$
58,066

$
53,125


5.     Deferred Financing and Intangible Assets

During the three months ended March 31, 2008, we entered into an agreement with Nycomed GmbH, or Nycomed, for the exclusive distribution, development and
commercialization in the United

7

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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 acquisition 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, $39.2 million was assigned to in-process research and development, or 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 allocated to IPR&D was
immediately charged to operations following the completion of the acquisition and is reflected in our condensed consolidated statement of operations.

A
project-by-project valuation using the guidance in SFAS No. 141Business Combinationshas
been conducted to determine the fair value of our research and development projects that were in-process, but not yet completed as of the completion of the acquisition. The three projects
in development as of the valuation date were a hydrofluoroalkane, or HFA, MDI and two respiratory related candidates. The HFA MDI is targeted for a 2012 launch. One of the respiratory candidates is a
combination therapy that is comprised of ciclesonide and a long-acting beta-agonist and is targeted for a 2014 launch. The second respiratory candidate is an inhalation
solution and is targeted to launch at the end of 2013 or early 2014. Successful development of our product candidates is highly uncertain. Completion costs can be significant and vary for each product
candidate 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 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 have a weighted-average useful life of approximately 13 years. The intangible assets that make up that amount
include: OMNARIS Nasal Spray
product rights for $21.2 million (8-year useful life), ALVESCO HFA Inhalation Aerosol product rights for $30.0 million (13-year useful life), and core
technology product rights for $59.6 million (15-year useful life).

8

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

|                              |  | March 31, 2008 |         | December 31, 2007
|----------------------------- |  | -------------- | ------- | -----------------
|
|
|Deferred Financing Costs      |  | $              | 20,407  |                  
|Purchased intangibles         |  |                | 110,763 |                  
|Patents and other intangibles |  |                | 2,259   |                  
|                              |  |                |         |                  
|Total                         |  | $              | 133,429 |                  
|                              |  |                |         |                  

The estimated aggregate amortization expense for each of the next five years is as follows: 2008, $12.9 million; 2009,
$11.7 million; 2010, $9.6 million; 2011, $9.0 million; and 2012, $8.9 million.

6.     Convertible Subordinated Debt

Convertible subordinated debt consists of the following:

March 31,
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


500,000


500,000Total

$
720,820

$
720,820


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.

7.     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 EndedMarch 31,
2008

March 31,
2007(in thousands)Comprehensive income:Net income

$
12,192

$
18,815Net foreign currency translation adjustment


(943
)

53Net unrealized (loss) gain on available-for-sale securities


(7,447
)

11,512Total comprehensive income

$
3,802

$
30,380


9

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8.     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 outcome or the duration 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 copies 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, financial condition and results of
operations.



In September 2005, we received notification that the 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 is seeking 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 terms of an exclusive 180 day license commencing on August 20, 2012 and a non-exclusive license thereafter. Upon launch, Breath
would 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 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.

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 Medicare Prescription Drug, Improvement and Modernization Act of 2003. The settlement with Breath and the other agreements with Breath and its affiliates, including the
supply agreement, the agreement for the acquisition of Oryx Pharmaceuticals, Inc., or Oryx, and license agreements with

10

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Arrow
International Limited, or 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, C.A. No. 07-438.

In
March 2008, the trial judge consolidated the Dey L.P. and Barr cases for all purposes, including discovery and trial. The court has not set a trial date.

The
filing of an action for patent infringement under the Hatch-Waxman Act invokes 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. 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 XOPENEX Inhalation Solution, we believe that Breath is the 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 stays against Dey, L.P. and Barr expire on or about July 9, 2008 and November 30, 2009, respectively.

11

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For
our 1.25 mg/0.5 mL XOPENEX Inhalation Solution concentrate, we believe that Dey, L.P. is the 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 infringe 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 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 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. In addition, since June 2007, the FDA has received ANDAs relating to various dosage forms of CLARINEX from ten different generic pharmaceutical
companies. These ANDA submissions include Paragraph IV certifications alleging that our patents, which Schering-Plough (as 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, whereby Glenmark agreed not to pursue its case and to not market CLARINEX
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.



In February 2008, we received notification that the FDA had received an ANDA from Synthon Pharmaceuticals, Inc., or Synthon, seeking approval of a generic
version of UCB, Inc.'s, or UCB, 5 mg tablets of XYZAL® (levocetirizine) tablets. Synthon's submission includes a Paragraph IV certification alleging that our patent listed by
UCB (as NDA owner and licensee of such patent) in the Orange Book for XYZAL is invalid, unenforceable or not infringed by the generic version for which Synthon is seeking approval. In April 2008, UCB
filed in its name and on our behalf civil actions in the United States District Court for the District of Delaware and the United States District Court for the Eastern District of North Carolina
against Synthon for patent infringement. We believe that Synthon's ANDA is subject to a statutory stay of approval until on or about August 31, 2010 based on the filing of the civil actions for
patent infringement.

In
April 2008, we received notification that the FDA had received an ANDA from Sun Pharmaceutical Industries Limited, or Sun, seeking approval of a generic version of UCB's 5 mg tablets
of XYZAL levocetirizine tablets. Sun's submission includes a Paragraph IV certification alleging that our patent listed by UCB (as NDA owner and licensee of such patent) in the Orange Book for
XYZAL is invalid, unenforceable or not infringed by the generic version for which Sun is seeking approval. We and/or UCB are contemplating bringing an action against Sun for patent infringement.

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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 manufacture and sale of BROVANA® (arformoterol
tartrate) Inhalation Solution infringes or will induce infringement of a single U.S. patent for which Dey owns all rights, title and interest. In April 2007, we filed an Answer and Counterclaim 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, trial will begin no earlier than January 12, 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, U.S. Patent 7,348,362 entitled "Bronchodilation b-agonist compositions and Methods" issued and Dey, L.P. is the assignee of
the patent. We are currently evaluating this patent.

Other Legal Proceedings

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.

9.     Commitments and Contingencies

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 and BialPortela & Ca, S.A., or Bial, of up to $280.0 million and $90.0 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
payments have not been recorded on our condensed consolidated balance sheet.

10.   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. We continue to maintain a valuation allowance for the full amount of our deferred tax assets, however we are currently assessing the impact of a number of
our recent corporate development and licensing transactions, including our agreement for the acquisition of Oryx, the license and development agreements with Arrow, and the Breath settlement and
license agreement. If in the future, we determine based on our future profitability, that these deferred tax assets are more likely than not to be realized, a release of all, or part, of the related
valuation allowance could result in an immediate material income tax benefit in the period of decrease and material income tax provisions in future periods. Such release of the valuation allowance
could occur in whole, or part, in the near-term.

We
account for uncertain tax positions in accordance with 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,

13

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interest,
penalties, and disclosure. At December 31, 2007, approximately $18.4 million of unrecognized tax benefits were identified related to certain temporary differences. In the first
quarter of 2008, an additional $12.7 million of unrecognized tax benefits have been identified related to certain tax credit carryforwards, which resulted in a reduction of the deferred tax
asset and related valuation allowance.

We
file tax returns in the U.S. 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 2004, although carryforward attributes that were generated prior to 2004 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 2004, however, carryforward attributes that were generated prior to 2004 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 quarter ended March 31, 2008, the amount of accrued
interest related to unrecognized tax benefits was not significant and no amount has been accrued for penalties.

11.   Fair Value Measurements

In September 2006, the FASB issued SFAS 157,Fair Value Measurements, or 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. We partially adopted this
statement effective January 1, 2008. 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 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

14

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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.

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 March 31, 2008:

Quoted Prices
in Active
Markets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

Carrying
Value at
March 31,
2008Level 1

Level 2

Level 3

Total(in thousands)Money Market Funds

$
443,356

$


$


$
443,356Federal Agency Bonds





5,164





5,164Asset-Backed Securities





11,870





11,870Bank Obligations





6,742





6,742Corporate Bonds





11,385





11,385Equity Securities


20,865








20,865Other Available-for-sale Investments





860





860Auction-Rate Securities








80,241


80,241Total

$
464,221

$
36,021

$
80,241

$
580,483


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 $80.2 million at March 31, 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. From February 2008 through
March 31, 2008, all scheduled auctions for

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our
auction-rate securities have failed, 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 or 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 sheet.

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 $3.5 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 accumulated other comprehensive income. 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.

The
fair values of these auction-rate securities are estimated utilizing a trinomial discounted cash flow valuation model as of March 31, 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 March 31, 2008 were auction-rate securities. The following table
summarizes the change in balances for the three-month period ended March 31, 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

$
80,241


12.   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. At December 31, 2007, the remaining accrual was $6.7 million.

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In
the three months ended March 31, 2008, we reversed $300,000 of our restructure reserve as the result of a change in estimate associated with a contract termination. The
remaining restructuring balance of $1.3 million is expected to be paid out by June 30, 2008.

The
following table sets forth the restructuring accrual activity during the three months ended March 31, 2008:

Employee Related
Items and Benefits

Contract
Terminations

Total(in thousands)Restructuring charges accrual at December 31, 2007

$
6,306

$
428

$
6,734Adjustment to the initial provision





(300
)

(300
)Cash payments


(5,074
)

(62
)

(5,136
)Restructuring charges accrual at March 31, 2008

$
1,232

$
66

$
1,298


The
restructuring reserve is recorded as other current liabilities on our condensed consolidated balance sheet.

13.   Subsequent Events

In April 2008, we entered into a share purchase agreement with Cobalt Pharmaceuticals Inc., or Cobalt, Melville Holdings Limited, which we refer to
together with Cobalt as the Sellers, Oryx and Arrow Group A.p.S., pursuant to which we, through one of our wholly-owned subsidiaries, will purchase all of the issued and outstanding capital stock of
Oryx from the Sellers. Under the terms of the agreement, we will pay the Sellers $50.0 million, subject to a post-closing working capital adjustment. The Sellers are also entitled
to receive milestone payments of up to an aggregate of $20.0 million upon the accomplishment of various regulatory milestones. The transaction is expected to close on or about June 1,
2008, subject to customary closing conditions.

In
April 2008, we entered into a settlement and license agreement with Breath to resolve the patent infringement litigation involving our XOPENEX Inhalation Solution products (1.25 mg/3
mL, 0.63 mg/3 mL and 0.31 mg/3 mL). The agreement permits Breath to sell its generic versions of these products in the United States under the terms of an exclusive 180 day license from
us commencing on August 20, 2012 and a non-exclusive license thereafter, subject to earlier commencement of the license under certain circumstances as provided in the agreement. Upon launch,
Breath would pay us a double-digit royalty on gross profits generated from the sales of generic versions of these 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 an agreed order of dismissal without prejudice, which
the court approved. The litigation is now concluded.

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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 and 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:



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In
January 2008, we obtained from Nycomed GmbH, or Nycomed, the exclusive U.S. distribution rights to OMNARIS Nasal Spray and ALVESCO® HFA (ciclesonide) Inhalation
Aerosol, which have been approved by the Food and Drug Administration, or FDA. We commercially launched OMNARIS Nasal Spray in April 2008 and expect to commercially launch ALVESCO HFA Inhalation
Aerosol during the second half of 2008. 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 comprised of approximately 1,600 sales professionals. 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 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:



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
$720.8 million. If not

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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

Maturity Date$72,800,000

2008$148,020,000

2010$500,000,000

2024
(1)




Our
long-term success depends in part on our ability to successfully develop or acquire and commercialize new products and product candidates as well as our ability to
successfully launch and commercialize OMNARIS Nasal Spray and ALVESCO HFA Inhalation Aerosol.

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 increase as compared to 2007 as we incur increasing sales
and marketing costs related to the commercialization of OMNARIS Nasal Spray and the anticipated commercialization of ALVESCO HFA Inhalation Aerosol, including costs associated with increasing our
sales force capacity to accommodate the launch of these two products, as well as continued revenue growth in our other marketed products. We expect to continue to invest in marketing programs related
to LUNESTA, BROVANA and XOPENEX and incur significant costs related to the commercial introduction of OMNARIS Nasal Spray and the planned ALVESCO HFA Inhalation Aerosol commercial introduction. We
expect research and development expenses to increase as compared to 2007 as we continue to invest in research and development activities relating to studies for LUNESTA, XOPENEX HFA, and BROVANA, and
for continued development of our earlier stage drug candidates, as well as increased drug discovery efforts and development activities for the ciclesonide pipeline. As part of our business strategy,
in 2008, and in the future, we expect to consider and, as appropriate, consummate acquisitions of other technologies, product candidates, approved products and/or businesses. We can provide no
assurance that we will be successful in achieving any such acquisitions.

Significant 2008 Developments and Recent Corporate Development and Licensing Transactions



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21

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Three Month Periods ended March 31, 2008 and 2007

Revenues

Product sales were $305.5 million and $317.6 million for the three months ended March 31, 2008 and 2007, respectively, a decrease of
approximately 4%.

Sales
of LUNESTA were $135.6 million and $147.5 million for the three months ended March 31, 2008 and 2007, respectively, a decrease of approximately 8%. The
decrease is primarily the result of a 13% decrease in the number of units sold, partially offset by an 18% increase in gross selling price, which
resulted in a 6% increase in net selling price. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of XOPENEX Inhalation Solution were $140.0 million and $149.6 million for the three months ended March 31, 2008 and 2007, respectively, a decrease of
approximately 6%. The decrease is primarily the result of a 6% decrease in the number of units sold, and a less than 1% decrease in net selling price, partially offset by a gross selling price
increase of approximately 19%. Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of XOPENEX HFA were $20.0 million and $20.5 million for the three months ended March 31, 2008 and 2007, respectively, a decrease of approximately 2%. The
decrease is primarily the result of a 19% decrease in the number of units sold, offset by a 20% increase in net selling price, partially offset by a gross selling price increase of approximately 9%.
Adjustments recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Sales
of BROVANA were $9.9 million and $0 for the three months ended March 31, 2008 and 2007, respectively. We introduced BROVANA commercially in April 2007. Adjustments
recorded to gross sales are disclosed below under the heading "Analysis of gross sales to net sales."

Analysis of gross sales to net salesWe 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 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

23

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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 March 31, |        
|--------------------------- | ----------------------------------------------- | ------------------------------------ | -------
|
|
|Gross sales                 |                                                 | $                                    | 445,680
|Adjustments to gross sales: |                                                 |                                      |        
|                            | Payment term discounts                          |                                      |        
|                            | Wholesaler fee-for-service                      |                                      |        
|                            | Government rebates and contractual discounts    |                                      |        
|                            | Returns                                         |                                      |        
|                            | Other (includes product introduction discounts) |                                      |        
|                            |                                                 |                                      |        
|Sub-total adjustments       |                                                 |                                      | 140,136
|                            |                                                 |                                      |        
|Net sales                   |                                                 | $                                    | 305,544
|                            |                                                 |                                      |        

The
increase in adjustments to gross sales as a percentage of gross sales for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007
primarily reflects an increase in government rebates and contractual discounts as a result of (i) an increase in Medicare Part B discounts given on the sales of XOPENEX Inhalation
Solution, (ii) an increase in discounts given through managed care programs on the sales of LUNESTA, XOPENEX HFA and XOPENEX Inhalation Solution, (iii) a decrease in chargebacks
primarily given on the sales of XOPENEX HFA, (iv) a net increase in Medicare Part D discounts given on the sales of LUNESTA and XOPENEX HFA, and (v) an increase in Medicaid
discounts primarily given on the sales of XOPENEX Inhalation Solution and XOPENEX HFA. Partially offsetting this increase in adjustments to gross sales as a percentage of gross sales was a decrease in
wholesaler fee-for-services discounts given on the sales of LUNESTA, XOPENEX Inhalation Solution and XOPENEX HFA.

Royalties
and license fees were $15.2 million and $10.1 million for the three months ended March 31, 2008 and 2007, respectively. Royalties earned on the sales of
ALLEGRA® (fexofenadine HCl) under our agreement with sanofi-aventis were $7.7 million and $5.9 million for the three months ended March 31, 2008 and 2007,
respectively, an increase of approximately 32%. The increase is primarily the result of increased sales in Japan and sanofi-aventis' product commercialization of a 180 mg dosage strength of
ALLEGRA.

Royalties
earned on sales of CLARINEX® (desloratadine) under our agreement with Schering-Plough Corporation, or Schering-Plough, were $6.1 million and
$3.3 million for the three months ended March 31, 2008 and 2007, respectively, an increase of approximately 83%. 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 agreement with UCB were $1.3 million and $1.0 million for the three months
ended March 31, 2008 and 2007, respectively, an increase of approximately 41%.

A
number of our U.S. and foreign patents that we have out-licensed to Schering-Plough, sanofi-aventis and UCB 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 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.

24

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Costs of Revenues

Cost of products sold was $29.3 million and $31.4 million for the three months ended March 31, 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 March 31, 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 March 31, 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 March 31, 2008 as compared to the same period
in 2007, in addition 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 16% for the three months ended March 31, 2008 and 2007, respectively. Included in the
costs of XOPENEX HFA sold is a royalty paid on net sales of XOPENEX HFA to 3M Company, or 3M, our third-party finished goods manufacturer of the product. 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 during the three months ended March 31, 2008 as compared to the same period in
2007.

Cost
of BROVANA sold as a percentage of BROVANA gross sales was approximately 14% for the three months ended March 31, 2008. We introduced BROVANA commercially in April 2007.

Cost
of royalties earned was $489,000 and $266,000 for the three months ended March 31, 2008 and 2007, respectively, an increase of approximately 84%. 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 earned in the three months ended March 31, 2008 as compared with the same period in 2007.

Research and Development

Research and development expenses were $66.2 million and $40.7 million for the three months ended March 31, 2008 and 2007, respectively, an
increase of approximately 63%. The increase is primarily due to the $10.0 million milestone payment due to Bial pursuant to the license agreement for SEP-0002093, referred to by
Bial as BIA-2093, 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 early-stage
programs (SEP-225441, SEP-227162, SEP-228425, SEP-228432, SEP-227900) and increased drug discovery efforts.

Research
and development in-process upon acquisition expenses were $39.2 million and $0 for the three months ended March 31, 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 three months ended
March 31, 2008, research and development-in process upon acquisition expenses included costs associated with our agreement with Nycomed to develop, market and commercialize OMNARIS Nasal Spray,
ALVESCO HFA Inhalation Aerosol and certain other ciclesonide product candidates in the United States.

25

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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 March 31, 2008 or 2007. 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 a New Drug Application, or 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 products and the two
product candidates listed accounted for approximately 71% of our direct project research and
development spending for the three months ended March 31, 2008. No other product candidate accounted for more than 8% of our direct research and development spending in this period.

|Product or Product Candidate    |  | Indication       |  | Phase of
Development |  | Estimate of
Completion of
Phase
|------------------------------- |  | ---------------- |  | -------------------- |  | -------------------------------
|LUNESTA (eszopiclone)           |  | Insomnia         |  | *                    |  | *                              
|BROVANA (arformoterol tartrate) |  | RespiratoryCOPD |  | **                   |  | **                             
|SEP-225441                      |  | Anxiety          |  | Phase II             |  | 2008                           
|SEP-225289                      |  | Depression       |  | Phase II             |  | 2008                           

---

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

26

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during
the three months ended March 31, 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
March 31, 2008 |        | Project costs to
date through
March 31, 2008 |   | Project costs for
the three
months ended
March 31, 2007 |  | Project costs to
date through
March 31, 2007
|------------------------------- |  | ------------------------------------------------------- | ------ | -------------------------------------------- | - | ------------------------------------------------------- |  | --------------------------------------------
|
|LUNESTA (eszopiclone)           |  | $                                                       | 10,716 |                                              | $ | 255,813                                                 |  | $                                           
|BROVANA (arformoterol tartrate) |  | $                                                       | 2,196  |                                              | $ | 190,964                                                 |  | $                                           
|SEP-225441                      |  | $                                                       | 3,031  |                                              | $ | 10,264                                                  |  | $                                           
|SEP-225289                      |  | $                                                       | 2,524  |                                              | $ | 26,717                                                  |  | $                                           

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 to FDA-approved
status.

Selling, Marketing and Distribution

Selling, marketing and distribution expenses were $155.3 million and $192.1 million for the three months ended March 31, 2008 and 2007,
respectively, a decrease of approximately 19%. The decrease was largely due to a decrease in marketing, advertising and promotional expenses primarily related to costs to support LUNESTA, in addition
to a decrease in salary and other compensation related expenses resulting from our sales force restructuring, during the quarter ended December 31, 2007.

General and Administrative

General and administrative costs were $23.5 million and $18.8 million for the three months ended March 31, 2008 and 2007, respectively, an
increase of approximately 25%. The increase is primarily the result of an increase in salary and other compensation related expenses, in addition to an increase in legal fees largely related to patent
litigation.

Amortization of Intangible Assets, net

Amortization of intangible assets, net were $2.3 million and $51,000 for the three months ended March 31, 2008 and 2007, respectively. The increase
primarily relates to the amortization of the intangible assets acquired from Nycomed during the first quarter of 2008.

Litigation Settlement

Litigation settlement expense was $0 and $34.0 million for the three months ended March 31, 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

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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 $8.7 million and $12.6 million for the three months ended March 31, 2008 and 2007, respectively, a decrease of
approximately 31%. The decrease is primarily due to lower average balances of cash and short- and long-term investments in the first quarter of 2008 and lower interest rates earned on
investments in 2008. For the three months ended March 31, 2008 and 2007, the average annualized interest rate that we earned on our investments was 3.97% and 5.26%, respectively.

Interest
expense was $55,000 and $2.8 million for the three months ended March 31, 2008 and 2007, respectively. The expense in the three months ended March 31, 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 $203,000 and $272,000 for the three months ended March 31, 2008 and 2007, respectively. The loss represents our portion of BioSphere losses.

Income Taxes

Income tax expense was $903,000 for the three months ended March 31, 2008 as compared to $1.4 million for the three months ended March 31,
2007. Income tax expense in 2008 and 2007 includes Federal and state alternative minimum tax, or AMT, state income taxes and foreign income tax. Although we had Federal and state tax net operating
loss carryforwards as of December 31, 2007 and 2006, the utilization of these loss carryforwards is limited in the calculation of AMT. 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. We continue to maintain a valuation
allowance for the full amount of our deferred tax assets, however we are currently assessing the impact of a number of our recent corporate development and licensing transactions, including our
agreement for the acquisition of Oryx, the license and development agreements with Arrow, and the Breath settlement and license agreement. If in the future, we determine based on our future
profitability, that these deferred tax assets are more likely than not to be realized, a release of all, or part, of the related valuation allowance could result in an immediate material income tax
benefit in the period of decrease and material income tax provisions in future periods. Such release of the valuation allowance could occur in whole, or part, in the near-term.

We
account for uncertain tax positions in accordance with 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. In the first quarter of 2008, an additional $12.7 million of unrecognized tax
benefits have been identified related to certain tax credit carryforwards, which resulted in a reduction of the deferred tax asset and related valuation allowance. We recognize accrued interest and
penalties related to unrecognized tax benefits as a component of tax expense. For the quarter ended March 31, 2008, the amount of accrued interest related to unrecognized tax benefits was not
significant and no amount has been accrued for penalties.

Liquidity and Capital Resources

Our liquidity requirements have historically consisted of research and development expenses, sales and marketing expenses, capital expenditures, working capital,
debt service and general corporate

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expenses.
Historically, we have funded these requirements and the growth of our 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 March 31, 2008.

At
March 31, 2008, $80.2 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 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 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. From February 2008 through March 31, 2008, all scheduled auctions for our auction-rate securities
have failed, 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
March 31, 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 SFAS No. 157,Fair Value Measurement, or SFAS 157,
framework and described in Note 11, Fair Value Measurements, of our condensed consolidated financial statements included in this quarterly report on Form 10-Q, with a fair value of
$80.2 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 March 31, 2008, we determined there was a decline in fair value of our
auction-rate securities investments of $3.5 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 rating of the security issuers deteriorates, 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.

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Cash,
cash equivalents and short- and long-term investments totaled $833.6 million, or 61% of total assets, at March 31, 2008, compared to $1.1 billion,
or 76% of total assets, at December 31, 2007.

Net
cash used in operating activities for the three months ended March 31, 2008 was $66.9 million, which includes net income of $12.2 million. Our net income for
this period includes non-cash charges of $57.3 million, consisting primarily of research and development in process upon acquisition, share-based compensation and depreciation and
amortization expense. Accounts receivable increased by $57.2 million primarily due to the timing of our sales. Other assets increased by $30.5 million, which is primarily as a result of
an increase in prepaid expenses and a change in our deferred tax asset. Accounts payable increased by $13.7 million primarily due to timing of vendor payments. Accrued expenses decreased by
$76.1 million primarily due to the $75.0 million upfront payment we paid to Bial in January 2008. Product sales allowances and reserves increased $6.5 million primarily due to
product revenue rebates related to LUNESTA and XOPENEX Inhalation Solution product sales. Other liabilities increased by $12.4 million primarily as a result of a change in our tax liability
pursuant to FIN 48, partially offset by the payments made relating to the 2007 sales force restructuring.

Net
cash used in investing activities for the three months ended March 31, 2008 was $70.7 million, which is primarily attributable to the purchase of intangible assets from
Nycomed in January 2008 of $150.0 million and the purchases of property and equipment of $8.2 million, partially offset by the cash provided by net sales of short- and
long-term investments of $87.5 million.

Net
cash provided by financing activities for the three months ended March 31, 2008 was $1.0 million. We received proceeds of $1.3 million from issuing common stock
upon the exercise of stock options issued under our stock option plans, and we used $300,000 to repay capital lease obligations and long-term debt.

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.
In the longer term, we expect to continue to fund our 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:



30

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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; however, we
may choose to do so. 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 equivalent, 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.

Product sales allowances and reservesThe following table summarizes activity in each of our product sales allowances and
reserve categories for the three months ended March 31, 2008:

|                             |              | Payment
Term
Discount |        | Wholesaler
Fee
for Service |   | Government
Rebates and
Contractual
Discounts |        | Returns |          | Other
Discounts |   | Total   |       
|---------------------------- | ------------ | --------------------- | ------ | -------------------------- | - | -------------------------------------------- | ------ | ------- | -------- | --------------- | - | ------- | ------
|
|Balance at December 31, 2007 |              | $                     | (4,139 | )                          | $ | (12,112                                      | )      | $       | (206,733 | )               | $ | (24,351 | )     
|Current provision:           |              |                       |        |                            |   |                                              |        |         |          |                 |   |         |       
|                             | Current year |                       |        | (8,966                     | ) |                                              | (3,484 | )       |          | (115,982        | ) |         | (6,462
|                             | Prior year   |                       |        |                           |   |                                              |       |         |          | (4,040          | ) |         |      
|                             |              |                       |        |                            |   |                                              |        |         |          |                 |   |         |       
|                             | Total        |                       |        | (8,966                     | ) |                                              | (3,484 | )       |          | (120,022        | ) |         | (6,462
|                             |              |                       |        |                            |   |                                              |        |         |          |                 |   |         |       
|Actual:                      |              |                       |        |                            |   |                                              |        |         |          |                 |   |         |       
|                             | Current year |                       |        | 4,319                      |   |                                              |       |         |          | 16,647          |   |         |      
|                             | Prior year   |                       |        | 3,912                      |   |                                              | 11,046 |         |          | 87,645          |   |         | 6,680 
|                             |              |                       |        |                            |   |                                              |        |         |          |                 |   |         |       
|                             | Total        |                       |        | 8,231                      |   |                                              | 11,046 |         |          | 104,292         |   |         | 6,680 
|                             |              |                       |        |                            |   |                                              |        |         |          |                 |   |         |       
|Balance at March 31, 2008    |              | $                     | (4,874 | )                          | $ | (4,550                                       | )      | $       | (222,463 | )               | $ | (24,133 | )     
|                             |              |                       |        |                            |   |                                              |        |         |          |                 |   |         |       

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 are able to make
reasonable estimates of sales discounts.

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Fair Value MeasurementsEffective January 1, 2008, we 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) to fiscal years beginning after November 15, 2007.

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 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 non-current auction-rate securities.

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

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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

As of March 31, 2008, our contractual obligations disclosure in our annual report on Form 10-K for the year ended December 31,
2007 has not materially changed.

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 our annual report on Form 10-K for the year ended December 31, 2007. As of May 12, 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 March 31, 2008, is estimated to be $3.5 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 sheet. 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 rating of the security issuers deteriorates, 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, Chief Financial Officer, and
Executive Vice President, Corporate Finance, Administration and Technical Operations, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31,
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 Securities and Exchange Commission'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

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weakness
in internal control over financial reporting described below, the Chief Executive Officer, the Chief Financial Officer and the Executive Vice President, Corporate Finance, Administration and
Technical Operations, have concluded that, as of March 31, 2008, our disclosure controls and procedures were not effective.

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 of America.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during our quarter ended March 31, 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 first and second quarters of 2008, we have engaged in substantial efforts to address
this material weakness and will continue to do so throughout 2008. All of these efforts were commenced in the first quarter of 2008 or will be commenced in the second quarter of 2008 and concluded
thereafter in a timely fashion as early in 2008 as is reasonably possible. Our ongoing improvements to the internal controls designed to address this material weakness will include the following,
which will be undertaken with the assistance of qualified outside legal counsel:

I)  Measures
are 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 will 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 year end 2008. 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 outcome or the duration 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 copies 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, financial condition and results of
operations.



In September 2005, we received notification that the FDA had received an 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 Inhalation Solution. Breath's submission includes a Paragraph IV certification alleging that our patents listed in the FDA publication entitled Approved 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 is seeking 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 terms of an exclusive 180 day license commencing on August 20, 2012 and a non-exclusive license thereafter. Upon launch, Breath
would pay Sepracor 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 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.

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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 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 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, C.A. No. 07-438.

In
March 2008, the trial judge consolidated the Dey L. P. and Barr cases for all purposes, including discovery and trial. The court has not set a trial date.

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" invokes 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. 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 XOPENEX Inhalation Solution, we believe that Breath is the 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

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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 stays against
Dey, L.P. and Barr expire on or about July 9, 2008 and November 30, 2009, respectively.

For
our 1.25 mg/0.5 mL XOPENEX Inhalation Solution concentrate, we believe that Dey, L.P. is the 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 infringe 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 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 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, CLARINEX products for which we receive sales royalties are currently the subject of patent
infringement litigation. In addition, since June 2007, the FDA has received ANDAs relating to various dosage forms of CLARINEX from ten different generic pharmaceutical companies. These ANDA
submissions include Paragraph IV
certifications alleging that our patents, which Schering-Plough (as 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, 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.



In February 2008, we received notification that the FDA had received an ANDA from Synthon Pharmaceuticals, Inc., or Synthon, seeking approval of a generic
version of UCB, Inc.'s, or UCB, 5 mg tablets of XYZAL levocetirizine tablets. Synthon's submission includes a Paragraph IV certification alleging that our patent listed by UCB (as NDA
owner and licensee of such patent) in the Orange Book for XYZAL is invalid, unenforceable or not infringed by the generic version for which Synthon is seeking approval. In April 2008, UCB filed in its
name and on our behalf civil actions in the United States District Court for the District of Delaware and the United States District Court for the Eastern District of North Carolina against Synthon
for patent infringement. We believe that Synthon's ANDA is

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subject
to a statutory stay of approval until on or about August 31, 2010 based on the filing of the civil actions for patent infringement.

In
April 2008, we received notification that the FDA had received an ANDA from Sun Pharmaceutical Industries Limited, or Sun, seeking approval of a generic version of UCB's 5 mg tablets
of XYZAL levocetirizine tablets. Sun's submission includes a Paragraph IV certification alleging that our patent listed by UCB (as NDA owner and licensee of such patent) in the Orange Book for
XYZAL is invalid, unenforceable or not infringed by the generic version for which Sun is seeking approval. We and/or UCB are contemplating bringing an action against Sun for patent infringement.

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 manufacture and sale of BROVANA infringes or will induce
infringement of a single U.S. patent for which Dey owns all rights, title and interest. In April 2007, we filed an Answer and Counterclaim 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, trial will begin no earlier than
January 12, 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, U.S. Patent 7,348,362 entitled "Bronchodilation b-agonist compositions and Methods" issued and Dey, L.P. is the assignee of
the patent. We are currently evaluating this patent.

Other Legal Proceedings

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.

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 achieve
profitability again or 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

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adjusted
accordingly, our business, results of operations and financial condition will be materially and adversely affected. In addition, if we are unable to achieve or maintain 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 86% of our total revenues for the three months ended March 31, 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. In April 2005, we commercially introduced LUNESTA as a new product in a highly and increasingly competitive market, and we cannot be certain that it will achieve
continued commercial success. In addition, we do not have long-term sales contracts with our customers, and we rely primarily on purchase orders for sales of LUNESTA and XOPENEX Inhalation
Solution. Reductions, delays or cancellations of orders for LUNESTA or XOPENEX Inhalation Solution could adversely affect our operating results. Additionally, 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. 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,
or if we do not prevail against those manufacturers seeking to market a generic version of our XOPENEX Inhalation Solution product, we may not have sufficient revenues to achieve our business plan or
repay our outstanding debt, and our business will
not be successful. Any other adverse developments with respect to the sale of LUNESTA or XOPENEX Inhalation Solution could significantly reduce revenues and have a material adverse effect on our
ability to maintain profitability and achieve our business plan.

In
December 2005, we commercially introduced XOPENEX HFA, in April 2007, we commercially introduced BROVANA and in April 2008, we commercially introduced OMNARIS Nasal Spray. In
addition, we expect to launch ALVESCO HFA Inhalation Aerosol in the second half of 2008. We cannot be certain that XOPENEX HFA, BROVANA, OMNARIS Nasal Spray or ALVESCO HFA Inhalation Aerosol will
achieve commercial success.

With
respect to XOPENEX Inhalation Solution, Breath, Dey, L.P., Barr, Teva Parenternal Medicines, a subsidiary of Teva Pharmaceuticals U.S.A., or Teva, and Watson
Laboratories, Inc., or Watson, 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 at this time as its
Paragraph IV certification is limited to a single patent that expires in 2021. Teva's Paragraph IV certification is also limited to a single patent that expires in 2021 and we are still
evaluating whether to commence litigation in response.

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 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 would pay Sepracor 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 an agreed order of dismissal without prejudice, which the court approved. The litigation is now concluded.

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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.

No
trial date has been set in our patent infringement litigation against Dey, L.P. and Barr pending in the United States District Court of the District of Delaware. The trial
judge recently consolidated both cases for all purposes.

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 stays against Dey, L.P. and Barr expire on or about July 9, 2008 and November 30, 2009, respectively. If either 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/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.

With
respect to BROVANA, 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 alleging that the manufacture and sale of BROVANA infringes or will induce infringement of a single U.S. patent for which Dey owns all
rights, title and interest. In April 2007, we filed an Answer and Counterclaim 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 scheduling order, trial will begin no earlier than January 12, 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.

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 or launch 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:



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Sales of XOPENEX Inhalation Solution have been adversely affected as a result of the changes in the Medicare Part B reimbursement rate, and if
our strategy for responding to such changes is not successful, our revenue will be further adversely affected.

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 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 20% of our XOPENEX Inhalation Solution units sold are subject to reimbursement under Medicare Part B. We have been actively contracting with home
health care and retail pharmacy providers in an effort to ensure the continued availability of XOPENEX Inhalation Solution to Medicare Part B beneficiaries with reversible obstructive airway
disease. If the contracting strategy for XOPENEX Inhalation Solution is not successful in maintaining as much of the current unit sales levels for the product in Medicare as commercially possible, if
the blended Medicare Part B

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reimbursement
rate for XOPENEX Inhalation Solution and generic albuterol falls to an amount where it is no longer financially feasible to market XOPENEX Inhalation Solution to Medicare Part B
participants and/or if the Durable Medical Equipment Program Safeguard Contractors, or DME-PSCs, the entities responsible for overseeing the Medicare Part B prescription drug
benefit for respiratory products, impose restrictive coverage policies on, or take action intended to further reduce the payment level for XOPENEX Inhalation Solution, revenue from sales of XOPENEX
Inhalation Solution will be adversely affected and our financial condition and results from operations will be impaired.

In
March 2006, the DME-PSCs announced their intention to implement a Least Costly Alternative, or LCA, reimbursement action for XOPENEX Inhalation Solution that would reduce
the reimbursement paid for XOPENEX Inhalation Solution to the level of generic racemic albuterol. In December 2006, CMS commenced a National Coverage Analysis, or NCA, to determine when use of
nebulized levalbuterol in treating COPD in the Medicare population is reasonable and necessary. While the NCA for XOPENEX Inhalation Solution was pending, the DME-PSCs announced that the
proposed LCA would be stayed. On June 20, 2007, CMS announced its preliminary coverage determination, stating that, based on its review of the available data and comments submitted, it was
unable to determine the criteria for when XOPENEX Inhalation Solution would be appropriate to use by the Medicare population and would instead defer this determination to the DME-PSCs. On
April 10, 2008, the Durable Medical Equipment Medicare Administrative Contractors, or DME-MACs, the entities responsible for administering the prescription drug benefit for Medicare
Part B respiratory products, announced its intention to implement the previously announced LCA, effective July 1, 2008. We believe that the LCA is inconsistent with the statutory
language of the MMA, both as originally enacted and as amended by the subsequent legislation referred to above, and we intend to consider and pursue options available to us to rescind this action and
allow us to continue to make XOPENEX Inhalation Solution available to Medicare beneficiaries. If allowed to go forward, this reimbursement action by the DME-MACs would reduce the level of
payment for XOPENEX Inhalation Solution dispensed to Medicare beneficiaries to that of generic racemic albuterol. At such a reimbursement rate, we would no longer be able to sell XOPENEX Inhalation
Solution profitably in the Medicare Part B market and revenues for the product may be materially adversely affected.

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

As of March 31, 2008, our total debt was approximately $720.8 million. None of our 0% Series A notes due December 2008, our 0%
Series B notes due December 2010 nor 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 April 30, 2008, the closing sale price of our common stock was $21.55. 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 0% Series B notes due 2010 or upon conversion of the 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 March 31, 2008, we had approximately $720.8 million of outstanding debt that could be converted into 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. 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. 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 Item 4 of this quarterly report on Form 10-Q, Controls and Procedures, 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 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

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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 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 March 31, 2008, $80.2 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 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 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. From February 2008 through March 31, 2008, all scheduled auctions for our auction-rate securities have failed, 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 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
March 31, 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 11, Fair Value Measurements, of our condensed
consolidated financial statements included in this quarterly report on Form 10-Q, with a fair value of $80.2 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 March 31, 2008, we determined there was a decline in fair value of our auction-rate securities investments of $3.5 million, which we deemed
temporary. If current market conditions deteriorate further, we may be required to record additional unrealized losses in other comprehensive income. If the credit rating of the security issuers
deteriorates, 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.

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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:



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

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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.

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

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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. We expect that LUNESTA will face increasing competition from a generic version of AMBIEN® (zolpidem tartrate), which was introduced in April 2007, a
generic version of AMBIEN CR® (zolpidem tartrate extended release), which 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.



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 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.

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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.



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. 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.



If and when commercialized, ALVESCO HFA Inhalation Aerosol, an inhaled corticosteroid in a MDI, will compete with other asthma therapies, including asthma
controller therapies, and face 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 when commercialized, 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. 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

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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 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. Future increases in our sales
force will result in significant expenses. 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 announced that we plan to increase 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 will offset 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
recent 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 recent sales force reduction 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

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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 recent sales force reduction, 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
recently announced that we planned to increase 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 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.

If we, our collaboration partners or our third-party manufacturers do not comply with current GMP regulations, then the FDA 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 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.

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 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.

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We have entered into wholesaler fee-for-service agreements, or FFSAs, with our three largest customers. Under the FFSAs, we pay the wholesalers a fee to maintain
certain minimum inventory levels that gradually decline over the next several quarters. We believe it is beneficial to enter into FFSAs to establish specified levels of product inventory to be
maintained by our wholesalers 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
declining minimum inventory requirements, or otherwise, or that the inventory level data provided through our FFSAs are accurate. If speculative purchasing does occur, if our wholesalers 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 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 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:



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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 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 and state 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.

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, 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 managed care organizations, 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 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 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, Managed Care Organizations, or MCOs, Health Maintenance Organizations, or HMOs, Preferred Provider

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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.

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:



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If
our past or present 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
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. This suit has been transferred to the Judicial Panel on Multidistrict Litigation to the District of Massachusetts, where the case is now
pending as part of MDL 1456 (in re Pharmaceutical Industry Average Wholesale Price Litigation) and our obligation to answer the Complaint has been stayed pending the Court's decisions in related
actions brought by other New York Counties against other defendants. We could be subject to damages and penalties as a consequence of this lawsuit, 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,
the FDA approved CLARITIN, an allergy medication, to be sold without a prescription. In November 2007, the FDA also approved ZYRTEC, another allergy medication, 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, the sale of other allergy medications without a
prescription, may have a material adverse effect on our business because the market for prescription drugs, including

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CLARINEX,
ALLEGRA, 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 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 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.

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Risks Related to Our Intellectual Property

If we fail to adequately protect or enforce our intellectual property rights, then we could lose revenue under our licensing agreements or lose sales to
generic copies of our 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 to obtain and maintain patents, including successful enforcement of those patents, of sufficient
scope to prevent third parties from developing substantially equivalent products. In the absence of patent and trade secret protection, competitors may adversely affect our business by independently
developing and marketing 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 drugs and drug 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
enforcing our patents, we will not be able to prevent others from introducing generic versions of our products.

A number of our products and products for which we receive royalties are the subject of patent invalidation claims.

With respect to XOPENEX Inhalation Solution, Breath, Dey, L.P., Barr, Teva and Watson 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 at this time as its Paragraph IV certification is limited to a single patent that expires in 2021. Teva's
Paragraph IV certification is also limited to a single patent that expires in 2021 and we are still evaluating whether to commence litigation in response.

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 would pay Sepracor 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 an agreed order of dismissal without prejudice, which the court approved. The litigation is now concluded.

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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.

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 stays against Dey, L.P. and Barr expire on or about July 9, 2008 and November 30, 2009, respectively. 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. In addition, since June 2007, the FDA has
received ANDAs relating to various dosage forms of CLARINEX from ten different generic pharmaceutical companies. These ANDA submissions include Paragraph IV certifications alleging that our
patents, which Schering-Plough (as 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.

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UCB's
XYZAL 5mg product, for which we receive royalties, is currently the subject of patent infringement litigation. In addition, the FDA has received ANDAs from two 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 litigation against one of these parties and we and/or UCB are
contemplating filing an action against the other party. We believe that these ANDAs are subject to a statutory stay of approval until at least August 31, 2010.

In
addition, a number of our foreign patents that we have out-licensed to Schering-Plough, sanofi-aventis and UCB 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 outcome or the duration 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 copies of any of our 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 upon proprietary rights of others, including patent and trademark rights. Third parties,
typically drug 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

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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 U.S. patent for which Dey owns all rights, title and interest. In April 2007, we filed an Answer and Counterclaim 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, trial will begin no earlier than
January 12, 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, U.S. Patent 7,348,362 entitled "Bronchodilation b-agonist compositions and
Methods" issued and Dey, L.P. is the assignee of the patent. We are currently evaluating this patent.

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 the 3M for the manufacturing of XOPENEX HFA. Under this agreement, 3M is responsible for manufacturing an 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 U.S. 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 also recently entered into a license agreement with Bial for the development and commercialization in the United States and Canada of
Bial's eslicarbazepine 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 recently 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 compound ciclesonide, 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 product 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 from such collaborator, we may not realize the potential commercial benefits of the arrangement and our results
of operations may

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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 may not
realize, or may be delayed in realizing, the potential commercial benefits of the 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 product candidates in amounts needed
for our clinical trials. We do not, however, have the capability to manufacture at our manufacturing facility all of our requirements for the active ingredients of our currently approved products, and
we have no 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 realize the potential commercial benefits of our supply and/or licensing arrangements with these parties and
our results of operations may be adversely

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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 and OMNARIS HFA. Furthermore, in the event that we develop and commercialize any additional products containing the compound ciclesonide,
Nycomed, upon request, will be our exclusive supplier of such additional products. If Nycomed experiences delays or difficulties in producing, packaging or delivering ALVESCO HFA Inhalation Aerosol,
OMNARIS Nasal Spray, OMNARIS HFA, or other products containing the compound ciclesonide, 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 five products and expect to launch a sixth product, ALVESCO HFA Inhalation Aerosol, in 2008. In addition, we recently acquired
from Nycomed the development rights to one late-stage product candidate, and recently licensed another late-stage product candidate from Bial. 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 inherent in pharmaceutical product development, including the possibility that the
product candidate will not be safe and effective or approved by regulatory authorities.

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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 such acquisitions 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. For transactions that are ultimately not
consummated, these charges may include fees and expenses for investment bankers, attorneys, accountants and other advisers in connection with our efforts. Even if our efforts are successful, we may
incur as part 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.

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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.

ITEMS 2-5.    NONE

ITEM 6.    EXHIBITS

|10.1(1) |  | Distribution and Development Agreement for ciclesonide in the USA dated January 25, 2008 between the Registrant and Nycomed GmbH.                 
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|31.1     |  | 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: May 12, 2008 |  | By:          
|Date: May 12, 2008 |  | By:          

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Exhibit Index

|Exhibit No. |  | Description                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|10.1(1)    |  | Distribution and Development Agreement for ciclesonide in the USA dated January 25, 2008 between the Registrant and Nycomed GmbH.                 
|31.1        |  | 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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