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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the Quarterly Period Ended September 30, 2004            
|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

---

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

|Delaware(State or Other Jurisdiction of
Incorporation or Organization)                |  | 22-2536587(IRS Employer Identification No.)
|------------------------------------------------------------------------------------- |  | -------------------------------------------
|84 Waterford Drive
Marlborough, Massachusetts(Address of Principal Executive Offices) |  | 01752(Zip Code)                            

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

---

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

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

The number of shares outstanding of the registrant's class of Common Stock as of November 1, 2004 was: 105,086,396 shares.



---





SEPRACOR INC.

INDEX



|Part IFinancial Information
|----------------------------
|Item 1.                     
|                            
|                            
|                            
|                            
|Item 2.                     
|Item 3.                     
|Item 4.                     
|Part IIOther Information   
|Item 1.                     
|Item 2.                     
|Item 6.                     
|                            
|                            

2

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SEPRACOR INC.        CONSOLIDATED BALANCE SHEETS        (Unaudited)        (In Thousands)

|                                                                                                                                                                                                        |  | September 30, 2004 |            | December 31, 2003 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ----------------- | -
|Assets                                                                                                                                                                                                  |  |                    |            |                   |  
|Current assets:                                                                                                                                                                                         |  |                    |            |                   |  
|Cash and cash equivalents                                                                                                                                                                               |  | $                  | 541,936    |                   | $
|Restricted cash                                                                                                                                                                                         |  |                    | 1,500      |                   |  
|Short-term investments                                                                                                                                                                                  |  |                    | 133,624    |                   |  
|Accounts receivable, net                                                                                                                                                                                |  |                    | 40,920     |                   |  
|Inventories                                                                                                                                                                                             |  |                    | 16,207     |                   |  
|Other assets                                                                                                                                                                                            |  |                    | 23,647     |                   |  
|                                                                                                                                                                                                        |  |                    |            |                   |  
|Total current assets                                                                                                                                                                                    |  |                    | 757,834    |                   |  
|Long-term investments                                                                                                                                                                                   |  |                    | 113,970    |                   |  
|Property and equipment, net                                                                                                                                                                             |  |                    | 71,057     |                   |  
|Investment in affiliate                                                                                                                                                                                 |  |                    | 2,006      |                   |  
|Patents and deferred financing costs, net                                                                                                                                                               |  |                    | 28,242     |                   |  
|Other assets                                                                                                                                                                                            |  |                    | 504        |                   |  
|                                                                                                                                                                                                        |  |                    |            |                   |  
|Total assets                                                                                                                                                                                            |  | $                  | 973,613    |                   | $
|                                                                                                                                                                                                        |  |                    |            |                   |  
|Liabilities and Stockholders' Equity (Deficit)                                                                                                                                                          |  |                    |            |                   |  
|Current liabilities:                                                                                                                                                                                    |  |                    |            |                   |  
|Accounts payable                                                                                                                                                                                        |  | $                  | 6,594      |                   | $
|Accrued expenses                                                                                                                                                                                        |  |                    | 117,938    |                   |  
|Current portion of notes payable and capital lease obligation                                                                                                                                           |  |                    | 1,926      |                   |  
|Current portion of convertible subordinated debt                                                                                                                                                        |  |                    |           |                   |  
|Other current liabilities                                                                                                                                                                               |  |                    | 31,620     |                   |  
|                                                                                                                                                                                                        |  |                    |            |                   |  
|Total current liabilities                                                                                                                                                                               |  |                    | 158,078    |                   |  
|Notes payable and capital lease obligation                                                                                                                                                              |  |                    | 2,975      |                   |  
|Long-term deferred revenue                                                                                                                                                                              |  |                    |           |                   |  
|Other long-term liabilities                                                                                                                                                                             |  |                    | 31,304     |                   |  
|Convertible subordinated debt                                                                                                                                                                           |  |                    | 1,160,820  |                   |  
|                                                                                                                                                                                                        |  |                    |            |                   |  
|Total liabilities                                                                                                                                                                                       |  |                    | 1,353,177  |                   |  
|                                                                                                                                                                                                        |  |                    |            |                   |  
|Stockholders' equity (deficit):                                                                                                                                                                         |  |                    |            |                   |  
|Preferred stock, $1.00 par value, 1,000 shares authorized, none outstanding at September 30, 2004 and December 31, 2003                                                                                 |  |                    |           |                   |  
|Common stock, $.10 par value, 240,000 and 240,000 shares authorized; 105,072 and 85,025 shares issued, 103,139 and 85,025 shares outstanding, at September 30, 2004 and December 31, 2003, respectively |  |                    | 10,507     |                   |  
|Treasury stock, at cost (1,933 and 0 shares at September 30, 2004 and December 31, 2003, respectively)                                                                                                  |  |                    | (100,321   | )                 |  
|Additional paid-in capital                                                                                                                                                                              |  |                    | 1,290,743  |                   |  
|Accumulated deficit                                                                                                                                                                                     |  |                    | (1,591,761 | )                 |  
|Accumulated other comprehensive income                                                                                                                                                                  |  |                    | 11,268     |                   |  
|                                                                                                                                                                                                        |  |                    |            |                   |  
|Total stockholders' equity (deficit)                                                                                                                                                                    |  |                    | (379,564   | )                 |  
|                                                                                                                                                                                                        |  |                    |            |                   |  
|Total liabilities and stockholders' equity (deficit)                                                                                                                                                    |  | $                  | 973,613    |                   | $
|                                                                                                                                                                                                        |  |                    |            |                   |  

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

3

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

|                                                                      |                                             | Three Months Ended       |   | Nine Months Ended |        
|--------------------------------------------------------------------- | ------------------------------------------- | ------------------------ | - | ----------------- | -------
|
|Revenues:                                                             |                                             |                          |   |                   |        
|                                                                      | Product sales                               |                          | $ | 60,122            |        
|                                                                      | Royalties and other                         |                          |   | 19,959            |        
|                                                                      |                                             |                          |   |                   |        
|                                                                      |                                             | Total revenues           |   |                   | 80,081 
|                                                                      |                                             |                          |   |                   |        
|Costs and expenses:                                                   |                                             |                          |   |                   |        
|                                                                      | Cost of product sold                        |                          |   | 7,021             |        
|                                                                      | Cost of royalties and other                 |                          |   | 285               |        
|                                                                      | Research and development                    |                          |   | 38,744            |        
|                                                                      | Selling, marketing and distribution         |                          |   | 82,843            |        
|                                                                      | General and administrative                  |                          |   | 7,465             |        
|                                                                      |                                             |                          |   |                   |        
|                                                                      |                                             | Total costs and expenses |   |                   | 136,358
|                                                                      |                                             |                          |   |                   |        
|                                                                      | Loss from operations                        |                          |   | (56,277           | )      
|Other income (expense):                                               |                                             |                          |   |                   |        
|                                                                      | Interest income                             |                          |   | 2,039             |        
|                                                                      | Interest expense                            |                          |   | (5,846            | )      
|                                                                      | Loss on redemption of debt                  |                          |   |                  |        
|                                                                      | Loss on conversion of debt                  |                          |   | (69,768           | )      
|                                                                      | Equity in investee (losses)                 |                          |   | (508              | )      
|                                                                      | Other income (expense), net                 |                          |   | (3                | )      
|                                                                      |                                             |                          |   |                   |        
|                                                                      | Net loss                                    |                          | $ | (130,363          | )      
|                                                                      |                                             |                          |   |                   |        
|                                                                      | Basic and diluted net loss per common share |                          | $ | (1.40             | )      
|Shares used in computing basic and diluted net loss per common share: |                                             |                          |   |                   |        
|                                                                      | Basic and diluted                           |                          |   | 92,800            |        

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

4

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

|                                                                            |                                                              | Nine Months Ended |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------ | ----------------- | -
|
|Cash flows from operating activities:                                       |                                                              |                   |  
|                                                                            | Net loss                                                     |                   | $
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                              |                   |  
|                                                                            | Depreciation and amortization                                |                   |  
|                                                                            | Provision for bad debt                                       |                   |  
|                                                                            | Equity in investee losses                                    |                   |  
|                                                                            | Loss on conversion of debt                                   |                   |  
|                                                                            | Loss on redemption of debt                                   |                   |  
|                                                                            | Loss (gain) on disposal of property and equipment            |                   |  
|                                                                            | Gain on sale of long-term investment                         |                   |  
|Changes in operating assets and liabilities:                                |                                                              |                   |  
|                                                                            | Accounts receivable                                          |                   |  
|                                                                            | Inventories                                                  |                   |  
|                                                                            | Other current assets                                         |                   |  
|                                                                            | Accounts payable                                             |                   |  
|                                                                            | Accrued expenses                                             |                   |  
|                                                                            | Other current liabilities                                    |                   |  
|                                                                            | Other liabilities                                            |                   |  
|                                                                            |                                                              |                   |  
|                                                                            | Net cash used in operating activities                        |                   |  
|                                                                            |                                                              |                   |  
|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                          |                   |  
|                                                                            | Proceeds from sale of property and equipment                 |                   |  
|                                                                            | Additions to patents and intangible assets                   |                   |  
|                                                                            | Change in other assets                                       |                   |  
|                                                                            |                                                              |                   |  
|                                                                            | Net cash (used in) provided by investing activities          |                   |  
|                                                                            |                                                              |                   |  
|Cash flows from financing activities:                                       |                                                              |                   |  
|                                                                            | Redemption of convertible subordinated notes                 |                   |  
|                                                                            | Conversion of convertible subordinated notes                 |                   |  
|                                                                            | Repurchase of convertible subordinated notes                 |                   |  
|                                                                            | Net proceeds from issuance of common stock                   |                   |  
|                                                                            | Proceeds from sale of convertible subordinated debt          |                   |  
|                                                                            | Costs associated with sale of convertible subordinated debt  |                   |  
|                                                                            | Settlement of call spread options                            |                   |  
|                                                                            | Purchase of treasury stock                                   |                   |  
|                                                                            | Repayments of long-term debt and capital leases              |                   |  
|                                                                            |                                                              |                   |  
|                                                                            | Net cash provided by (used in) financing activities          |                   |  
|                                                                            |                                                              |                   |  
|                                                                            | Effect of exchange rate changes on cash and cash equivalents |                   |  
|                                                                            |                                                              |                   |  
|                                                                            | Net decrease in cash and cash equivalents                    |                   |  
|                                                                            | Cash and cash equivalents at beginning of period             |                   | $
|                                                                            |                                                              |                   |  
|                                                                            | Cash and cash equivalents at end of period                   |                   | $
|                                                                            |                                                              |                   |  
|Non cash activities:                                                        |                                                              |                   |  
|                                                                            | Additions to capital leases                                  |                   |  
|                                                                            | Conversion of Convertible Subordinated Notes                 |                   |  

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

5

---





NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying 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 year-end consolidated condensed balance
sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. The consolidated interim financial statements, in
the opinion of our management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for the interim periods ended September 30,
2004 and 2003. Certain prior amounts have been reclassified to conform to current year presentation.

The
consolidated financial statements include our accounts and the accounts of our majority and 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
consolidated results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the fiscal year. These consolidated interim
financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2003, which are contained in our annual report on
Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission.

The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the following:
(1) the reported amounts of assets and liabilities, (2) the disclosure of contingent assets and liabilities at the dates of the financial statements and (3) the reported amounts
of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

2. Recent Accounting Pronouncements

In September 2004, the Emerging Issues Task Force, or EITF, of the Financial Accounting Standards Board, or FASB, reached consensus on EITF Issue
No. 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share", or EITF No. 04-8. Under the EITF's conclusion, contingently convertible
shares attached to a debt instrument are to be included in the calculation of diluted earnings per share regardless of whether or not the contingency has been met. The EITF consensus supersedes the
accounting under Statement of Financial Accounting Standards No. 128, "Earnings Per Share," and accordingly, we will be required to adopt the provisions of EITF No. 04-8 for
our 0% convertible subordinated notes due 2024 when effective, which is expected to be for the year ending December 31, 2004, including the retroactive restatement of all diluted earnings per
share calculations for all periods presented. Based on a review of the provisions of EITF No. 04-8, we have determined that the adoption will have no effect on our current or prior
year diluted earnings per share, as inclusion of any contingently convertible shares would be anti-dilutive.

3. Basic and Diluted Net Loss Per Common Share

Basic earnings (loss) 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 common equivalent shares during the period. Common
equivalent shares are not included in the per share calculations where the effect of their inclusion would be anti-dilutive. Common equivalent shares result from the assumed conversion of
preferred stock, convertible

6

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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. Purchased call options are also not included in the per share calculations because including them would be anti-dilutive.

For
the three and nine months ended September 30, 2004 and 2003, basic and diluted net loss per common share is computed based on the weighted-average number of common shares
outstanding during the period because the effect of common stock equivalents would be anti-dilutive. Certain securities were not included in the computation of diluted earnings per share
for the three and nine months ended September 30, 2004 and 2003 because they would have an anti-dilutive effect due to net losses for such periods. These excluded securities include
the following:



(in thousands, except price per share data)

September 30, 2004

September 30, 2003Number of options

12,274

13,616Price range per share

$2.625 to $87.50

$2.50 to $87.50




|(in thousands)                                             |  | September 30, 2004 |  | September 30, 2003
|---------------------------------------------------------- |  | ------------------ |  | ------------------
|5% convertible subordinated debentures due 2007            |  | 4,763              |  | 4,763             
|5.75% convertible subordinated notes due 2006              |  |                   |  | 7,166             
|0% Series A convertible senior subordinated notes due 2008 |  | 2,283              |  |                  
|0% Series B convertible senior subordinated notes due 2010 |  | 4,961              |  |                  
|                                                           |  |                    |  |                   
|                                                           |  | 12,007             |  | 11,929            
|                                                           |  |                    |  |                   

The
0% convertible subordinated notes due 2024 are not convertible at the present time. If the notes were currently convertible, no shares of common stock would need to be reserved under
the conversion formula for issuance upon conversion until our stock price exceeds $67.20 per share.

4. Accounting for Stock-Based Compensation

We have elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", or APB 25, and related interpretations,
in accounting for our stock-based compensation plans, rather than the alternative fair value accounting method provided for under FASB Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", or SFAS No. 123. Under APB 25, when the exercise price of options granted under these plans equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.

7

---



The
following table illustrates the effect on net loss and loss per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation:

Three Months Ended
September 30,

Nine Months Ended
September 30,(in thousands, except per share data)2004

2003

2004

2003Net loss attributable to common stockholders

$
(130,363
)
$
(38,488
)
$
(261,933
)
$
(102,038
)Total stock-based employee compensation expense determined under fair value based method for all awards


(12,537
)

(16,025
)

(35,332
)

(45,405
)Pro forma net loss

$
(142,900
)
$
(54,513
)
$
(297,265
)
$
(147,443
)Amounts per common share:Basic and dilutedas reported

$
(1.40
)
$
(0.45
)
$
(2.97
)
$
(1.21
)Basic and dilutedpro forma

$
(1.54
)
$
(0.64
)
$
(3.37
)
$
(1.74
)


5. Inventories

Inventories consist of the following:

(in thousands)

September 30, 2004

December 31, 2003Raw materials

$
3,281

$
1,062Work in progress


1,843


1,295Finished goods


11,083


4,509$
16,207

$
6,866


6. Patents and Deferred Financing Costs

The following schedule details the carrying value of our patents and deferred financing costs as of September 30, 2004 and December 31, 2003:

(in thousands)

September 30, 2004

December 31, 2003Deferred finance costs, gross

$
34,440

$
42,957Accumulated amortization


(10,296
)

(13,136
)Deferred finance costs, net

$
24,144

$
29,821Patents, gross

$
6,679

$
7,223Accumulated amortization


(2,581
)

(2,231
)Patents, net

$
4,098

$
4,992


8

---



The
following schedule details our amortization expense related to patents and deferred financing costs:

Three Months
Ended September 30,

Nine Months
Ended September 30,(in thousands)2004

2003

2004

2003Amortization of deferred finance costs

$
1,222

$
1,106

$
3,928

$
3,550Amortization of patents


173


938


521


2,767Total amortization

$
1,395

$
2,044

$
4,449

$
6,317


We
currently estimate that our amortization expense will be $1,049,000, $4,248,000, $4,222,000, $2,588,000 and $2,231,000 for the remainder of 2004 and for the years ending
December 31, 2005, 2006, 2007 and 2008, respectively.

During
the second quarter of 2004, we recorded a charge of approximately $374,000 related to the impairment of all patents related to ticalopride (formerly known as (+)-norcisapride).
This impairment of patents is related to our termination, during the second quarter of 2004, of all plans for development of ticalopride. This charge is included in research and development expense in
the consolidated statements of operations for the nine months ended September 30, 2004.

During
September 2004, we converted $177,200,000 and $351,980,000 aggregate principal amount of our 0% Series A convertible senior subordinated notes due 2008, or 0%
Series A notes due 2008, and 0% Series B convertible senior subordinated notes due 2010, or 0% Series B notes due 2010, respectively, into an aggregate of 5,556,104 and 11,797,483
shares of our common stock, respectively. As a result of the conversions, deferred financing costs related to the converted 0% Series A notes due 2008 and 0% Series B notes due 2010 of
$4,244,000 and $8,846,000, respectively, were netted against the amount of debt converted into equity.

On
September 22, 2004, we issued $500,000,000 in principal amount of 0% convertible senior subordinated notes due 2024, or 0% notes due 2024. As part of the sale of the 0% notes
due 2024, we incurred offering costs of $14,190,000 which have been recorded as deferred financing costs and are being amortized over the 20 year term of the 0% notes due 2024.

7. Convertible Subordinated Debt

Convertible subordinated debt, including current portion, consists of the following:

(in thousands)

September 30, 2004

December 31, 20035.75% convertible subordinated notes due 2006

$


$
430,0005% convertible subordinated debentures due 2007


440,000


440,0000% Series A convertible senior subordinated notes due 2008


72,800


200,0000% Series B convertible senior subordinated notes due 2010


148,020


400,0000% convertible senior subordinated notes due 2024


500,000


Total

$
1,160,820

$
1,470,000


9

---



On
January 9, 2004, using funds from our December 2003 issuance of 0% Series A notes due 2008 and Series B notes due 2010, we redeemed the remaining
outstanding $430,000,000 principal amount of our 5.75% convertible subordinated notes due 2006 for an aggregate redemption price of $433,709,000, including approximately $3,709,000 in accrued
interest. As a result of this redemption, we recorded a loss of approximately $7,022,000 related to the write-off of deferred financing costs in the first quarter of 2004.

On
January 15, 2004, pursuant to an option granted to the initial purchasers of our 0% Series A notes due 2008 and 0% Series B notes due 2010, we issued an
additional $50,000,000 of 0% Series A notes due 2008 and $100,000,000 of 0% Series B notes due 2010. These notes have the same terms and conditions as our previously issued 0%
Series A notes due 2008 and 0% Series B notes due 2010. Net of issuance costs, our proceeds were approximately $145,875,000. The issuance costs have been recorded as deferred financing
costs and are being amortized over 4 and 6 years, respectively, the remaining term of the debt.

During
September 2004, certain holders agreed, in separately negotiated transactions, to convert $177,200,000 and $351,980,000 in aggregate principal amount of their 0%
Series A notes due 2008 and 0% Series B notes due 2010, respectively, into an aggregate of 5,556,104 and 11,797,483 shares of our common stock, respectively. As an inducement to convert
their notes, we paid the holders of the 0% Series A notes due 2008 and 0% Series B notes due 2010 aggregate cash payments of $23,868,250 and $45,899,900, respectively. These amounts are
recorded as a loss on conversion of convertible notes. Deferred financing costs related to the converted 0% Series A notes due 2008 and 0% Series B notes due 2010 of $4,244,000 and
$8,846,000, respectively, were netted against the amount of debt converted into equity.

On
September 22, 2004, we issued $500,000,000 in principal amount of 0% convertible senior subordinated notes due 2024, or 0% notes due 2024. The 0% notes due 2024 are convertible
into cash and, if applicable, shares of our common stock, at the option of the holder upon certain specified circumstances, at an initial price of $67.20 per share, subject to adjustment.

Holders
may convert the notes into cash and, if applicable, shares of our common stock at a conversion rate of 14.8816 shares of common stock per $1,000 principal amount of notes
(which is equal to a conversion price of approximately $67.20 per share), subject to adjustment, before the close of business on the business day immediately preceding October 15, 2024
only under the following circumstances:



10

---





Upon
conversion of the notes, if the adjusted conversion value of the notes is less than or equal to the principal amount of the notes, then we will convert the notes for an amount in
cash equal to the adjusted conversion value of the notes. If the adjusted conversion value of the notes is greater than the principal amount of the notes, then we will convert the notes into whole
shares of our common stock for an amount equal to the adjusted conversion value of the notes less the principal amount of the notes, plus an amount in cash equal to the principal amount of the notes
plus the cash value of any fractional shares of our common stock. The notes do not bear interest. On or after October 20, 2009, we have the option to redeem for cash all or part of the notes at
any time at a redemption price equal to 100% of the principal amount of the notes to be redeemed. We may be required by the note holders to repurchase for cash all or part of the notes on
October 15 of 2009, 2014 and 2019 at a repurchase price equal to 100% of the principal amount of the notes to be repurchased. We may be required to repurchase for cash all or part of the notes
upon a change in control of our company or a termination of trading of our common stock on the NASDAQ or similar markets at a repurchase price equal to 100% of the principal amount of the notes to be
repurchased. The initial purchaser has an option to purchase an additional $100,000,000 in principal amount of 0% notes due 2024 until November 29, 2004 pursuant to the Purchase Agreement
between the initial purchaser and us, dated September 17, 2004, as amended. In connection with the sale of the notes, we incurred offering costs of approximately $14,190,000 which have been
recorded as deferred financing costs and are being amortized over 20 years, the term of the notes.

8. Equity

During the second quarter of 2004, pursuant to the call spread option agreements we entered into in December 2003, we settled 4,919,496 call spread options
for cash in the amount of $50,006,000. The settled options expired at various dates beginning on May 12, 2004 and ending on June 9, 2004. We recorded the full amount of the call spread
option settlement as an increase to additional paid-in capital. Our remaining outstanding call spread options expire at various dates through 2005 and we have the option to settle the
remaining outstanding call spread options in either net shares or in cash. We currently expect to settle these call spread options for cash, although the amount we receive upon settlement, if any,
will vary based on the price of our common stock on the option expiration dates. Proceeds from a cash settlement of these options are calculated based on the difference between our stock price and the
option price if our stock price is below the cap price or the difference between the cap price and the option price if our stock price exceeds the cap price. Any
cash received in settlement of the remaining call spread options will be recorded as additional paid-in capital.

The
following table sets forth the potential proceeds from our remaining call spread options if settled in cash using the closing price of our common stock on November 1, 2004 of
$45.94:

|Expiration period                          |  | Number of Options |  | Option
Price |       | Cap
Price |   | Proceeds
|------------------------------------------ |  | ----------------- |  | ------------ | ----- | --------- | - | --------
|November 11, 2004 through December 9, 2004 |  | 4,919,496         |  | $            | 29.84 |           | $ | 45.00   
|May 12, 2005 through June 9, 2005          |  | 4,919,496         |  | $            | 29.84 |           | $ | 55.00   
|November 11, 2004 through December 9, 2005 |  | 4,919,496         |  | $            | 29.84 |           | $ | 65.00   
|                                           |  |                   |  |              |       |           |   |         
|Total                                      |  | 14,758,488        |  |              |       |           |   |         
|                                           |  |                   |  |              |       |           |   |         

11

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On
September 22, 2004, we purchased 1,933,000 shares of our common stock for approximately $100,321,000, including transaction costs of $394,000. The shares are being held in
treasury at cost and may be issued in connection with our employee stock purchase plan and other corporate purposes.

9. Comprehensive Loss

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

|                                                            |  | Three Months Ended |          | Nine Months Ended |  
|----------------------------------------------------------- |  | ------------------ | -------- | ----------------- | -
|
|Comprehensive loss:                                         |  |                    |          |                   |  
|Net loss                                                    |  | $                  | (130,363 | )                 | $
|Net foreign currency translation adjustment                 |  |                    | 574      |                   |  
|Net unrealized gain (loss) on available-for-sale securities |  |                    | 1,075    |                   |  
|                                                            |  |                    |          |                   |  
|Total comprehensive loss                                    |  | $                  | (128,714 | )                 | $
|                                                            |  |                    |          |                   |  

10. Commitments and Contingencies

We enter into indemnification agreements in our ordinary course of business pursuant to which we indemnify and hold harmless certain parties against claims,
liabilities and losses brought by a third party to the extent that the claims arise out of (1) injury or death to person or property caused by defects in our product or product candidates,
(2) negligence in the manufacture or distribution of our product or product candidates or (3) a material breach by us. We have not incurred a liability on these guarantees at
September 30, 2004. If liabilities were incurred, we have insurance policies covering product liabilities, which should mitigate, but may not eliminate, losses.

We
have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity.
The term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements
is unlimited; however, we believe the fair value of these indemnification agreements is minimal.

The
Securities and Exchange Commission is conducting an investigation into trading in our securities, including trading by certain of our officers and employees during the period from
January 1, 1998 through December 31, 2001. We have cooperated with the investigation and plan to continue to do so.

We
and several of our current and former officers and a current director are named as defendants in several purported class action complaints which have been filed on behalf of certain
persons who purchased our common stock and/or debt securities during different time periods, beginning on various dates, the earliest being May 17, 1999, and all ending on March 6, 2002.
These complaints allege violations of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder by the Securities and Exchange Commission. Primarily they
allege that the defendants made certain materially false and misleading statements relating to the testing, safety and likelihood of approval of tecastemizole (formerly SOLTARA) by the
United States Food and Drug

12

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Administration,
or FDA. On April 11, 2003, two consolidated amended complaints were filed, one on behalf of the purchasers of our common stock and the other on behalf of the purchasers of our
debt securities. These consolidated amended complaints reiterate the allegations contained in the previously filed complaints and define the alleged class periods as May 17, 1999 through
March 6, 2002. We filed a motion to dismiss both consolidated amended complaints on May 27, 2003. On March 11, 2004, the court, while granting in part the motion to dismiss, did
allow much of the case to proceed. The parties are currently engaged in discovery. We are unable to reasonably estimate any possible range of loss related to these lawsuits due to their uncertain
resolution.

11. Ross Agreement Amendment

On March 25, 2004, we announced an amendment to our agreement with the Ross Products Division of Abbott Laboratories, or Ross, for the
co-promotion of XOPENEX® brand levalbuterol HCl inhalation solution. Under the terms of the amendment, our agreement with Ross will terminate effective December 31,
2004. Ross will continue to co-promote XOPENEX through December 31, 2004. Under the terms of the amendment, we will make residual payments to Ross of $30,000,000 on or before
December 31, 2005 and $3,000,000 on or before December 31, 2006. We charged the present value of these payments, approximately $30,671,000, to selling, marketing and distribution expense
in the first quarter of 2004 and this amount is included on the balance sheet in other long-term liabilities as of September 30, 2004. The difference between the payment amounts and
the present value will be accreted to interest expense at a rate of $317,000 per quarter through the end of 2005 and then $28,000 per quarter in 2006.

12. MedPointe Agreement Amendment

On October 1, 2004, we terminated our co-promotion agreement with MedPointe, Inc., or MedPointe, for the co-promotion of
ASTELIN® brand azelastine HCl for the treatment of allergic rhinitis. Such termination was not for cause and was undertaken in accordance with the terms of the agreement, which had been
amended as of April 30, 2004. Pursuant to the terms of the amended agreement, as of July 1, 2004, our sales force was only responsible for providing ASTELIN samples to doctors and, as of
October 1, 2004, both parties had the right to unilaterally terminate the agreement without cause. In connection with our termination of the agreement, we are entitled to receive a payment from
MedPointe of $6,950,000, less any amount earned for sample coverage services provided for ASTELIN prior to the October 1, 2004 termination of the agreement. As of September 30, 2004, we
had earned all $6,950,000 by providing sample coverage and that amount has been recognized as other revenue.

13. Subsequent Event

We have agreed to purchase, in a private placement, 4,000 shares of BioSphere Series A Convertible Preferred Stock and warrants to purchase
200,000 shares of BioSphere common stock from BioSphere for an aggregate purchase price of $4,000,000. The completion of the private placement is subject to the execution of definitive
agreements and is expected to close on or about November 9, 2004. We will continue to account for our investment in BioSphere under the equity method.

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

This quarterly report on Form 10-Q contains, in addition to historical information, forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties and are not guarantees of future performance. Our actual results
could differ significantly from the results we discuss in these forward-looking statements. See the section entitled "Factors Affecting Future Operating Results" below for a discussion of important
factors that could cause our actual results to differ materially from the results we discuss in our forward-looking statements.

Executive Overview

We are a research-based pharmaceutical company dedicated to treating and preventing human disease through discovery, development and commercialization of
innovative pharmaceutical compounds. We select compounds for development that have potential to offer improvements over existing therapies with respect to efficacy, side-effect profile,
dosage forms and, in some cases, opportunity for additional indications. We market and sell XOPENEX inhalation solution, currently our only commercialized product, directly through our sales force and
through a co-promotion agreement. We have entered into out-licensing arrangements with respect to several other compounds. We expect to commercialize any additional products
that we successfully develop through our sales force, through co-promotion agreements and/or through out-licensing partnerships.

Significant 2004 Developments

On October 22, 2004 we commenced notifying drug wholesalers, hospitals and pharmacies of a manufacturer-initiated voluntary Class III recall of one
component of our XOPENEX product line, XOPENEX Inhalation Solution Concentrate (1.25mg/0.5mL), which we had introduced in August 2004. The recall, which affects only XOPENEX Concentrate and no
other components of our XOPENEX product line, was necessitated by packaging process validation issues relating to the automated process
of placing the finished vials into a foil pouch. We have suspended manufacture and sale of XOPENEX Concentrate until the issues giving rise to the recall have been fully addressed.

On
October 1, 2004, we terminated our co-promotion agreement with MedPointe, Inc., or MedPointe, for the co-promotion of ASTELIN brand azelastine
HCl for the treatment of allergic rhinitis. Such termination was not for cause and was undertaken in accordance with the terms of the agreement, which had been amended as of April 30, 2004.
Pursuant to the terms of the amended agreement, as of July 1, 2004, our sales force was only responsible for providing ASTELIN samples to doctors and, as of October 1, 2004, both parties
had the right to unilaterally terminate the agreement without cause. In connection with our termination of the agreement, we are entitled to receive a payment from MedPointe of $6,950,000, less any
amount earned for sample coverage services provided for ASTELIN prior to the October 1, 2004 termination of the agreement. As of September 30, 2004, we had earned all $6,950,000 by
providing sample coverage and that amount has been recognized as other revenue.

On
September 22, 2004, we issued $500,000,000 in principal amount of 0% convertible senior subordinated notes due 2024, or 0% notes due 2024. In connection with the sale of these
notes, we incurred offering costs of approximately $14,190,000. The net proceeds to us after offering costs were approximately $485,810,000. We used $100,321,000 of the proceeds from the issuance of
these notes to purchase 1,933,200 shares of our common stock. The initial purchaser has an option to purchase an additional $100,000,000 in principal amount of 0% notes due 2024 until
November 29, 2004 pursuant to the Purchase Agreement between the initial purchaser and us, dated September 17, 2004, as amended.

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During
September 2004, certain holders of our 0% Series A convertible senior subordinated notes due 2008, or 0% Series A notes due 2008, and 0% Series B
convertible senior subordinated notes due 2010, or 0% Series B notes due 2010, agreed, in separately negotiated transactions, to convert $177,200,000 and $351,980,000 in aggregate principal
amount of their 0% Series A notes due 2008 and 0% Series B notes due 2010, respectively, into an aggregate of 5,556,104 and 11,797,483 shares of our common stock, respectively. As an
inducement to convert their notes, we paid the holders of the 0% Series A notes due 2008 and 0% Series B notes due 2010 aggregate cash payments of $23,868,250 and $45,899,900,
respectively.

On
July 15, 2004, we announced that the United States Food and Drug Administration, or FDA, had accepted our resubmission of our New Drug Application, or NDA, for
ESTORRA brand eszopiclone for the treatment of insomnia characterized by difficulty falling asleep, and/or difficulty maintaining sleep during the night and early morning. We received an
"approvable" letter from the FDA on February 27, 2004 for the original NDA for ESTORRA. The FDA has classified our resubmission as a Class 2 resubmission. Under the Prescription Drug
User Fee Act, or PDUFA, the FDA is expected to complete its review of this Class 2 resubmission within a six-month period beginning on the date that the resubmission was received.
As a result of this Class 2 designation,
the PDUFA date, or the date by which the FDA is expected to review and act on the NDA submission for our ESTORRA NDA, is December 15, 2004. We are currently planning for a January 2005
product launch, contingent upon approval from the FDA. We have expanded our sales force in anticipation of marketing ESTORRA to primary care physicians and psychiatrists, the principal prescribers of
sleep medications. Contingent upon approval from the FDA, we expect the recommended dosing to achieve sleep onset and maintenance to be 2 mg or 3 mg for adult patients, 2 mg for elderly patients with
sleep maintenance difficulties, and 1 mg for sleep onset in elderly patients whose primary complaint is difficulty falling asleep. The FDA has not requested additional clinical or preclinical trials
for final approval. If the FDA delays or denies final approval of our NDA for eszopiclone, or the trademark we propose to use in connection with the product, then our plans for commercialization of
ESTORRA would be delayed or terminated, which would have a material adverse effect on our business.

On
July 15, 2004, we announced that the FDA had accepted for formal review our NDA for XOPENEX HFA (levalbuterol tartrate HFA) Inhalation Aerosol, a
hydrofluoroalkane, or HFA, metered-dose inhaler, or MDI. The FDA has notified us that the PDUFA date for our NDA for XOPENEX HFA MDI is March 12, 2005. On May 12, 2004, we
submitted our NDA to the FDA for XOPENEX HFA MDI for the treatment or prevention of bronchospasm in adults, adolescents and children 4 years of age and older with reversible obstructive airway
disease, such as asthma and chronic obstructive pulmonary disease, or COPD. MDIs are hand-held, pressurized canisters that deliver inhaled medications directly to the lungs. Our MDI
development program included approximately 1,870 pediatric and adult subjects and 54 studies (preclinical and clinical). In 2003, we completed our Phase III studies of XOPENEX HFA. In each of the
three, large-scale, pivotal Phase III trials that we conducted, the XOPENEX HFA MDI was well tolerated and met the targeted efficacy endpoints in both adults and children with asthma. In the primary
airway function measure, FEV1 (a test of lung function that measures the amount of air forcefully exhaled in one second), the XOPENEX HFA MDI produced statistically and clinically significant
improvements relative to placebo (p<0.001). If the FDA delays or denies approval of our NDA for XOPENEX HFA MDI, then commercialization of this product candidate could be delayed or
terminated, which would have a material adverse effect on our business.

On
July 13, 2004, we announced a conditional amendment to our agreement with Aventis relating to eszopiclone. The amendment became effective upon the completion of the business
combination between Aventis and Sanofi-Synthelabo. Under the amended agreement, we have the right to read and reference Aventis' regulatory filings related to zopiclone outside of the United States
for the purpose of development and regulatory registration of eszopiclone outside of the U.S., and Aventis will assign to

15

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us
the foreign counterparts to the U.S. patent covering eszopiclone and its therapeutic use. Also as part of the amendment, we permitted Aventis to assign our obligation to pay a royalty on sales of
eszopiclone in the U.S. to a third party. Under the original agreement, we have exclusively licensed Aventis' preclinical, clinical and post-marketing surveillance data package relating to
zopiclone, its isomers and metabolites, to develop, make, use and sell eszopiclone in the U.S. Zopiclone is marketed by Aventis in approximately 80 countries worldwide under the brand names of
IMOVANE® and AMOBAN®.

During
the second quarter of 2004, pursuant to the call spread option agreements we entered into in December 2003, we settled 4,919,496 call spread options for cash which resulted
in payments to us in the amount of $50,006,000. The settled options expired at various dates beginning on May 12, 2004 and ending on June 9, 2004. We recorded the full amount of the call
spread option settlement as an increase to additional paid-in capital. Our remaining outstanding call spread options expire at various dates through 2005 and we have the option to settle
the remaining outstanding call spread options in either net shares or in cash. The next series of call spread options expire in December 2004 and are valued at $74,603,000, based on the closing
price of our common stock on November 1, 2004, which was $45.94. We currently expect to settle these call spread options for cash, although the amount we receive upon settlement, if any, will
vary based on the price of our common stock on the option expiration dates. Any cash received in settlement of the remaining call spread options will be recorded as additional paid-in
capital.

On
March 25, 2004, we announced an amendment to our agreement with the Ross Products Division of Abbott Laboratories, or Ross, for the co-promotion of XOPENEX brand
levalbuterol HCl inhalation solution. Under the terms of the amendment, our agreement with Ross will terminate effective December 31, 2004. Ross will continue to co-promote XOPENEX
through December 31, 2004. Under the terms of the amendment, we will make residual payments to Ross of $30,000,000 on or before December 31, 2005 and $3,000,000 on or before
December 31, 2006. We charged the present value of these payments, approximately $30,671,000, to selling, marketing and distribution expense in the first quarter of 2004 and this amount is
included on the balance sheet in other long-term liabilities as of September 30, 2004. The difference between the payment amounts and the present value will be accreted to interest
expense at a rate of $317,000 per quarter through the end of 2005 and then $28,000 per quarter in 2006.

On
January 15, 2004, pursuant to an option granted to the initial purchasers of our 0% Series A notes due 2008 and 0% Series B notes due 2010, we issued an
additional $50,000,000 of 0% Series A notes due 2008 and $100,000,000 of 0% Series B notes due 2010. These notes have the same terms and conditions as our previously issued 0%
Series A notes due 2008 and 0% Series B notes due 2010. Net of issuance costs, our proceeds were approximately $145,875,000.

On
January 9, 2004, we completed the redemption of $430,000,000 aggregate principal amount of our 5.75% convertible subordinated notes due November 15, 2006. We redeemed
the 5.75% notes, pursuant to their terms, at 100% of the principal amount, plus accrued but unpaid interest from November 15, 2003 to, but excluding, the redemption date. The total aggregate
redemption price for the 5.75% notes was approximately $433,709,000, including approximately $3,709,000 of accrued interest. The 5.75% notes that we redeemed represented all of our remaining
outstanding 5.75% notes.

Critical Accounting Policies

We identified critical accounting policies in our annual report on Form 10-K for the year ended December 31, 2003. These critical
accounting policies relate to product revenue recognition, royalty revenue recognition, rebate and return reserves, patents, intangibles and other assets, accounts receivable and bad debt, induced
conversion of debt and inventory write-downs. These policies require us to make estimates in the preparation of our financial statements as of a given date. Because of the

16

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uncertainty
inherent in these matters, our actual results could differ from the estimates we use in applying the critical accounting policies. No changes to these critical accounting policies have
taken place since December 31, 2003.

Three Month Periods ended September 30, 2004 and 2003

Revenues

Product revenues were $60,122,000 and $53,097,000 for the three months ended September 30, 2004 and 2003, respectively, an increase of approximately 13%.
The increase in product revenue is primarily attributable to an 8% increase in the net selling price per unit of XOPENEX and a 5% increase in XOPENEX unit volume sales. The 8% net selling price per
unit increase is due primarily to a gross unit price increase of approximately 8%. The 5% increase in unit volume sales is significantly less than the increase in unit volume sales during prior recent
periods. We believe this decrease in unit volume sales growth is primarily attributable to (1) an atypically mild allergy season, which resulted in reduced unit volume sales growth for
respiratory drugs generally during the period and (2) state-by-state changes in the status of XOPENEX on Medicaid preferred drug lists, which resulted in a decrease in
the number of Medicaid beneficiaries having access to XOPENEX without prior authorization from their state Medicaid agency.

Royalties
and other revenues were $19,959,000 and $17,687,000 for the three months ended September 30, 2004 and 2003, respectively, an increase of approximately 13%. The increase
for the three months ended September 30, 2004 as compared with the same period in 2003 is partially due to an increase in MedPointe-related revenue which was $5,051,000 for the three months
ended September 30, 2004 as compared with MedPointe-related revenue of $3,741,000 for the three months
ended September 30, 2003. MedPointe revenue consists primarily of revenue related to the fair value of services performed pursuant to our agreement with MedPointe, for the
co-promotion of ASTELIN. On October 1, 2004, we terminated our co-promotion agreement with MedPointe. Combined royalties earned on sales of CLARINEX® under
our agreement with Schering-Plough, and on sales of ALLEGRA® under our agreement with Aventis, remained consistent for the three months ended September 30, 2004 as compared with the
same period in 2003. However, we expect royalties earned from these products to continue to be adversely affected by decreased sales volume resulting from the availability of other allergy drugs
without a prescription. Royalties earned on sales of XYZAL®/XUSAL under our agreement with UCB Farchim SA, increased by approximately $1,127,000 during the three months ended
September 30, 2004 as compared with the same period in 2003.

Costs of Revenues

Cost of product sold was $7,021,000 and $5,638,000 for the three months ended September 30, 2004 and 2003, respectively, an increase of approximately 24%.
Cost of product sold as a percentage of product sales was approximately 11% for each of the three months ended September 30, 2004 and 2003.

Cost
of royalties and other revenues was $285,000 and $360,000 for the three months ended September 30, 2004 and 2003, respectively, a decrease of approximately 21%. Our cost of
royalties and other revenues consists primarily of a royalty obligation to a third-party as a result of royalties we receive from Schering-Plough Corporation based upon its sales of CLARINEX. The
decrease for the three months ended September 30, 2004 as compared with the same period in 2003 resulted from the decrease in royalties we earned on sales of CLARINEX.

Research and Development

Research and development expenses were $38,744,000 and $40,703,000 for the three months ended September 30, 2004 and 2003, respectively, a decrease of
approximately 5%. The decrease for the three

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months
ended September 30, 2004 as compared with the same period in 2003 is primarily due to our reduced spending on our XOPENEX HFA MDI, arformoterol and tecastemizole programs. We submitted
an NDA for XOPENEX HFA MDI to the FDA in May 2004, which was accepted for filing on July 14, 2004 and we discontinued our development of tecastemizole in December 2003. Our
decreased spending in these programs was partially offset by our increased spending on Phase IIIB/IV studies of eszopiclone.

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:
Phases I, II and III. The most significant costs in clinical development are in the 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. As further
discussed below, we currently have one product candidate in NDA preparation stage and two NDAs submitted and currently under FDA review. The 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 the subsequent
compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals could materially
adversely affect our business. We cannot assure you 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 "Factors Affecting Future Operating Results".

Below
is a summary of our product candidates representing 10% or more of our direct project research and development spending during the three months ended September 30, 2004. The
"Estimate of Completion of Stage" column contains forward-looking statements regarding timing of completion of product development stages. Completion of product development, if successful, culminates
in the submission of an NDA to the FDA. The actual timing of completion of stages could differ materially from the estimates provided in the table. The table is sorted by highest to lowest spending
amounts for the three months ended September 30, 2004, and the three product candidates listed accounted for approximately 88% of our direct project research and development spending during
this period.

|Product Candidate     |  | Indication         |  | Stage of
Development |  | Estimate of
Completion of Stage |   
|--------------------- |  | ------------------ |  | -------------------- |  | ------------------------------- | --
|ESTORRA (eszopiclone) |  | Insomnia           |  | NDA Review           |  | 2004                            | * 
|Arformoterol          |  | RespiratoryCOPD   |  | NDA Preparation      |  | 2005                            |   
|XOPENEX HFA MDI       |  | RespiratoryAsthma |  | NDA Review           |  | 2005                            | **

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Below is expenditure information related to our product candidates representing 10% or more of our direct project research and development spending during the three months ended
September 30, 2004 and 2003, respectively, 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 or other costs which benefit multiple projects. As a result, fully loaded research and development cost summaries by project are not presented.

|(in thousands)        |  | Project costs for the
three months ended
September 30, 2004 |        | Project costs to
date through
September 30, 2004 |   | Project costs for the
three months ended
September 30, 2003 |  | Project costs to
date through
September 30, 2003
|--------------------- |  | ----------------------------------------------------------- | ------ | ------------------------------------------------ | - | ----------------------------------------------------------- |  | ------------------------------------------------
|ESTORRA (eszopiclone) |  | $                                                           | 15,331 |                                                  | $ | 170,711                                                     |  | $                                               
|Arformoterol          |  |                                                             | 4,710  |                                                  |   | 139,531                                                     |  |                                                 
|XOPENEX HFA MDI       |  |                                                             | 3,385  |                                                  |   | 126,599                                                     |  |                                                 

Due to the length of time necessary to develop a product, the uncertainties related to the ability to obtain governmental approval for
commercialization and the difficulty in estimating costs of projects, it is difficult to make accurate and meaningful estimates of the ultimate cost to bring our product candidates to FDA approved
status. We do not believe it is possible to estimate, with any degree of accuracy, the costs of product candidates which are in stages earlier than Phase III. We estimate that the cost range to bring
arformoterol from its current state to an NDA submission is $25,000,000 to $30,000,000 based on a targeted NDA submission of mid-2005, provided that no significant delays are imposed by
internal resource constraints or unanticipated FDA requirements.

Delays
in meeting expected NDA submission dates may adversely impact our business due to (1) potential lost revenues due to competition and market changes and
(2) additional expenditures if a project timeline is extended in order to conduct additional studies.

The
uncertainties related to completion of development, regulatory approval and timing of commercialization make it difficult to estimate when, if ever, our product candidates will
generate revenue and cash flows. We do not expect to receive net cash inflows from any of our major research and development projects until a product candidate becomes a profitable commercial product.

Selling, Marketing and Distribution

Selling, marketing and distribution expenses were $82,843,000 and $42,462,000 for the three months ended September 30, 2004 and 2003, respectively, an
increase of approximately 95%. The increase is primarily due to increases in salary, commission, travel and benefit costs as a result of having approximately 800 more sales representatives in the
three months ended September 30, 2004 than in the same period ended September 30, 2003, in anticipation of the commercialization of ESTORRA, which we are planning to launch in
January 2005, subject to receipt of final approval from the FDA in December 2004. We also incurred increased spending in the three months ended September 30, 2004 as compared to
the three months ended September 30, 2003 for trade shows and promotions relating to preparation for the expected commercialization of ESTORRA.

General and Administrative

General and administrative expenses were $7,465,000 and $5,869,000 for the three months ended September 30, 2004 and 2003, respectively, an increase of
approximately 27%. The increase for the three months ended September 30, 2004 as compared with the same period in 2003 is primarily due to payroll and related expenses resulting from an
increase in headcount related to permanent and temporary employees and contracted service providers to support the expected commercialization of ESTORRA.

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Other Income (Expense)

Interest income was $2,039,000 and $1,136,000 for the three months ended September 30, 2004 and 2003, respectively. The increase for the three months ended
September 30, 2004 as compared with the same period in 2003 is due primarily to higher average balances of cash and short- and long-term investments in 2004.

Interest
expense was $5,846,000 and $11,909,000 for the three months ended September 30, 2004 and 2003, respectively. The decrease for the three months ended September 30,
2004 as compared with the same period in 2003 is due to lower outstanding average balances on our interest-bearing debt. The average outstanding balance on our interest-bearing debt for the third
quarter of 2004 was $440,000,000 as compared to the average outstanding balance in the third quarter of 2003 of approximately $981,870,000.

Loss
on conversion of debt was $69,768,000 and $0 for the three months ended September 30, 2004 and 2003, respectively. During September 2004, we converted $177,200,000 of
our 0% Series A notes due 2008 and $351,980,000 of our 0% Series B notes due 2010, respectively. The loss represents the cash payments of $23,868,250 and $45,899,900 that we paid to the
holders of the 0% Series A notes due 2008 and 0% Series B notes due 2010, respectively, as an inducement to convert their notes.

Equity
in investee (losses) were ($508,000) and ($859,000) for the three months ended September 30, 2004 and 2003, respectively. The loss for the three-month periods ended
September 30, 2004 and 2003 represents our portion of BioSphere losses.

Nine Month Periods ended September 30, 2004 and 2003

Revenues

Product revenues were $202,628,000 and $186,603,000 for the nine months ended September 30, 2004 and 2003, respectively, an increase of approximately 9%.
The increase in product revenue is due to an approximate 9% increase in unit volume sales of XOPENEX. The net selling price for each period remained consistent as a result of an approximate 6%
increase in sales rebates, including supplemental rebates and additional discounting, that are accounted for as a reduction in gross product sales, offset by a gross unit price increase of
approximately 6%. The increase in rebates is primarily attributable to an increase in supplemental Medicaid rebates that we provided in connection with the inclusion of XOPENEX on the Medicaid
preferred drug lists in certain states. The 9% increase in unit volume sales is significantly less than the increase in unit volume sales during recent prior periods. We believe this decrease in unit
volume sales growth is primarily attributable to: (1) an atypically mild allergy season, which resulted in reduced unit volume sales growth for respiratory drugs generally during the period and
(2) state-by-state changes in the status of XOPENEX on Medicaid preferred drug lists, which resulted in a decrease in the number of Medicaid beneficiaries having access
to XOPENEX without prior authorization from their state Medicaid agency.

Royalties
and other revenues were $46,898,000 and $45,142,000 for the nine months ended September 30, 2004 and 2003, respectively, an increase of approximately 4%. The increase
for the nine months ended September 30, 2004 as compared with the same period in 2003 is partially due to an increase in MedPointe-related revenue which was $8,946,000 for the nine months ended
September 30, 2004 as compared with MedPointe-related revenue of $3,960,000 for the nine months ended September 30, 2003. MedPointe revenue consists primarily of revenue related to the
fair value of services performed pursuant to our agreement with MedPointe, for the co-promotion of ASTELIN. On October 1, 2004, we terminated our co-promotion agreement with
MedPointe. Royalties earned on sales of XYZAL/XUSAL under our agreement with UCB Farchim SA increased by approximately $2,038,000 during the nine months ended September 30, 2004 as compared
with the same period in 2003. Offsetting the increase in MedPointe and UCB-related revenue is a decrease in royalties earned

20

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on
sales of CLARINEX under our agreement with Schering-Plough, and to a lesser extent, a decrease in royalties earned on sales of ALLEGRA under our agreement with Aventis. Royalties earned from these
products continue to be adversely affected by decreased sales volume resulting from the availability of other allergy drugs without a prescription in the United States.

Costs of Revenues

Cost of product sold was $22,702,000 and $19,551,000 for the nine months ended September 30, 2004 and 2003, respectively, an increase of approximately 16%.
Cost of product sales as a percentage of product sales was approximately 11% and 10% for the nine months ended September 30, 2004 and 2003, respectively. The increase for the nine months ended
September 30, 2004 as compared with the same period in 2003 is primarily due to the increase in product sales of 9% and, to a lesser extent, to a reduction in the cost of products sold of
$771,000 in the nine months ended September 30, 2003 due to a favorable outcome of a quality control issue. This was partially offset by a lower manufacturing cost per unit, as a result of
manufacturing efficiencies that resulted from an increase in the number of units of XOPENEX produced in the nine months ended September 30, 2004 as compared with the same period in 2003.

Cost
of royalties and other revenues was $634,000 and $1,060,000 for the nine months ended September 30, 2004 and 2003, respectively, a decrease of approximately 40%. Our cost of
royalties and other revenues consists primarily of a royalty obligation to a third-party as a result of royalties we receive from Schering-Plough Corporation based upon its sales of CLARINEX. The
decrease for the nine months ended September 30, 2004 as compared with the same period in 2003 resulted from the decrease in royalties we earned on sales of CLARINEX.

Research and Development

Research and development expenses were $121,117,000 and $142,141,000 for the nine months ended September 30, 2004 and 2003, respectively, a decrease of
approximately 15%. The decrease for the nine months ended September 30, 2004 as compared with the same period in 2003 is primarily due to our decreased spending on our XOPENEX HFA MDI,
tecastemizole, arformoterol and (S)-oxybutynin programs. We submitted an NDA for XOPENEX HFA MDI to the FDA in May 2004, which was accepted for filing in July 2004. We discontinued our
development of tecastemizole in December 2003, and we have elected not to fund the (S)-oxybutynin clinical program at this time. Our decreased spending in these programs was partially offset by
our increased spending on Phase IIIB/IV studies under our ESTORRA program.

Below
is a summary of our product candidates representing 10% or more of our direct project research and development spending during the nine months ended September 30, 2004. The
"Estimate of Completion of Stage" column contains forward-looking statements regarding timing of completion of product development stages. Completion of product development, if successful, culminates
in the submission of an NDA to the FDA. The actual timing of completion of stages could differ materially from the estimates provided in the table. The table is sorted by highest to lowest spending
amounts for

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the
nine months ended September 30, 2004, and the three product candidates listed accounted for approximately 84% of our direct project research and development spending during this period.

|Product Candidate     |  | Indication         |  | Stage of
Development |  | Estimate of
Completion of Stage |   
|--------------------- |  | ------------------ |  | -------------------- |  | ------------------------------- | --
|ESTORRA (eszopiclone) |  | Insomnia           |  | NDA Review           |  | 2004                            | * 
|Arformoterol          |  | RespiratoryCOPD   |  | NDA Preparation      |  | 2005                            |   
|XOPENEX HFA MDI       |  | RespiratoryAsthma |  | NDA Review           |  | 2005                            | **

---

Below
is expenditure information related to our product candidates representing 10% or more of our direct project research and development spending during the nine months
ended September 30, 2004 and 2003, respectively, 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 or other costs which benefit multiple projects. As a result, fully loaded research and development cost summaries by project are not presented.

|(in thousands)        |  | Project costs for the
nine months ended
September 30, 2004 |        | Project costs to
date through September 30, 2004 |   | Project costs for the
nine months ended
September 30, 2003 |  | Project costs to
date through
September 30, 2003
|--------------------- |  | ---------------------------------------------------------- | ------ | ------------------------------------------------ | - | ---------------------------------------------------------- |  | ------------------------------------------------
|ESTORRA (eszopiclone) |  | $                                                          | 34,981 |                                                  | $ | 170,711                                                    |  | $                                               
|Arformoterol          |  |                                                            | 21,407 |                                                  |   | 139,531                                                    |  |                                                 
|XOPENEX HFA MDI       |  |                                                            | 15,836 |                                                  |   | 126,599                                                    |  |                                                 

Due to the length of time necessary to develop a product, the uncertainties related to the ability to obtain governmental approval for
commercialization and the difficulty in estimating costs of projects, it is difficult to make accurate and meaningful estimates of the ultimate cost to bring our product candidates to FDA approved
status. We do not believe it is possible to estimate, with any degree of accuracy, the costs of product candidates which are in stages earlier than Phase III. We estimate that the cost range to bring
arformoterol from its current state to an NDA submission is $25,000,000 to $30,000,000 based on a targeted NDA submission of mid-2005, provided that no significant delays are imposed by
internal resource constraints or unanticipated FDA requirements.

Delays
in meeting expected NDA submission dates may adversely impact our business due to (1) potential lost revenues due to competition and market changes and
(2) additional expenditures if a project timeline is extended in order to conduct additional studies.

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

The
uncertainties related to completion of development, regulatory approval and timing of commercialization make it difficult to estimate when, if ever, our product candidates will
generate revenue and cash flows. We do not expect to receive net cash inflows from any of our major research and development projects until a product candidate becomes a profitable commercial product.

Selling, Marketing and Distribution

Selling, marketing and distribution expenses were $253,632,000 and $114,960,000 for the nine months ended September 30, 2004 and 2003, respectively, an
increase of approximately 121%. Of the

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121%
increase, 27% is due to an accrual for $30,671,000, which represents the present value of the termination payments totaling $33,000,000 that we will make to Ross pursuant to a March 2004
amendment to our XOPENEX co-promotion agreement with Ross in which we agreed to terminate the agreement effective December 31, 2004. The remaining increase of 94% is primarily due
to increases in salary, commission, travel and benefit costs as a result of having approximately 800 more sales representatives in the nine months ended September 30, 2004 than in the same
period ended September 30, 2003, in anticipation of the commercialization of ESTORRA, which we expect to launch in January 2005, subject to receipt of final approval from the FDA in
December 2004. We also incurred increased spending in the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003 for trade shows and
promotions relating to preparation for the expected commercialization of ESTORRA. Additionally, as a result of the increase in sales of XOPENEX for the nine months ended September 30, 2004 as
compared with the same period in 2003, we incurred increased sales commission expense paid to internal sales representatives and to Ross.

General and Administrative

General and administrative expenses were $22,398,000 and $17,474,000 for the nine months ended September 30, 2004 and 2003, respectively, an increase of
approximately 28%. The increase for the nine months ended September 30, 2004 as compared with the same period in 2003 is primarily due to payroll and related expenses resulting from an increase
in headcount related to permanent and temporary employees and contracted service providers to support the expected commercialization of ESTORRA.

Other Income (Expense)

Interest income was $4,718,000 and $4,941,000 for the nine months ended September 30, 2004 and 2003, respectively. The decrease for the nine months ended
September 30, 2004 as compared with the same period in 2003 is due primarily to lower average cash and short- and long-term investment balances available for investment and a slight
decrease in the interest rate earned on investments in 2004.

Interest
expense was $17,800,000 and $39,220,000 for the nine months ended September 30, 2004 and 2003, respectively. The decrease for the nine months ended September 30,
2004 as compared with the same period in 2003 is due to lower outstanding average balances on our interest-bearing debt. The average outstanding balance on our interest-bearing debt for the nine
months ended September 30, 2004 was $655,000,000 as compared to the average outstanding balance for the nine months ended September 30, 2003 of approximately $925,935,000.

Loss
on debt redemption was $7,022,000 and $4,645,000 for the nine months ended September 30, 2004 and 2003, respectively. The loss in the nine months ended September 30,
2004 resulted from our redemption of the remaining outstanding $430,000,000 face value of our 5.75% convertible subordinated notes due 2006 for aggregate cash consideration of $430,000,000, excluding
accrued interest. The loss represents the write-off of $7,022,000 of deferred financing costs related to the notes. The loss in the nine months ended September 30, 2003 resulted
from our redemption of the remaining outstanding $111,870,000 face value of our 7% convertible subordinated debentures due 2005 for aggregate cash consideration of $115,226,000, excluding accrued
interest. Included in the loss of $4,645,000 is the write-off of $1,289,000 of deferred financing costs related to the debentures.

Loss
on conversion of debt was $69,768,000 and $0 for the nine months ended September 30, 2004 and 2003, respectively. During September 2004, we converted $177,200,000 of
our 0% Series A notes due 2008 and $351,980,000 of our 0% Series B notes due 2010, respectively. The loss represents the cash
payments of $23,868,250 and $45,899,900 that we paid to the holders of the 0% Series A notes due 2008 and 0% Series B notes due 2010, respectively, as an inducement to convert their
notes.

Equity
in investee (losses) were ($1,013,000) and ($1,701,000) for the nine months ended September 30, 2004 and 2003, respectively. The loss for the nine-month periods
ended September 30, 2004 and 2003 represents our portion of BioSphere losses.

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Liquidity and Capital Resources

Cash, cash equivalents and short- and long-term investments totaled $791,030,000 at September 30, 2004, compared to $840,388,000 at
December 31, 2003.

The
net cash used in operating activities for the nine months ended September 30, 2004 was $175,168,000. The net cash used in operating activities includes a net loss of
$261,933,000 adjusted by non-cash charges of $92,124,000, which includes a loss on debt conversion of $69,768,000 and loss on early debt extinguishment of $7,022,000. Accounts receivable
decreased by $9,671,000 due primarily to the decreased sales of XOPENEX during September 2004 as compared to December 2003 due to customary seasonal fluctuations. Inventory increased by
$9,341,000 due to lower than expected sales volume, shifts in product mix and inventory build-up in anticipation of fourth quarter sales growth. On a combined basis, accounts payable and
accrued expenses decreased by $15,010,000 primarily due to lower research and development costs. Other current liabilities increased by $2,863,000 primarily due to additional accruals for product
revenue rebates and return reserves related to XOPENEX revenues. Other liabilities increased by $31,304,000 due to an accrual for $31,304,000, which represents the present value of a termination
payment we will make to Ross.

The
net cash used in investing activities for the nine months ended September 30, 2004 was $125,193,000. Cash was used for net sales and maturities of short- and
long-term investments of $116,732,000. We also made purchases of property and equipment of $8,498,000.

The
net cash provided by financing activities for the nine months ended September 30, 2004 was $136,293,000. We used $433,709,000 to redeem the remaining outstanding $430,000,000
face value of our 5.75% subordinated notes due 2006 at face value plus accrued interest. In January 2004, we received proceeds of $150,000,000, from the exercise of an option granted to the
initial purchasers of our 0% Series A notes due 2008 and 0% Series B notes due 2010, to purchase an additional $50,000,000 of 0% Series A notes due 2008 and $100,000,000 of 0%
Series B notes due 2010. Net of issuance costs, our proceeds were approximately $145,875,000. We received $500,000,000 from the issuance in September 2004 of 0% notes due 2024. Net of
issuance costs, our proceeds were approximately $481,685,000. We received proceeds of $50,006,000 from the settlement of a portion of our call spread options. We also received proceeds of $36,745,000
from the issuance of common stock upon the exercise of stock options issued under our stock option plans. We used $100,321,000 to purchase 1,933,200 shares of our common stock. We paid $47,342,000 of
the $69,768,000 we used as an inducement to convert $177,200,000 face value of our 0% Series A notes due 2008 and $351,980,000 face value of our 0% Series B notes due 2010 into an
aggregate of 17,353,591 shares of our common
stock. The remaining amount of $22,426,000 was paid during October 2004. We also used $771,000 to repay capital lease obligations and long-term debt.

We
currently generate cash from the sale of XOPENEX inhalation solution, from royalties on sales generated by our license agreements, primarily the agreements related to ALLEGRA and
CLARINEX, and from our co-promotion arrangement with MedPointe, which we terminated on October 1, 2004. We believe our existing cash and the anticipated cash flow from our current
strategic alliances and operations will be sufficient to support existing operations through 2005. In the longer term, we expect 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:



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If
our assumptions underlying our beliefs regarding future revenues and expenses change, or if unexpected opportunities or needs arise, we may seek to raise additional cash by selling
debt or equity securities or borrowing money from a bank. 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. If we are not
able to commercialize ESTORRA, 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. In addition, if we are not able to commercialize XOPENEX HFA MDI, we may be required to raise additional funds. There can be no assurance that, if required, we would be able to raise
the additional funds on favorable terms, if at all.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, other than operating leases in the ordinary course of business, or variable interest entities or
activities that include non-exchange traded contracts accounted for at fair value.

Contractual Obligations

Our contractual obligations disclosure in our annual report on Form 10-K for the year ended December 31, 2003 has materially changed
since we filed that report, as follows:



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Factors Affecting Future Operating Results

Certain of the information contained in this report, including information with respect to the expected timing of completion of phases of development of our drugs
under development, the safety, efficacy and potential benefits of our drugs under development, the timing and results of regulatory filings and the scope and duration of patent protection with respect
to these products and information with respect to the other plans and strategies for our business and the business of our subsidiaries and certain of our affiliates, consists of forward-looking
statements. The forward-looking statements contained in this report represent our expectations as of the date of this report. Subsequent events may cause our expectations to change. However, while we
may elect to update these forward-looking statements, we specifically disclaim any intention or obligation to do so. Important factors that could cause our actual results to differ materially from the
forward-looking statements include the following:

We have never been profitable and we may not be able to generate revenues sufficient to achieve profitability.

We have not been profitable since inception, and it is possible that we will not achieve profitability. We incurred net losses on a consolidated basis of
approximately $261.9 million for the nine months ended September 30, 2004 and $135.9 million for the year ended December 31, 2003. We expect to continue to incur
significant operating and capital expenditures. As a result, we will need to generate significant revenues to achieve and maintain profitability. We cannot assure you that we will achieve significant
revenues or that we will ever achieve profitability. Even if we do achieve profitability, we cannot assure you that we will be able to sustain or increase profitability on a quarterly or annual basis
in the future. If revenues grow more slowly than we anticipate or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial
condition will be materially and adversely affected.

If we or our development partners fail to successfully develop our principal product candidates, we will be unable to commercialize the product candidates and our ability to
become profitable will be adversely affected.

Our ability to achieve profitability will depend in large part on successful development and commercialization of our principal products under development.
Failure to successfully commercialize our marketed products or our products under development may have a material adverse effect on our business. Before we commercialize any product candidate, we will
need to successfully develop the product candidate by completing successful clinical trials, submit an NDA for the product candidate that is accepted by the FDA and receive FDA approval to market the
candidate. If we fail to successfully develop a product candidate and/or the FDA delays or denies approval of any submitted NDA or any NDA that we 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:



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We
received an "approvable" letter from the FDA for ESTORRA on February 27, 2004 and on July 15, 2004 we announced that the FDA accepted our resubmission of our NDA for
ESTORRA. In addition, on July 15, 2004, we announced that the FDA had accepted for formal review, our NDA for XOPENEX HFA MDI. However, we cannot be certain that the FDA will approve the
ESTORRA NDA or the NDA for XOPENEX HFA MDI.

Our
success significantly depends on our continued ability to develop and market new products. There can be no assurance that we will be able to develop and introduce new products in a
timely manner or that new products, if developed, will achieve market acceptance. In addition, our growth is dependent
on our continued ability to penetrate new markets where we have limited experience and competition is intense. There can be no assurance 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 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.

Although we have received an "approvable" letter from the FDA for our NDA for ESTORRA brand eszopiclone, we may not receive approval to commercialize ESTORRA.

The FDA issues an "approvable" letter when it believes it can approve an NDA if the applicant submits specific additional information or agrees to specific
conditions. In order to receive approval, the applicant must satisfy the requests made and/or answer the questions posed by the FDA, through a resubmission of the NDA. On February 27, 2004, we
received an "approvable" letter from the FDA for our ESTORRA NDA, and on July 15, 2004 we announced that the FDA accepted our resubmission of our NDA for ESTORRA. The PDUFA date for our ESTORRA
NDA is December 15, 2004. However, we cannot be certain that we satisfactorily responded to the issues raised by the FDA or that the FDA will grant us approval during 2004, if at all. In
addition, on July 15, 2004, we announced that the FDA had accepted for filing our NDA for XOPENEX HFA MDI. The PDUFA date for this NDA is March 12, 2005. If the FDA delays or denies
approval of our NDA or trademark for ESTORRA or XOPENEX HFA MDI, or any other NDA that we file in the future, or if the FDA delays or denies approval of our use of the trademarks we propose to use in
connection with the sale of our products, then commercialization of ESTORRA, XOPENEX HFA MDI or our other products under development, may be delayed or terminated, which would have a material adverse
effect on our business. If the FDA approves ESTORRA, XOPENEX HFA MDI or any other NDA that we may file in the future, it may set unexpected limitations on the indication for which the product may be
marketed, which could result in us failing to realize, or being delayed in realizing, expected product revenues.

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

We have entered into a collaboration agreement with 3M Drug Delivery Systems Division for the scale-up and manufacturing of XOPENEX HFA MDI, and we
may enter into additional development collaboration agreements in the future. Under our agreement with 3M, 3M is responsible for manufacturing an MDI formulation of XOPENEX. We are responsible for
conducting clinical trials using the 3M-manufactured formulation. Based on the results of the trials, we submitted an NDA to

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the
FDA for XOPENEX HFA MDI in May 2004 and the FDA accepted the NDA for filing in July 2004. If 3M, 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 obligation to us in a timely manner or is unsuccessful in its
development and/or commercialization efforts, we may not realize the potential commercial benefits of the arrangement and our results of operations may be adversely affected. In addition, if
regulatory approval of XOPENEX HFA MDI or any other product candidate under development by, or in collaboration with, a partner is delayed, denied or includes limitations on indicated uses for which
the product may be marketed, we may not realize, or may be delayed in realizing, the potential commercial benefits of the arrangement.

The royalties we receive under collaboration arrangements could be delayed, reduced or terminated if our collaboration partners terminate, or fail to perform their obligations
under, their agreements with us, if our collaboration partners are unsuccessful in their sales efforts, or if we lose certain patent rights.

We have entered into collaboration arrangements pursuant to which we license patents to pharmaceutical companies and our revenues under these collaboration
arrangements consist primarily of royalties on sales of products in countries where we hold patents. Payments and royalties under these arrangements depend in large part on the commercialization
efforts of our collaboration partners in countries where we hold patents, including sales efforts which we cannot control. If any of our collaboration partners does not devote sufficient time and
resources to its collaboration 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 collaboration partners was to breach or terminate its agreement
with us or fail to perform its obligations to us in a timely manner, the royalties we receive under the collaboration agreement could decrease or cease. Any failure or inability by us to perform, or
any breach by us in our performance of, our obligations under a collaboration agreement could reduce or extinguish the royalties and benefits to which we are otherwise entitled under the agreement. If
the patents covering the products upon which we receive royalties expire or are held invalid or unenforceable, generic versions of these products may be introduced, which would decrease sales of the
royalty-bearing product or terminate our right to receive royalties. Any delay or termination of these types 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 collaboration partners and/or revenue from product sales, if any, could be delayed,
reduced or terminated.

The approval of the 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 the future, the FDA may also allow the sale of other allergy medications
without a prescription. The sale of CLARITIN 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 ALLEGRA and CLARINEX, for which we receive royalties on sales, has been and may continue to be adversely affected. We expect revenues from royalties earned on both
CLARINEX and ALLEGRA to decrease in 2004 due to the continued adverse impact on sales of these prescription allergy drugs resulting from the availability of competing allergy drugs without a
prescription.

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We will be required to expend significant resources for research, development, testing and regulatory approval of our drugs under development and these drugs may not be
developed successfully.

We develop and commercialize proprietary products for the primary care and specialty markets. Most of our drug candidates are still undergoing clinical trials or
are in the early stages of development. Our drugs may not provide greater benefits or fewer side effects than other drugs used to treat the same condition and our research efforts may not lead to the
discovery of new drugs with benefits over existing treatments or development of new therapies. All of our drugs under development will require significant additional research, development, preclinical
and/or clinical testing, regulatory approval and a commitment of significant additional resources prior to their commercialization. Our potential products may not:



Sales of XOPENEX inhalation solution represent a majority of our revenues; if sales of XOPENEX inhalation solution do not continue to increase, we may not have sufficient
revenues to achieve our business plan and our business will not be successful.

All of our revenues from product sales for the nine months ended September 30, 2004 and the years ended December 31, 2003 and 2002 and substantially
all of our product revenues for the year ended December 31, 2001, resulted from sales of XOPENEX inhalation solution. If the FDA grants final marketing approval for our ESTORRA NDA, we do not
expect to launch ESTORRA until the first quarter of 2005, at the earliest. Accordingly, we expect that sales of XOPENEX will represent all of our product sales and a majority of our total revenues
through 2004. We do not have long-term sales contracts with our customers and we rely on purchase orders for sales of XOPENEX inhalation solution. Reductions, delays or cancellations of
orders, as well as decreases in the average selling price and increases in rebates and allowances for XOPENEX could adversely affect our operating results. If sales of XOPENEX inhalation solution do
not continue to increase, we may not have sufficient revenues to achieve our business plan and our business will not be successful.

XOPENEX
and generic albuterol account for the majority of beta-agonist inhalation solution prescriptions. XOPENEX is more expensive than generic albuterol. We must continue
to demonstrate to physicians and other health care professionals that the benefits of XOPENEX justify the higher price. Unit volume sales of XOPENEX for the three and nine months ended
September 30,
2004 did not increase at the same rate as in prior periods. If XOPENEX does not continue to be viewed favorably by physicians relative to generic albuterol, our business will not be successful.

A
significant proportion of prescriptions for beta-agonist inhalation solutions (such as XOPENEX) are dispensed to patients who are eligible for Medicaid benefits. Many state
Medicaid authorities are implementing preferred drug lists, or PDLs. XOPENEX's status on PDLs will vary from state to state and from time to time. We may be required to provide significant
supplemental rebates for Medicaid utilization when and where XOPENEX is on the PDL. Where XOPENEX is not on the PDL, utilization of the product by Medicaid beneficiaries may decrease because
physicians will be required to receive authorization from the Medicaid authority before XOPENEX may be prescribed.

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

Our success depends in part on our ability to obtain, maintain and enforce patents, and protect trade secrets. Our ability to commercialize any drug successfully
will largely depend upon our ability to obtain and maintain patents of sufficient scope to prevent third parties from developing similar or competitive products. In the absence of patent and trade
secret protection, competitors may adversely affect our business by independently developing and marketing substantially equivalent products and technology. 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 methods of using, single-isomer or active-metabolite forms of various compounds for specific
applications. Our revenues under collaboration agreements with pharmaceutical companies depend in part on the existence and scope of issued patents. 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. 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 recently
has been the subject of much litigation. Legal standards relating to the 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, which we refer to as the PTO, 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.

Should
a generic drug company submit an Abbreviated New Drug Application, or ANDA, to the FDA seeking approval of a generic version of XOPENEX, we would expect to enforce patents against
the generic drug company. However, the resulting patent litigation would involve complex legal and factual questions, and we may not be able to exclude a generic company, for the full term of our
patents, from marketing a generic version of XOPENEX. Introduction of a generic copy of XOPENEX before the expiration of our patents could have a material adverse effect on our business.

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 the proprietary rights of others. Third parties, typically drug companies, hold
patents or patent applications covering compositions, methods of making and uses, covering the composition of matter for most of the drug candidates for which we have patents or patent applications.
Third parties also hold patents relating to drug delivery technology that may be necessary for the development or commercialization of some of our drug candidates. In each of these cases, unless we
have or obtain a license, 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. In addition, it would be costly for us to contest the validity of a third-party patent or defend any claim that we infringe a third-party patent.
Moreover, litigation involving third-party patents may not be resolved in our favor. Such contests and litigation would be costly, would require significant time and attention of our management, could
prevent us from commercializing our products, could require us to pay significant damages and could have a material adverse effect on our business.

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

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

In
February 2004, we received an "approvable" letter from the FDA for our NDA for ESTORRA, and in July 2004, we announced that the FDA accepted our resubmission of our NDA
for ESTORRA. In addition, in July 2004, we announced that the FDA had accepted for filing our NDA for XOPENEX HFA MDI. If the FDA delays or denies approval of our NDA for eszopiclone, or the
trademark we propose to use in connection with the product, or XOPENEX HFA MDI, or delays or denies acceptance or approval of any other NDA that we file in the future, then commercialization of
ESTORRA, XOPENEX HFA MDI, or our other products under development may be delayed or terminated, which could have a material adverse effect on our business.

The
regulatory process to obtain marketing approval requires clinical trials of a product to establish its safety and efficacy. Problems that may arise during clinical trials include:



Even
if the FDA or similar foreign agencies grant us regulatory approval of a product, including ESTORRA and XOPENEX HFA MDI, 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.

The 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. The inability to enter into collaboration agreements could delay or preclude the development, manufacture and/or marketing of some of
our drugs and could have a material adverse effect on our financial condition and results of operations because:



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We
are required to file a notice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which we refer to as the HSR Act, for certain agreements
containing
exclusive license grants and to delay the effectiveness of any such exclusive license until the expiration or earlier termination of the notice and waiting period under the HSR Act. If the 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.

We have limited sales and marketing experience and we have incurred significant expenses in expanding our sales force. Our limited sales and marketing experience may restrict
our success in commercializing additional products.

We currently have limited marketing and sales experience. If we successfully develop and obtain regulatory approval for the products we are currently developing,
we may: (1) market and sell them through our sales force, (2) license some of them to large pharmaceutical companies and/or (3) market and sell them through other arrangements,
including co-promotion arrangements. We have established a sales force to market XOPENEX. We have incurred significant expenses in expanding our sales force because we expect to rely
primarily on our sales force to market ESTORRA, if it is approved by the FDA. In addition, if we enter into co-promotion arrangements or market and sell additional products directly, we
may need to further expand our sales force.

Our
ability to realize significant revenues from direct marketing and sales activities depends on our ability to attract and retain qualified sales personnel in the pharmaceutical
industry and competition for these persons is intense. If we are unable to attract and retain qualified sales personnel, we will not be able to successfully expand our marketing and sales force on a
timely or cost effective basis. We may also need to enter into additional co-promotion arrangements with third parties where our own sales force is neither well situated nor large enough
to achieve maximum penetration in the market. We may not be successful in entering into any co-promotion arrangements, and the terms of any co-promotion arrangements may not be
favorable to us.

If we do not maintain current Good Manufacturing Practices, then the FDA could refuse to approve marketing applications. We do not have the capability to manufacture in
sufficient quantities all of the products that may be approved for sale, and developing and obtaining this capability will be time consuming and expensive.

The FDA and other regulatory authorities require that our products be manufactured according to their Good Manufacturing Practices, or GMP, regulations. The
failure by us, our collaborative development partners or third-party manufacturers to maintain current GMP compliance and/or our failure to scale up our manufacturing processes could lead to refusal
by the FDA to approve marketing applications. Failure in either respect could also be the basis for action by the FDA to withdraw approvals previously granted and for other regulatory action.

On
October 22, 2004 we commenced notifying drug wholesalers, hospitals and pharmacies of a manufacturer-initiated voluntary Class III recall of one component of our XOPENEX
product line, XOPENEX Inhalation Solution Concentrate (1.25mg/0.5mL), which we had introduced in August 2004. The recall, which affects only XOPENEX Concentrate and no other components of our
XOPENEX product line, was necessitated by packaging process validation issues relating to the automated process of placing the finished vials into a foil pouch. We have suspended manufacture and sale
of XOPENEX Concentrate until the issues giving rise to the recall have been fully addressed. If our manufacturer cannot remedy the GMP deficiencies giving rise to the recall of XOPENEX Concentrate, or
if these or similar deficiencies are found to extend to other components of our XOPENEX product line, our

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ability
to supply product to the market may be limited or interrupted indefinitely, which would have a material adverse effect on our business.

Failure
to increase our manufacturing capabilities may mean that even if we develop promising new products, we may not be able to produce them. We currently operate a manufacturing
plant, which is compliant with current Good Manufacturing Practices, that we believe can produce commercial quantities of the active pharmaceutical ingredient for XOPENEX and support the production of
our other product candidates in amounts needed for our clinical trials. However, we will not have the capability to manufacture in sufficient quantities all of the products that may be approved for
sale. Accordingly, we will be required to spend money to expand our current manufacturing facility, build an additional manufacturing facility or contract the production of these drugs to third-party
manufacturers.

Our reliance on a third-party manufacturer could adversely affect our ability to meet our customers' demands.

Cardinal Health, Inc. is currently the sole finished goods manufacturer of our product, XOPENEX inhalation solution. If Cardinal Health experiences delays
or difficulties in producing, packaging or delivering XOPENEX, we could be unable to meet our customers' demands for XOPENEX, which could lead to customer dissatisfaction and damage to our reputation.
Furthermore, 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. The delays associated with the verification of a new manufacturer could negatively affect our ability to produce XOPENEX in a timely manner or within budget.

Our
contract manufacturers may possess technology related to the manufacture of our compounds that such manufacturer owns independently. This would increase our reliance on such
manufacturer or require us to obtain a license from such manufacturer in order to have another third party manufacture our products.

If we or our collaboration partners fail to obtain an adequate level of reimbursement for our future products or services by third-party payors, there may be no commercially
viable markets for our products or services.

The availability and amounts of reimbursement by governmental and other third-party payors affects the market for any pharmaceutical product or service. These
third-party payors continually attempt to contain or reduce the costs of health care by challenging the prices charged for medical products and services. In certain foreign countries, including the
countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. We may not be able to sell our products profitably if reimbursement is unavailable or
limited in scope or amount.

In
both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system. Further proposals are
likely. The potential for adoption of these proposals affects or will affect our ability to raise capital, obtain additional collaboration partners and market our products. We expect to experience
pricing pressure for our existing products and any future products for which marketing approval is obtained due to the trend toward managed health care, the increasing influence of health maintenance
organizations and additional legislative proposals.

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

We may be subjected to product liability claims that arise through the testing, manufacturing, marketing and sale of human health care products. These claims
could expose us to significant liabilities that could prevent or interfere with our product commercialization efforts. Product liability

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claims
could require us to spend significant time and money in litigation or to pay significant damages. Although we maintain product liability insurance coverage for both the clinical trials and
commercialization of our products, 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.

If our Medicaid rebate program practices are investigated, the costs of responding to the investigation could be substantial and could divert the attention of management.

We are a participant in the Medicaid rebate program established by the Omnibus Budget Reconciliation Act of 1990, and under amendments of that law that became
effective in 1993. Under the Medicaid rebate program, we pay a rebate for each unit of our product reimbursed by Medicaid, and the amount of the rebate for each product is set by law. We are also
required to pay certain statutorily defined rebates on Medicaid purchases for reimbursement on prescription drugs under state Medicaid plans. Both the federal government and state governments have
initiated investigations into the rebate practices of many pharmaceutical companies to ensure compliance with these rebate programs. If our rebate practices are investigated, the costs of compliance
with any such investigations could be substantial and could divert the attention of our management.

We have significant long-term debt and we may not be able to make interest or principal payments when due.

As of September 30, 2004, our total long-term debt excluding the current portion, was approximately $1.2 billion and our stockholders'
equity (deficit) was ($379.6 million). None of the 5% convertible subordinated debentures due 2007, which we refer to as the 5% debentures due 2007, the 0% Series A notes due 2008, the
0% Series B notes due 2010 nor the 0% notes due 2024 restricts our ability or our subsidiaries' ability to incur additional indebtedness, including debt that ranks senior to the notes. The 0%
notes due 2024 are senior to our 0% Series A notes and 0% Series B notes, which are senior to our 5% debentures due 2007. Additional indebtedness that we incur may in certain
circumstances rank senior to or on parity with the notes. 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 5% debentures due 2007, 0% Series A notes due 2008, 0% Series B notes due 2010 and 0% notes due 2024 are $92.38, $31.89, $29.84 and $67.20,
respectively. If the market price for our common stock does not exceed the conversion price, the holders of our outstanding convertible debt may not convert their securities into common stock.

Historically,
we have had negative cash flow from operations. For the nine months ended September 30, 2004, net cash used in operating activities was approximately
$175.2 million. Our annual debt service through 2006, assuming none of our outstanding convertible debt is converted, redeemed, repurchased or exchanged, is approximately $22.0 million.
Unless we are able to generate sufficient operating cash flow to service our outstanding debt, we will be required to raise additional funds or default on our obligations under the debentures and
notes. If we are not able to commercialize ESTORRA, 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. In addition, if we are not able to commercialize XOPENEX HFA MDI, we may be required to raise additional funds. There can be no assurance that, if required, we would
be able to raise the additional funds on favorable terms, if at all.

Our exchanges of debt into shares of common stock would result in additional dilution.

As of September 30, 2004, we had approximately $1.2 billion of outstanding convertible debt. In order to reduce future payments due at maturity and,
in the case of our 5% debentures due 2007, future cash interest payments, we may, from time to time, depending on market conditions, repurchase

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additional
outstanding convertible debt for cash; pay debt holders cash in order to induce them to convert their debt into shares of common stock; 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 the proceeds from the issuance of convertible debt to fund the 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 assure you that we will repurchase or exchange any additional outstanding convertible debt.

If the estimates we make, and 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 of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, 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. There can be
no assurance, however, that our estimates, or the assumptions underlying them, will be correct. 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. This, in turn, could adversely affect our 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 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 or eliminate certain of our research and product development programs 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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We expect to face intense competition and our competitors have greater resources and capabilities than we have. Developments by others may render our products or technologies
obsolete or noncompetitive.

We expect to encounter intense competition in the sale of our current and future products. If we are unable to compete effectively, our financial condition and
results of operations could be materially adversely affected because we may use our financial resources to seek to differentiate ourselves from our competition and because we may not achieve our
product revenue objectives. Many of our competitors and potential competitors, which include pharmaceutical and biotechnology companies, have substantially greater resources, manufacturing and
marketing capabilities, research and development staff and production facilities than we have. The fields in which we compete are subject to rapid and substantial technological change. Our competitors
may be able to respond more quickly to new or emerging technologies or to devote greater resources to the development, manufacture and marketing of new products and/or technologies than we can. As a
result, any products and/or technologies that we develop may become obsolete or noncompetitive before we can recover expenses incurred in connection with their development.

XOPENEX
and generic albuterol account for the majority of beta-agonist inhalation solution prescriptions. Albuterol has existed for many years, is well established and sells
at prices substantially less than XOPENEX. To continue to be successful in the marketing of XOPENEX, we must continue to demonstrate that the efficacy and safety features of the drug outweigh its
higher cost. In the sleep disorder market, if eszopiclone is approved, we will face intense competition from established products, such as AMBIEN® and SONATA®. There are also
other potentially competitive therapies that are in late-stage clinical development for the treatment of insomnia.

Several class action lawsuits have been filed against us which may result in litigation that is costly to defend and the outcome of which is uncertain and may harm our
business.

We and several of our current and former officers and a current director are named as defendants in several purported class action complaints which have been
filed on behalf of certain persons who purchased our common stock and/or debt securities during different time periods, beginning on various dates, the earliest being May 17, 1999, and all
ending on March 6, 2002. These complaints allege violations of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder by the Securities and Exchange
Commission. Primarily they allege that the defendants made certain materially false and misleading statements relating to the testing, safety and likelihood of FDA approval of SOLTARA. On
April 11, 2003, two consolidated amended complaints were filed, one on behalf of the purchasers of our common stock and the other on behalf of the purchasers of our debt securities. These
consolidated amended complaints reiterate the allegations contained in the previously filed complaints and define the alleged class periods as May 17, 1999 through March 6, 2002. We
filed a motion to dismiss both consolidated amended complaints on May 27, 2003. On March 11, 2004, the court, while granting in part the motion to dismiss, did allow much of the case to
proceed. The parties are currently engaged in discovery.

We
can provide no assurance as to the outcome of these lawsuits. Any conclusion of these matters in a manner adverse to us would have a material adverse effect on our financial position
and results of operations; however, we are unable to reasonably estimate any possible range of loss due to the uncertain resolution of these matters. In addition, the costs to us of defending any
litigation or other proceeding, even if resolved in our favor, could be substantial. Such litigation could also substantially divert the attention of our management and our resources in general.
Uncertainties resulting from the initiation and continuation of any litigation or other proceedings could harm our ability to compete in the marketplace.

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Fluctuations in the demand for products, the success and timing of collaboration arrangements and regulatory approval, any termination of development efforts, expenses and the
results of operations of our subsidiaries 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
factors, which include:



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



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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 us to
consummate an acquisition transaction.

The Securities and Exchange Commission is conducting an inquiry into the trading of our securities that could divert the attention of our management and our resources
generally.

The Securities and Exchange Commission is conducting an investigation into the trading in our securities, including trading by officers and employees during the
period from January 1, 1998 through December 31, 2001. Uncertainties resulting from this inquiry could substantially divert the attention of our management and our resources in general.
We can provide no assurance as to the outcome of this inquiry. Any conclusion of these matters in a manner adverse to us or our officers or employees could harm our ability to compete in the
marketplace and have a material adverse effect on our business. In addition, the costs to us to respond to the inquiry, even if the outcome is favorable, could be
substantial. Such inquiry could also substantially divert the attention of our management and our resources in general.

The price of our common stock historically has been volatile, which could cause you to lose part or all of your investment.

The market price of our common stock, like that of the common stock of many other pharmaceutical and biotechnology companies, may be highly volatile. In addition,
the stock market has experienced extreme price and volume fluctuations. This volatility has significantly affected the market prices of securities of many pharmaceutical and biotechnology companies
for reasons frequently unrelated 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 will be determined in the marketplace and may be influenced by many factors, including variations in our financial results, changes in recommendations by securities
analysts, investors' perceptions of us and general economic, industry and market conditions.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

We are exposed to market risk from changes in interest rates and equity prices, which could affect our future results of operations and financial condition. These
risks are described in our annual report on Form 10-K for the year ended December 31, 2003. As of November 9, 2004, 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, 2003. 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.

The
amount that we will be able to realize from the exercise of our remaining outstanding call spread options is specifically tied to the market price of our common stock at the
expiration of those options. The table below shows the effect a 10% increase or a 10% decrease in the price of our common stock would have on the value of the options, based on the closing price of
our common stock on November 1, 2004 ($45.94).

|Expiration period                          |  | Number of
Options |  | Option
Price |       | Cap
Price |   | Current
Proceeds |  | 10%
Increase |             | 10% Decrease
|------------------------------------------ |  | ----------------- |  | ------------ | ----- | --------- | - | ---------------- |  | ------------ | ----------- | ------------
|November 11, 2004 through
December 9, 2004 |  | 4,919,496         |  | $            | 29.84 |           | $ | 45.00            |  | $            | 74,603,000  |             
|May 12, 2005 through June 9, 2005          |  | 4,919,496         |  | $            | 29.84 |           | $ | 55.00            |  |              | 79,227,000  |             
|November 11, 2004 through
December 9, 2005 |  | 4,919,496         |  | $            | 29.84 |           | $ | 65.00            |  |              | 79,227,000  |             
|Total                                      |  | 14,758,488        |  |              |       |           |   |                  |  | $            | 233,057,000 |             

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.Our management, with the participation of our Chief Executive Officer, or
CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act) as of September 30, 2004. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that, as of September 30, 2004, our disclosure controls and procedures were
(1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our CEO and CFO by others within those entities, particularly during
the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

Changes in Internal Controls.No change in our internal controls over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the fiscal quarter ended September 30, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial reporting.

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PART II  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Securities and Exchange Commission is conducting an investigation into trading in our securities, including trading by certain of our officers and employees
during the period from January 1, 1998 through December 31, 2001. We have cooperated with the investigation, and plan to continue to do so.

We
and several of our current and former officers and a current director are named as defendants in several purported class action complaints which have been filed on behalf of certain
persons who purchased our common stock and/or debt securities during different time periods, beginning on various dates, the earliest being May 17, 1999, and all ending on March 6, 2002.
These complaints allege violations of the Exchange Act and the rules and regulations promulgated thereunder by the Securities and Exchange Commission. Primarily they allege that the defendants made
certain materially false and misleading statements relating to the testing, safety and likelihood of FDA approval of SOLTARA. On April 11, 2003, two consolidated amended complaints were filed,
one on behalf of the purchasers of our common stock and the other on behalf of the purchasers of our debt securities. These consolidated amended complaints reiterate the allegations contained in the
previously filed complaints and define the alleged class periods as May 17, 1999 through March 6, 2002. We filed a motion to dismiss both consolidated amended complaints on
May 27, 2003. On March 11, 2004, the court, while granting in part the motion to dismiss, did allow much of the case to proceed. The parties are currently engaged in discovery. We are
unable to reasonably estimate any possible range of loss related to these lawsuits due to their uncertain resolution.

ITEM 2. ISSUER PURCHASES OF EQUITY SECURITIES

This table provides information with respect to purchases we made of our Common Stock during the third quarter of 2004:

|Period                                 |  | Total Number of
Shares Purchased |  | Average Price Paid
per Share |       | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |           | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
|-------------------------------------- |  | -------------------------------- |  | ---------------------------- | ----- | -------------------------------------------------------------------------------- | --------- | ----------------------------------------------------------------------------------------
|September 1 through September 30, 2004 |  | 1,933,200                        |  | $                            | 51.89 |                                                                                  | 1,933,200 |                                                                                         
|Total                                  |  | 1,933,200                        |  | $                            | 51.89 |                                                                                  | 1,933,200 |                                                                                         

ITEMS 3-5. NONE

ITEM 6. EXHIBITS

|10.1 |  | Amendment by and between the Registrant and Aventis S.A., dated as of July 2, 2004, which amendment amends the License Agreement, dated August 31, 1999, by and between the Registrant and Hoechst Marion Rousel, Inc.
(now Aventis).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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: November 9, 2004 |  | By:          
|Date: November 9, 2004 |  | By:          

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Exhibit Index

|Exhibit No. |  | Description                                                                                                                                                                                                                          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1        |  | Amendment by and between the Registrant and Aventis S.A., dated as of July 2, 2004, which amendment amends the License Agreement, dated August 31, 1999, by and between the Registrant and Hoechst Marion Rousel, Inc.
(now Aventis).
|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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