Use these links to rapidly review the documentSEPRACOR INC. INDEX

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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the Quarterly Period Ended September 30, 2003            
|or                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission file number 0-19410

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

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

Registrant's
telephone number, including area code:(508) 481-6700Securities registered pursuant to Section 12(b) of the Act:NONESecurities registered pursuant to Section 12(g) of the Act:

Common Stock, $.10 par value(Title of class)

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

Indicate
by check mark whether the registrant is 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 October 31, 2003 was: 84,891,310 shares.

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SEPRACOR INC.        INDEX



|Part IFinancial Information |  |                                                                                                                  
|---------------------------- |  | -----------------------------------------------------------------------------------------------------------------
|Item 1.                      |  | Consolidated Financial Statements (Unaudited)                                                                    
|                             |  | Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 (Unaudited)                           
|                             |  | Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002 (Unaudited)
|                             |  | Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (Unaudited)          
|                             |  | Notes to Consolidated Interim Financial Statements                                                               
|Item 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                            
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                                       
|Item 4.                      |  | Controls and Procedures                                                                                          
|Part IIOther Information    |  |                                                                                                                  
|Item 1.                      |  | Legal Proceedings                                                                                                
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                                                 
|                             |  | Signatures                                                                                                       
|                             |  | Exhibit Index                                                                                                    

2

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SEPRACOR INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In Thousands)

|                                                                                                                                                                                |  | September 30, 2003 |            | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ----------------- | -
|Assets                                                                                                                                                                          |  |                    |            |                   |  
|Current assets:                                                                                                                                                                 |  |                    |            |                   |  
|Cash and cash equivalents                                                                                                                                                       |  | $                  | 208,321    |                   | $
|Restricted cash                                                                                                                                                                 |  |                    | 1,500      |                   |  
|Short-term investments                                                                                                                                                          |  |                    | 61,959     |                   |  
|Accounts receivable, net                                                                                                                                                        |  |                    | 29,436     |                   |  
|Inventories                                                                                                                                                                     |  |                    | 7,127      |                   |  
|Other assets                                                                                                                                                                    |  |                    | 18,379     |                   |  
|                                                                                                                                                                                |  |                    |            |                   |  
|Total current assets                                                                                                                                                            |  |                    | 326,722    |                   |  
|Long-term investments                                                                                                                                                           |  |                    | 86,750     |                   |  
|Property and equipment, net                                                                                                                                                     |  |                    | 67,888     |                   |  
|Investment in affiliate                                                                                                                                                         |  |                    | 3,239      |                   |  
|Patents and other intangible assets, net                                                                                                                                        |  |                    | 24,494     |                   |  
|Other assets                                                                                                                                                                    |  |                    | 14,739     |                   |  
|                                                                                                                                                                                |  |                    |            |                   |  
|Total assets                                                                                                                                                                    |  | $                  | 523,832    |                   | $
|                                                                                                                                                                                |  |                    |            |                   |  
|Liabilities and Stockholders' Equity (Deficit)                                                                                                                                  |  |                    |            |                   |  
|Current liabilities:                                                                                                                                                            |  |                    |            |                   |  
|Accounts payable                                                                                                                                                                |  | $                  | 10,727     |                   | $
|Accrued expenses                                                                                                                                                                |  |                    | 101,058    |                   |  
|Notes payable and current portion of capital lease obligation and long-term debt                                                                                                |  |                    | 379        |                   |  
|Other current liabilities                                                                                                                                                       |  |                    | 18,151     |                   |  
|                                                                                                                                                                                |  |                    |            |                   |  
|Total current liabilities                                                                                                                                                       |  |                    | 130,315    |                   |  
|Long-term debt and capital lease obligation                                                                                                                                     |  |                    | 746        |                   |  
|Convertible subordinated debt                                                                                                                                                   |  |                    | 870,000    |                   |  
|Other liabilities                                                                                                                                                               |  |                    | 438        |                   |  
|                                                                                                                                                                                |  |                    |            |                   |  
|Total liabilities                                                                                                                                                               |  |                    | 1,001,499  |                   |  
|                                                                                                                                                                                |  |                    |            |                   |  
|Stockholders' equity (deficit):                                                                                                                                                 |  |                    |            |                   |  
|Preferred stock $1.00 par value, 1,000 shares authorized, none outstanding at September 30, 2003 and December 31, 2002, respectively                                            |  |                    |           |                   |  
|Common stock, $.10 par value, 240,000 and 240,000 shares authorized; 84,876 and 84,356 shares issued and outstanding, at September 30, 2003 and December 31, 2002, respectively |  |                    | 8,488      |                   |  
|Additional paid-in capital                                                                                                                                                      |  |                    | 782,463    |                   |  
|Unearned compensation, net                                                                                                                                                      |  |                    | (15        | )                 |  
|Accumulated deficit                                                                                                                                                             |  |                    | (1,295,933 | )                 |  
|Accumulated other comprehensive income                                                                                                                                          |  |                    | 27,330     |                   |  
|                                                                                                                                                                                |  |                    |            |                   |  
|Total stockholders' equity (deficit)                                                                                                                                            |  |                    | (477,667   | )                 |  
|                                                                                                                                                                                |  |                    |            |                   |  
|Total liabilities and stockholders' equity (deficit)                                                                                                                            |  | $                  | 523,832    |                   | $
|                                                                                                                                                                                |  |                    |            |                   |  

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

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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                               |                          | $ | 53,097            |       
|                                                                      | Royalties and other                         |                          |   | 17,687            |       
|                                                                      |                                             |                          |   |                   |       
|                                                                      |                                             | Total revenues           |   |                   | 70,784
|                                                                      |                                             |                          |   |                   |       
|Costs and expenses:                                                   |                                             |                          |   |                   |       
|                                                                      | Cost of product sold                        |                          |   | 5,638             |       
|                                                                      | Cost of royalties and other                 |                          |   | 360               |       
|                                                                      | Research and development                    |                          |   | 40,703            |       
|                                                                      | Selling, marketing and distribution         |                          |   | 42,462            |       
|                                                                      | General and administrative and patent costs |                          |   | 5,869             |       
|                                                                      |                                             |                          |   |                   |       
|                                                                      |                                             | Total costs and expenses |   |                   | 95,032
|                                                                      |                                             |                          |   |                   |       
|                                                                      | Loss from operations                        |                          |   | (24,248           | )     
|Other income (expense):                                               |                                             |                          |   |                   |       
|                                                                      | Interest income                             |                          |   | 1,136             |       
|                                                                      | Interest expense                            |                          |   | (11,909           | )     
|                                                                      | Debt conversion expense                     |                          |   |                  |       
|                                                                      | Gain on early extinguishment of debt        |                          |   |                  |       
|                                                                      | Loss on redemption of debt                  |                          |   | (4,645            | )     
|                                                                      | Equity in investee (losses)                 |                          |   | (859              | )     
|                                                                      | Other income (expense), net                 |                          |   | 2,037             |       
|                                                                      |                                             |                          |   |                   |       
|                                                                      | Net loss                                    |                          | $ | (38,488           | )     
|                                                                      |                                             |                          |   |                   |       
|                                                                      | Basic and diluted net loss per common share |                          | $ | (0.45             | )     
|Shares used in computing basic and diluted net loss per common share: |                                             |                          |   |                   |       
|                                                                      | Basic and diluted                           |                          |   | 84,783            |       

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

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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                                                           |                   |  
|                                                                            | Debt conversion expense                                                             |                   |  
|                                                                            | Gain on early extinguishment of debt                                                |                   |  
|                                                                            | Loss on redemption of debt                                                          |                   |  
|                                                                            | Loss (gain) on disposal of property and equipment                                   |                   |  
|                                                                            | Gain on sale of long-term investment                                                |                   |  
|                                                                            | Other                                                                               |                   |  
|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                                          |                   |  
|                                                                            | Changes in other assets                                                             |                   |  
|                                                                            |                                                                                     |                   |  
|                                                                            | Net cash provided by (used in) investing activities                                 |                   |  
|                                                                            |                                                                                     |                   |  
|Cash flows from financing activities:                                       |                                                                                     |                   |  
|                                                                            | Repurchase of convertible subordinated debentures                                   |                   |  
|                                                                            | Net proceeds from issuance of common stock                                          |                   |  
|                                                                            | Costs associated with sale of 5% convertible subordinated debentures                |                   |  
|                                                                            | Repayments of long-term debt and capital leases                                     |                   |  
|                                                                            |                                                                                     |                   |  
|                                                                            | Net cash 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:                                                        |                                                                                     |                   |  
|                                                                            | Conversion of convertible subordinated debt to shares of common stock               |                   |  
|                                                                            | Interest due on convertible subordinated debt converted into shares of common stock |                   |  
|                                                                            | Additions to capital leases                                                         |                   |  

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

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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,
2003 and 2002. Certain prior amounts have been reclassified to conform with current year presentation.

The
consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, including Sepracor Canada Limited. We also have an investment in BioSphere
Medical, Inc., referred to in this report as 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, 2002, which are contained in our annual report on
Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission.

The
preparation of financial statements in conformity with generally accepted accounting principles requires our management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, our management evaluates its estimates, including
those related to revenue recognition, accounts receivable, inventories, investments and intangible assets. Management bases these estimates on historical experience and on various other factors that
are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from
these estimates under different assumptions or conditions.

2. Recent Accounting Pronouncements

In July 2002, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard, or SFAS, No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the
date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. Our adoption of SFAS No. 146, effective January 1, 2003, has had no material impact on our financial statements through September 30, 2003.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which addresses financial accounting and reporting for
the recording of expenses for the fair value of stock options. SFAS No. 148 provides alternative methods of transition for a voluntary change to a fair value based method of accounting for
stock-based employee compensation. Additionally, SFAS No. 148 requires more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The
provisions of this statement are effective for fiscal years ending after December 15, 2002. While we have not elected to adopt fair value

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accounting
for our stock-based compensation, we have complied with the new disclosure requirements under SFAS No. 148 and provide interim disclosure on the effects of stock-based compensation
in this report.

Also
during 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", referred to as FIN 45. FIN 45 elaborates on the existing disclosure requirements for most guarantees and clarifies that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and
measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. We have no history of any claims or losses under FIN 45 and therefore have no
liabilities recorded for guarantees at September 30, 2003. Therefore, the adoption of FIN 45 has not had a material impact on our financial position, results of operations or cash flows.

In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51", referred to as FIN 46. The primary
objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than voting rights ("variable interest entities" or "VIEs") and how to
determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity for which
either: (a) the equity investors (if any) do not have a controlling financial interest; or (b) the equity investment at risk is insufficient to finance that entity's activities without
receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in
a VIE make additional disclosures. We are required to apply FIN 46 to all new VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, we
are required to apply FIN 46 on December 31, 2003. The adoption of FIN 46 is not expected to have a material effect on our financial statements.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 (1) clarifies under
what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in Statement 133, (2) clarifies when a derivative contains a financing component,
(3) amends the definition of an underlying to conform it to language used in FIN 45 and (4) amends certain other existing pronouncements. The provisions of this statement are effective
for us for contracts entered into or modified after June 30, 2003. Our adoption of SFAS No. 149 has not had a material effect on our financial statements.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial
instrument that is within the scope of SFAS No. 150 as a liability (or an asset in some circumstances). Many of the instruments that fall within the scope of SFAS No. 150 were previously
classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is generally effective at the beginning of the first
interim period beginning after June 15, 2003. Our adoption of SFAS No. 150 has not had a material effect on our financial statements.

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3. Basic and Diluted Net Loss Per Common Share

Basic earnings (loss) per share, or EPS, excludes dilution and is computed by dividing income available to common shareholders 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 and convertible subordinated debentures and notes 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.

For
the three and nine months ended September 30, 2003 and 2002, we calculated basic and diluted net loss per common share based on the weighted-average number of common shares
outstanding during the period because the effect of common stock equivalents would be anti-dilutive. We did not include certain securities in the computation of diluted earnings per share
for the three and nine months ended September 30, 2003 and 2002 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, 2003

September 30, 2002Number of options


13,616


8,995Price range per share

$
2.50 to $87.50

$
2.50 to $92.25




(in thousands)

September 30, 2003

September 30, 20027% convertible subordinated debentures due 2005



2,0435% convertible subordinated debentures due 2007

4,763

4,7635.75% convertible subordinated notes due 2006

7,166

7,16611,929

13,972


4. Accounting for Stock-Based Compensation

We have elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", referred to as 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 SFAS No. 123, "Accounting for Stock-Based
Compensation". Under APB 25, when the exercise price of options granted under stock-based compensation plans equals the market price of the underlying stock on the date of grant, no compensation
expense is recognized.

If
we had applied the fair value recognition provisions of SFAS No. 123 and determined the compensation costs for stock options issued to employees based on the estimated fair
value upon grant as calculated in accordance with SFAS No. 123, our reported net loss and basic and diluted net loss per

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common
share for the three and nine months ended September 30, 2003 and 2002 would have been adjusted to the pro forma amounts set forth in the table below.

|                                                                                                        |  | Three Months Ended
September 30, |         | Nine Months Ended
September 30, |  
|------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | ------------------------------- | -
|
|
|Net loss attributable to common stockholders                                                            |  | $                                | (38,488 | )                               | $
|Total stock-based employee compensation expense determined under fair value based method for all awards |  |                                  | (16,025 | )                               |  
|                                                                                                        |  |                                  |         |                                 |  
|Pro forma net loss                                                                                      |  | $                                | (54,513 | )                               | $
|                                                                                                        |  |                                  |         |                                 |  
|Amounts per common share:                                                                               |  |                                  |         |                                 |  
|Basic and dilutedas reported                                                                           |  | $                                | (0.45   | )                               | $
|Basic and dilutedpro forma                                                                             |  | $                                | (0.64   | )                               | $

5. Inventories

Inventories consist of the following:

(in thousands)

September 30, 2003

December 31, 2002Raw materials

$
1,534

$
1,828Work in progress


1,050


1,509Finished goods


4,543


4,623$
7,127

$
7,960


6. Patents and Other Intangible Assets

The following schedule details the carrying value of our patents and other intangible assets as of September 30, 2003 and December 31, 2002:

(in thousands)

September 30, 2003

December 31, 2002Gross patents and other intangible assets

$
42,194

$
42,050Accumulated amortization patents and other intangible assets


(17,700
)

(14,933
)Total patents and other intangible assets

$
24,494

$
27,117


Amortization
expense was $937,000 and $997,000 for the three months ended September 30, 2003 and 2002, respectively, and $2.8 million and $2.9 million for the nine
months ended September 30, 2003 and 2002, respectively. We currently estimate that our amortization expense will be $937,000, $3.8 million, $3.8 million, $3.8 million and
$3.8 million for the remainder of 2003 and for the years ending December 31, 2004, 2005, 2006 and 2007, respectively.

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7. Convertible Subordinated Debt

Our outstanding convertible subordinated debt consists of the following:

(in thousands)

September 30, 2003

December 31, 20027% convertible subordinated debentures due 2005




$
111,8705% convertible subordinated debentures due 2007

$
440,000


440,0005.75% convertible subordinated notes due 2006


430,000


430,000$
870,000

$
981,870


On
July 10, 2003, we redeemed the remaining outstanding $111.9 million face value of our 7% convertible subordinated debentures due 2005 for aggregate cash consideration of
$115.2 million,
excluding accrued interest. As a result of this redemption, we recorded a loss in other income of approximately $4.6 million, including the write-off of $1.3 million of
deferred financing costs, in the third quarter of 2003.

In
connection with each convertible subordinated debt offering, we incurred deferred finance costs that we have recorded as other assets on our balance sheet and are amortizing over the
respective term of each convertible debt offering. Amortization of deferred finance costs was $1.1 million and $1.3 million for the three months ended September 30, 2003 and 2002,
respectively, and $3.5 million and $4.3 million for the nine months ended September 30, 2003 and 2002, respectively.

8. Comprehensive Loss

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

|                                                        |  | Three Months Ended |         | Nine Months Ended |  
|------------------------------------------------------- |  | ------------------ | ------- | ----------------- | -
|
|Comprehensive loss:                                     |  |                    |         |                   |  
|Net loss                                                |  | $                  | (38,488 | )                 | $
|Cumulative foreign currency translation adjustment      |  |                    | (239    | )                 |  
|Unrealized gain (loss) on available-for-sale securities |  |                    | 4,310   |                   |  
|                                                        |  |                    |         |                   |  
|Total comprehensive loss                                |  | $                  | (34,417 | )                 | $
|                                                        |  |                    |         |                   |  

9. Commitments and Contingencies

Since November 15, 2002, eight purported class action lawsuits have been filed in the United States District Court for the District of Massachusetts
against us and several of our current and former officers and directors. The complaints were filed allegedly on behalf of persons who purchased our common stock and/or debt securities during different
time periods, beginning on various dates, the earliest of which is May 17, 1999, and all ending on March 6, 2002. The complaints are similar and 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 the complaints allege that the defendants disseminated to
the investing public false and misleading statements relating to the

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testing,
safety and likelihood of approval of SOLTARA, our nonsedating antihistamine drug candidate. On April 11, 2003, two consolidated amended complaints were filed, one on
behalf of the purchasers of our common stock, the other on behalf of the purchasers of our debt securities. The 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, the
plaintiffs opposed the motion and a hearing has been scheduled on the matter for November 24, 2003.

As
permitted under Delaware Law, our Restated Certificate of Incorporation, as amended, provides that we will indemnify our officers and directors for certain claims asserted against
them in connection with their service as an officer or director of Sepracor. The indemnification does not apply if the person is adjudicated not to have acted in good faith in the reasonable belief
that his or her actions were in our best interests. The indemnification obligation survives termination of the indemnified persons' role as an officer or director. The maximum potential amount of
future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance policies that, in most cases, would limit our exposure
and enable us to recover a portion of any future amounts paid. As a result of the insurance coverage, the estimated fair value of these indemnification agreements is minimal. Accordingly, we have no
liabilities recorded for these agreements as of September 30, 2003.

We
enter into indemnification provisions under our agreements with other companies in our ordinary course of business, typically with business partners, contractors, clinical sites and
customers. Under these provisions, we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities. These
indemnification provisions
generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is generally unlimited.
We have no history of any claims or losses related to these agreements and therefore have no liabilities recorded for these agreements as of September 30, 2003.

10. Subsequent Event

On November 12, 2003, we received notification from the United States Food and Drug Administration that the agency now anticipates completing its review of
the ESTORRA brand eszopiclone New Drug Application on or before February 29, 2004, which is a three-month extension of the original Prescription Drug User Fee Act date of
November 30, 2003.

11

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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.

OVERVIEW

We are a research-based pharmaceutical company dedicated to treating and preventing human disease through the discovery, development and commercialization of
innovative pharmaceutical compounds. Our drug development program has yielded an extensive portfolio of pharmaceutical compounds that are focused on the treatment of respiratory, urology and central
nervous system disorders. Our corporate headquarters are located in Marlborough, Massachusetts.

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

On
January 31, 2003, we submitted a New Drug Application, or NDA, to the United States Food and Drug Administration, or FDA, seeking clearance to market ESTORRA brand eszopiclone
2mg and 3mg tablets for the treatment of transient and chronic insomnia. On April 2, 2003, we announced that the FDA accepted for filing our NDA for ESTORRA. On April 17, 2003, we
announced that the FDA had notified us that the Prescription Drug User Fee Act, or PDUFA, date for ESTORRA is November 30, 2003. This is the date by which the FDA is expected to review and act
on a filed complete drug application. The term "review and act on" is understood to mean the issuance of a complete action letter after the complete review of a filed complete application. On
November 12, 2003, we received notification from the FDA that the agency now anticipates completing its review of the ESTORRA NDA on or before February 29, 2004, which is a three-month
extension of the original PDUFA date of November 30, 2003. It is our understanding that this extension is not related to any specific questions concerning safety or efficacy. If the FDA issues
an approvable letter for ESTORRA,
we expect to expand our primary care sales force in anticipation of marketing ESTORRA to primary care physicians and psychiatrists, the principal prescribers of sleep medications. If the FDA delays or
denies approval of our NDA for ESTORRA, then commercialization of ESTORRA may be delayed or terminated, which could have a material adverse effect on our business.

In
June 2002, we initiated a stock option exchange program for our employees, excluding members of the board of directors and officers, and filed a Schedule TO-I
relating to the stock option exchange program with the Securities and Exchange Commission. Under the terms of this program, we agreed to grant to eligible employees six months and one day after our
acceptance of surrendered stock options a stock option to purchase one share of our common stock for every one share for which a surrendered stock option was exercisable. On July 17, 2002, we
accepted for exchange stock options, held by certain of our employees, to purchase an aggregate of 4,268,542 shares of our common stock. On January 21, 2003, we issued new stock options to
purchase an aggregate of 4,066,940 shares of our common stock at an exercise price of $12.93, which was the closing price of our common stock on January 21, 2003.

In
August 2002, we signed an agreement with MedPointe, Inc. for the co-promotion of ASTELIN® (azelastine HCl), a nasal-spray antihistamine. On
June 2, 2003, we signed an amendment to the agreement for ASTELIN. Under the remaining two years of the agreement, as amended, our sales force will continue to market ASTELIN, we will receive a
percentage of ASTELIN net sales

12

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above
agreed upon quarterly baseline sales levels and we will continue to be reimbursed for certain promotional and training expenses. Upon signing this amendment, we received an upfront,
nonrefundable payment of $1,750,000. We will recognize this upfront payment as revenue ratably over the remaining two years of the agreement, as amended. In the three and nine months ended
September 30, 2003, we recorded $219,000 and $438,000, respectively, as revenue related to this upfront payment. For the three and nine months ended September 30, 2003, we recorded
co-promotion revenue of $3,552,000 related to our co-promotion agreement, as amended, with MedPointe.

In
June 2003, we revised our previously estimated cumulative future minimum lease obligation under our facility leases at 33 and 111 Locke Drive, Marlborough, Massachusetts, and
recorded an additional $1,405,000 related to changes in our estimated future sublease income. During 2002, we had accrued $2,263,000 as our estimated cumulative future minimum lease obligation under
these leases, net of estimated future sublease rental income through the term of the leases. In aggregate, we have recorded $3,668,000 as future minimum lease obligations under these leases and at
September 30, 2003 the remaining accrual was $1,639,000.

On
July 10, 2003, we redeemed 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. Due to this redemption, we recorded a loss in other income of
approximately $4,645,000, including the write-off of $1,289,000 of deferred financing costs, in the third quarter of 2003.

In
July 1998, we entered into a license agreement with Janssen Pharmaceutical NV, a wholly-owned subsidiary of Johnson & Johnson, granting Janssen exclusive worldwide rights to our
patents covering ticalopride, formerly known as (+)- norcisapride, an isomer of the active metabolite of Janssen's PROPULSID®. In April 2001, we were notified by Janssen that it had
suspended clinical trials of ticalopride for the treatment of gastroesophageal reflux disease, or GERD, pending further analysis of a small number of adverse events reported in GERD and diabetic
patients. In October 2003, we were notified by Janssen that its investigational new drug application, or IND, for ticalopride had been placed on inactive status and that Janssen had terminated
development of ticalopride.

Critical Accounting Policies

We identified critical accounting policies in our annual report on Form 10-K for the year ended December 31, 2002. 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 uncertainty inherent in
these matters, our actual results could differ from the estimates we use in applying the critical accounting policies. Within the context of these critical accounting policies, we are not currently
aware of any reasonably likely events or circumstances that would result in us reporting materially different amounts. Additionally, we identify in the next paragraph an addition to our critical
accounting policies for revenue recognition during the nine-month period ended September 30, 2003 to reflect revenue recognition for co-promotion agreement revenue,
which became significant during the quarter ended September 30, 2003.

License
fees and other revenue include non-refundable upfront license fees, co-promotion agreement revenue, milestones and other revenue. Co-promotion
revenue is recognized when cash is received from our co-promotion partner, usually one quarter in arrears from when the revenue is recognized by our co-promotion partner, due
to the difficulty for us to estimate our co-promotion revenue in the current quarter since our co-promotion revenue is based on product sales recognized by our
co-promotion partner.

13

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Three Month Periods ended September 30, 2003 and 2002

Product revenues were $53,097,000 and $42,530,000 for the three months ended September 30, 2003 and 2002, respectively, an increase of approximately 25%.
The increase for the three-month period ended September 30, 2003 as compared with the same period in 2002 is due primarily to an increase in unit volume sales of XOPENEX® of
approximately 32%, offset by a decrease in the net selling price per unit of XOPENEX of approximately 6%. The decrease in the net selling price per unit of XOPENEX is due primarily to an increase in
sales rebates and allowances of approximately 11%, which are accounted for as a reduction to gross product sales, offset by a gross unit price increase of approximately 8%. The increase in sales
rebates and allowances is due primarily to an increase in Medicaid allowances of approximately 59% that are impacted materially by our sales of 1.25 mg XOPENEX product as the rebate per unit on this
dosage is higher than the rebate per unit on our other dosages of XOPENEX. Gross unit sales of our 1.25 mg XOPENEX product increased by approximately 62% for the three months ended
September 30, 2003 as compared with the same period in 2002. We believe that the increase in total XOPENEX unit volume is due to (1) market share increases that can be attributed to
increased demand for XOPENEX as a result of positive experiences reported by patients and physicians, (2) our targeted marketing to high volume prescribers and (3) our increase in the
number of sales representatives.

Royalties
and other revenues were $17,687,000 and $12,547,000 for the three months ended September 30, 2003 and 2002, respectively, an increase of approximately 41%. The increase
for the three months ended September 30, 2003 as compared with the same period in 2002 is primarily due to the recognition in the third quarter of 2003 of $3,552,000 of ASTELIN
co-promotion revenue related to our amended agreement with MedPointe. In addition, royalties that we earned on sales of ALLEGRA® under an agreement with Aventis increased in
the three months ended September 30, 2003 as compared with the same period in 2002. The increase in these royalties resulted from an increase in the volume of sales of ALLEGRA in Japan.

Cost
of product sold, as a percentage of product sales, was approximately 11% and 12% for the three months ended September 30, 2003 and 2002, respectively. The decrease for the
three months ended September 30, 2003 as compared with the same period in 2002 is due primarily to lower per unit manufacturing costs for XOPENEX resulting from an increase in the number of
units of XOPENEX produced, offset by an approximately 6% lower average net selling price per unit of XOPENEX.

Research
and development expenses were $40,703,000 and $60,144,000 for the three months ended September 30, 2003 and 2002, respectively, a decrease of approximately 32%. The
decrease for the three months ended September 30, 2003 as compared with the same period in 2002 is partially due to our decreased spending on ESTORRA brand eszopiclone, for which we submitted
an NDA to the FDA in January 2003. The decrease is also due to our decreased spending on our (S)-oxybutynin and SOLTARA brand tecastemizole programs. The (S)-oxybutynin clinical
program has been delayed in order for us to focus on later stage pipeline products and SOLTARA related spending is slowing as planned studies near completion. Our decreased spending in these programs
was partially offset by our increased spending on the XOPENEX metered-dose inhaler, or MDI, and arformoterol (formerly (R,R)-Formoterol) programs.

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 opportunity for clinical study of the potential new drug. Clinical development typically involves three phases of study: Phase I, II and III. The most
significant costs in clinical development are in 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 three product candidates

14

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in
Phase III clinical trials, one NDA submitted in January 2003 and currently under FDA review and one NDA recently reviewed by the FDA and subject to a "not approvable" letter. The successful
development of our product candidates is highly uncertain. An estimation of product 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 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 and the related stages of development for each product candidate in clinical development. The "Estimate of Completion of Phase" column
contains forward-looking statements regarding timing of completion of product development phases. Completion of product development, if successful, culminates in the submission of an NDA to the FDA.
The actual timing of completion of phases 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, 2003, and the five product candidates listed accounted for approximately 91% of our direct project research and development spending during this period.

|Product Candidate       |  | Indication            |  | Phase of
Development |  | Estimate of
Completion of Phase |    
|----------------------- |  | --------------------- |  | -------------------- |  | ------------------------------- | ---
|XOPENEX MDI             |  | RespiratoryAsthma    |  | Phase III            |  | 2004                            |    
|Arformoterol            |  | RespiratoryCOPD      |  | Phase III            |  | 2004                            |    
|SOLTARA (tecastemizole) |  | RespiratoryAllergies |  | NDA                  |  | 2004                            | *  
|ESTORRA (eszopiclone)   |  | Insomnia              |  | NDA                  |  | 2003                            | ***
|(S)-Oxybutynin          |  | UrologyIncontinence  |  | Phase III            |  |                                 | ** 

---

Selling,
marketing and distribution expenses were $42,461,000 and $32,919,000 for the three months ended September 30, 2003 and 2002, respectively, an increase of approximately
29%. The increase for the three months ended September 30, 2003 as compared with the same period in 2002 is primarily due to an increase in XOPENEX sales commission expense paid to internal
sales representatives and to a third-party sales contractor in 2003. The increase in sales commission resulted from the increase in sales of XOPENEX.

General
and administrative and patent expenses were $5,870,000 and $5,857,000 for the three months ended September 30, 2003 and 2002. For the three months ended
September 30, 2003 as compared with the same period in 2002, an increase in directors and officers liability insurance costs incurred in 2003, which are the result of an overall increase in
insurance premiums in 2003, was offset

15

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by
a decrease in rent expense in 2003, resulting from our move to our new corporate headquarters in June 2002.

Interest
income was $1,136,000 and $3,331,000 for the three months ended September 30, 2003 and 2002, respectively. The decrease for the three months ended September 30,
2003 as compared to September 30, 2002 is due primarily to lower average cash and short and long-term investment balances available for investment and a slight decrease in the
interest earned on investments in 2003.

Interest
expense was $11,909,000 and $15,691,000 for the three months ended September 30, 2003 and 2002, respectively. The decrease for the three months ended September 30,
2003 as compared with the same period in 2002 is due to lower outstanding average balances on all of our convertible debentures, particularly on the 7% convertible subordinated debentures due 2005.
The average outstanding balance on the 7% convertible subordinated debentures in the third quarter of 2003 was $55,935,000 as compared to the average outstanding balance in the third quarter of 2002
of approximately $185,273,000. On July 10, 2003, we redeemed the remaining outstanding $111,870,000 face value of subordinated debentures due 2005. This decrease in the outstanding balance on
the 7% convertible subordinated debentures comprises approximately $2,263,000, or 60%, of the decrease in interest expense for the three months ended September 30, 2003 as compared to the same
period in 2002.

Gain
on early extinguishment of debt was $0 and $38,950,000 for the three months ended September 30, 2003 and 2002, respectively. The gain in the three months ended
September 30, 2002 resulted from our repurchase of approximately $115,374,000 of our 7% convertible subordinated debentures in privately
negotiated transactions during the third quarter of 2002. The gain represents the difference between the face value of the debentures repurchased and the $76,718,000 paid in cash to the holders of the
debentures, less accrued interest and deferred financing cost adjustments.

Loss
on debt redemption was $4,645,000 and $0 for the three months ended September 30, 2003 and 2002, respectively. The loss in the three 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.

Equity
in investee (losses) were ($859,000) and ($304,000) for the three months ended September 30, 2003 and 2002, respectively. The loss for the three-month periods ended
September 30, 2003 and 2002 represents our portion of BioSphere losses.

Nine Month Periods ended September 30, 2003 and 2002

Product revenues were $186,603,000 and $124,657,000 for the nine months ended September 30, 2003 and 2002, respectively, an increase of approximately 50%.
The increase for the nine-month period ended September 30, 2003 as compared with the same period in 2002 is due primarily to an increase in unit volume sales of XOPENEX®
of approximately 48% combined with an increase in the net selling price per unit of XOPENEX of approximately 1%. The increase in the net selling price per unit of XOPENEX is due primarily to a gross
unit price increase of approximately 9%, offset by an increase in sales rebates and allowances of approximately 7%, which are accounted for as a reduction to gross product sales. The increase in sales
rebates and allowances is due primarily to an increase in Medicaid allowances of approximately 75% that are materially impacted by our sales of 1.25 XOPENEX product as the rebate per unit on this
dosage is higher than the rebate per unit on our other dosages of XOPENEX. Gross unit sales of our 1.25 mg XOPENEX product increased by approximately 94% for the nine months ended September 30,
2003 as compared with the same period in 2002. We believe that the increase in total XOPENEX unit volume is due to (1) market share increases that can be attributed to increased demand for
XOPENEX as a result of positive experiences reported by patients and

16

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physicians,
(2) our targeted marketing to high volume prescribers and (3) our increase in the number of sales representatives.

Royalties
and other revenues were $45,142,000 and $35,404,000 for the nine months ended September 30, 2003 and 2002, respectively, an increase of approximately 28%. The increase
for the nine months ended September 30, 2003 as compared with the same period in 2002 is due primarily to increased royalties that we earned on sales of CLARINEX under an agreement with
Schering-Plough
Corporation. The increase in royalties resulted from an increase in the volume of sales of CLARINEX, which was launched in January 2002. In addition, we recognized $3,552,000 of ASTELIN
co-promotion revenue related to our amended agreement with MedPointe in 2003.

Cost
of product sold, as a percentage of product sales, was approximately 10% and 12% for the nine months ended September 30, 2003 and 2002, respectively. The decrease for the
nine months ended September 30, 2003 as compared with the same period in 2002 is due primarily to lower per unit manufacturing costs for XOPENEX resulting from an increase in the number of
units of XOPENEX produced and also due to an approximately 1% higher average net selling price per unit of XOPENEX.

Research
and development expenses were $142,141,000 and $182,580,000 for the nine months ended September 30, 2003 and 2002, respectively, a decrease of approximately 22%. The
decrease for the nine months ended September 30, 2003 as compared with the same period in 2002 is partially due to our decreased spending on ESTORRA brand eszopiclone, for which we submitted an
NDA to the FDA in January 2003, and also due to our decreased spending on our (S)-oxybutynin and SOLTARA brand tecastemizole programs. The (S)-oxybutynin clinical program has been delayed in
order for us to focus on later stage pipeline products and SOLTARA related spending is slowing as planned studies near completion. Our decreased spending in these programs was partially offset by our
increased spending on the XOPENEX MDI and arformoterol programs.

Below
is a summary of our product candidates and the related stages of development for each product candidate in clinical development. The "Estimate of Completion of Phase" column
contains forward-looking statements regarding timing of completion of product development phases. Completion of product development, if successful, culminates in the submission of an NDA to the FDA.
The actual timing of completion of phases could differ materially from the estimates provided in the table. The table is sorted by highest to lowest spending amounts for the nine months ended
September 30, 2003, and the five product candidates listed accounted for approximately 86% of our direct project research and development spending during this period.

|Product Candidate       |  | Indication            |  | Phase of
Development |  | Estimate of
Completion of Phase |    
|----------------------- |  | --------------------- |  | -------------------- |  | ------------------------------- | ---
|XOPENEX MDI             |  | RespiratoryAsthma    |  | Phase III            |  | 2004                            |    
|Arformoterol            |  | RespiratoryCOPD      |  | Phase III            |  | 2004                            |    
|SOLTARA (tecastemizole) |  | RespiratoryAllergies |  | NDA                  |  | 2004                            | *  
|ESTORRA (eszopiclone)   |  | Insomnia              |  | NDA                  |  | 2003                            | ***
|(S)-Oxybutynin          |  | UrologyIncontinence  |  | Phase III            |  |                                 | ** 

---

17

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Selling,
marketing and distribution expenses were $114,960,000 and $111,437,000 for the nine months ended September 30, 2003 and 2002, respectively, an increase of approximately
3%. The increase for the
nine months ended September 30, 2003 as compared with the same period in 2002 is primarily due to an increase in XOPENEX sales commission expense paid to internal sales representatives and to a
third-party sales contractor for the nine months ended September 30, 2003. Offsetting the increase in sales commission expense are significant decreases in our recruiting costs in 2003. In the
first quarter of 2002, we expanded our direct sales force by approximately 225 people, which caused us to incur significant recruiting costs. The recruiting costs in the 2002 period related to
increases in our sales force for commercialization of XOPENEX and also to the anticipated launch and commercialization of SOLTARA, for which we received a "not approvable" letter from the FDA in
March 2002.

General
and administrative and patent expenses were $17,474,000 and $17,535,000 for the nine months ended September 30, 2003 and 2002, respectively. The slight decrease for the
nine months ended September 30, 2003 as compared with the same period in 2002 is primarily due to a decrease in amortization of deferred financing costs as a result of the exchange of
$147,000,000 of convertible subordinated debt for our common stock in March and April 2002, offset by an increase in our directors and officers liability insurance costs.

Interest
income was $4,941,000 and $12,253,000 for the nine months ended September 30, 2003 and 2002, respectively. The decrease for the nine months ended September 30,
2003 as compared with September 30, 2002 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 2003.

Interest
expense was $39,220,000 and $50,037,000 for the nine months ended September 30, 2003 and 2002, respectively. The decrease for the nine months ended September 30,
2003 is due to lower outstanding average balances on all of our convertible debentures, particularly on the 7% convertible subordinated debentures due 2005. The average outstanding balance on the 7%
convertible subordinated debentures in the first nine months of 2003 was $55,935,000 as compared to the average outstanding balance in the first nine months of 2002 of approximately $213,773,000. This
decrease in the outstanding balance on the 7% convertible subordinated debentures comprises approximately $8,286,000, or 77%, of the decrease in interest expense for the nine months ended
September 30, 2003 as compared to the same period in 2002.

Debt
conversion expense was $0 and $63,258,000 for the nine months ended September 30, 2003 and 2002, respectively. During March and April 2002, we exchanged approximately
$147,000,000 of our convertible subordinated debt in privately negotiated transactions, for approximately 5,712,000 shares of our common stock. The debt conversion expense represents the inducement
costs of the fair market value of the 3,415,561 shares of our common stock issued as a conversion inducement to the debt holders.

Gain
on early extinguishment of debt was $0 and $38,950,000 for the nine months ended September 30, 2003 and 2002, respectively. The gain resulted from our repurchase of
approximately $115,374,000 of our 7% convertible subordinated debentures in privately negotiated transactions during the nine months ended September 30, 2002. The gain represents the difference
between the face value of the
debentures repurchased and the $76,718,000 paid in cash to the holders of the debentures, less accrued interest and deferred financing cost adjustments.

Loss
on debt redemption was $4,645,000 and $0 for the nine months ended September 30, 2003 and 2002, respectively. The loss resulted from our redemption of our remaining
outstanding $111,870,000 face value of our 7% convertible subordinated debentures due 2005 for aggregate cash

18

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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.

Equity
in investee (losses) were ($1,701,000) and ($1,501,000) for the nine months ended September 30, 2003 and 2002, respectively. The loss for the nine-month periods
ended September 30, 2003 and 2002 represents our portion of BioSphere losses.

Recent Accounting Pronouncements

In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 148 requires
companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date the company commits to an exit or disposal plan. Examples of costs covered by
the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity.
SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Our adoption of SFAS No. 146, effective January 1, 2003, has
not had a material impact on our financial statements through September 30, 2003.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure," which addresses financial accounting and reporting
for the recording of expenses for the fair value of stock options. SFAS No. 148 provides alternative methods of transition for a voluntary change to a fair value based method of accounting for
stock-based employee compensation. Additionally, SFAS No. 148 requires more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The
provisions of this statement are effective for fiscal years ending after December 15, 2002. While we have not elected to adopt fair value accounting for our stock-based compensation, we have
complied with the new disclosure requirements under SFAS No. 148 and provided interim disclosure on the effects of stock-based compensation in this report.

Also
during 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates
on the
existing disclosure requirements for most guarantees, and clarifies that at the time a company issues a guarantee, it must recognize an initial liability for the fair value of the obligation it
assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. We have no history of any claims or losses under FIN 45 and therefore have no liabilities recorded for guarantees at September 30,
2003. Therefore, the adoption of FIN 45 has not had a material impact on our financial position, results of operations or cash flows.

In
January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51". The primary objectives of FIN 46 are to provide guidance on
the identification of entities for which control is achieved through means other than voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise
should consolidate the VIE. This new model for consolidation applies to an entity for which either: (a) the equity investors (if any) do not have a controlling financial interest; or
(b) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46
requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. We are required to apply FIN 46 to all new VIEs created
or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, we are required to apply FIN 46 on December 31, 2003. The adoption of FIN 46 is not
expected to have a material effect on our financial statements.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 (1) clarifies under
what circumstances a contract

19

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with
an initial net investment meets the characteristic of a derivative discussed in Statement 133, (2) clarifies when a derivative contains a financing component, (3) amends the
definition of an underlying to conform it to language used in FIN 45 and (4) amends certain other existing pronouncements. The provisions of this statement are effective for contracts entered
into or modified by us after June 30, 2003. Our adoption of SFAS No. 149 did not have a material effect on our financial statements.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial
instrument that is within the scope of SFAS No. 150 as a liability (or an asset in some circumstances). Many of the instruments that fall within the scope of SFAS No. 150 were previously
classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise became generally effective for us as of
July 1, 2003. Our adoption of SFAS No. 150 has not had a material effect on our financial statements.

Liquidity and Capital Resources

Cash, cash equivalents and short and long-term investments totaled $358,530,000 at September 30, 2003, compared to $556,434,000 at
December 31, 2002.

The
net cash used in operating activities for the nine months ended September 30, 2003 was $96,197,000. The net cash used in operating activities includes a net loss of
$102,038,000 adjusted by non-cash charges of $18,907,000. Accounts receivable increased by $7,782,000 due to the timing of customer orders in the third quarter of 2003 as compared to the
fourth quarter of 2002. Inventory decreased by $833,000 because our actual third quarter 2003 sales of XOPENEX exceeded our forecast. On a combined basis, accounts payable and accrued expenses
decreased by $9,216,000 primarily due to lower research and development costs. Other current liabilities increased by $3,721,000 primarily due to additional accruals for product revenue rebates and
return reserves related to XOPENEX revenues and deferred revenue related to the amendment of the ASTELIN agreement with MedPointe, Inc.

The
net cash provided by investing activities for the nine months ended September 30, 2003 was $40,296,000. Cash was provided by net sales and maturities of short and
long-term investments of $43,803,000. We also made purchases of property and equipment of $3,501,000.

The
net cash used in financing activities for the nine months ended September 30, 2003 was $110,747,000. We used $115,770,000 to repurchase $111,870,000 face value of subordinated
debentures. Repayments of capital lease obligations and long-term debt were $788,000, offset by proceeds from the issuance of our common stock of $5,811,000.

We
currently generate cash from the sale of XOPENEX, 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. We believe our existing cash and the anticipated cash flow from our current strategic alliances and operations will be sufficient to
support existing operations at least through 2004. Our actual future cash requirements, however, will depend on many factors, including the progress of our preclinical, clinical, and research
programs, the number and breadth of these programs, achievement of milestones under our strategic alliance arrangements, sales of our products, acquisitions, our ability to establish and maintain
additional strategic alliances and licensing arrangements, and the progress of our development efforts and the development efforts of our strategic partners. 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 or to complete any future redemptions, repurchases or conversions of
our convertible debt. However, if we are not able to commercialize our current late-stage products, including both ESTORRA and XOPENEX MDI, or if such products do not achieve expected
sales levels, we may be required to raise additional

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funds
in order to repay our outstanding convertible debt and there can be no assurance that, if required, we would be able to raise such funds on favorable terms, if at all.

We
do not have any off-balance sheet financing arrangements, nor do we have any transactions, arrangements or other relationships with any VIEs, as currently defined.

Our
contractual obligations disclosure in our annual report on Form 10-K for the year ended December 31, 2002 has not materially changed since we filed that
report, except for the redemption on July 10, 2003 of the remaining outstanding $111,870,000 face value of our 7% convertible subordinated debentures due 2005.

Factors Affecting Future Operating Results

This report includes information consisting of forward-looking statements, including forward-looking statements 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 success of regulatory filings and approvals 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
affiliate. The forward-looking statements contained in this report represent our expectations as of the date of this report. Subsequent events will 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 $102.0 million for the nine months ended September 30, 2003 and $276.5 million for the year ended December 31, 2002. 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 products and 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 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.

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



The
FDA is currently reviewing our NDA for ESTORRA brand eszopiclone. On November 12, 2003, we were notified by the FDA that it had extended the PDUFA date for the ESTORRA NDA by
three months. We cannot be certain that the FDA will approve the ESTORRA NDA. In March 2002, the FDA issued a "not-approvable" letter for our NDA for SOLTARA brand tecastemizole 15
mg and 30 mg capsules. We have conducted additional preclinical and clinical studies to support a possible amendment to the SOLTARA NDA and we are evaluating the results. Upon completion of our
evaluation, we will determine if we are in a position to amend the SOLTARA NDA. There can be no assurance whether or when we will file an amendment or if the FDA will approve SOLTARA.

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.

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. If the trials are successful, we would be responsible for submitting an NDA to the FDA for XOPENEX HFA MDI. If 3M is unable to
manufacture a XOPENEX HFA MDI formulation, or our clinical trials are unsuccessful, we may be unable to proceed
with the development of XOPENEX HFA MDI. 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 or limited, we may not realize, or may be delayed in realizing, the potential commercial benefits of the arrangement.

In
October 2003, Janssen notified us that its investigational new drug application, or IND, for ticalopride, formerly known as (+)- norcisapride, had been placed on inactive status and
that Janssen

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had
terminated development of ticalopride for the treatment of gastroesophageal reflux disease, or GERD, which it had been developing under a license agreement between Janssen and us dated July 1998.
As a result of this termination, we will not receive royalties under the Janssen Agreement.

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, or if our collaboration partners are unsuccessful in their sales efforts.

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. 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 and the maintenance and protection of patents, 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.
Any delay or termination of this type could have a material adverse effect on our financial condition and results of operations because we may lose technology rights and milestone or royalty payments
from 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 adversely affect our business because the market for prescription
drugs, including SOLTARA brand tecastemizole, if approved, and ALLEGRA and CLARINEX, for which we receive royalties on sales, may be adversely affected.

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:



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Sales of XOPENEX represent a majority of our revenues; if sales of XOPENEX 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, 2003 and the year ended December 31, 2002 and substantially all of
our product revenues for the years ended December 31, 2001 and December 31, 2000, resulted from sales of XOPENEX. In March 2002, the FDA issued a "not approvable" letter for
SOLTARA. If the FDA approves our ESTORRA NDA, which is currently under review, we do not expect to launch ESTORRA until the first half of 2004 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 at least the end of 2003. We do not have long-term sales contracts with our customers and we
rely on purchase orders for sales of XOPENEX. Reductions, delays or cancellations of orders for XOPENEX could adversely affect our operating results. If sales of XOPENEX do not continue to increase,
we may not have sufficient revenues to achieve our business plan and our business will not be successful.

XOPENEX
competes primarily against generic albuterol in the asthma market. XOPENEX is more expensive than generic albuterol. We must continue to demonstrate to physicians and other
healthcare professionals that the benefits of XOPENEX justify the higher price. If XOPENEX does not continue to compete successfully against competitive products, our business will not be successful.

If we fail to adequately protect or enforce our intellectual property rights, then we could lose revenue under our collaborative 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

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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.

We
have five issued United States patents covering the approved therapeutic use of XOPENEX, expiring between January 2010 and August 2012. We have one other issued United
States patent covering the marketed formulation of XOPENEX, expiring in March 2021. Each of these patents is listed in the FDA's publications entitled "Approved Drug Products with Therapeutic
Equivalence Evaluations", commonly referred to as the Orange Book. 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 these 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 agreement, we
generally may not commercialize the drug candidates until these third-party patents expire or are declared invalid or unenforceable by the courts. Licenses may not be available to us on acceptable
terms, if at all. 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.

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 the attempt by us or our collaborative development partners to receive regulatory approval to achieve labeling objectives, could prevent or adversely affect the timing of the commercial
introduction of, or our ability to market and sell, our products. In March 2002, we were informed by the FDA that it issued a "not approvable" letter for our NDA for SOLTARA brand tecastemizole
capsules. While we had expected to launch SOLTARA in the United States during 2002, we will not be able to commercialize SOLTARA unless and until we receive approval from the FDA and, currently, we do
not expect to receive an approval, if at all, until at least 2005.

In
January 2003, we submitted an NDA to the FDA for ESTORRA brand eszopiclone and, in April 2003, the FDA notified us that it had accepted the NDA for filing. The FDA is
currently

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reviewing
our ESTORRA NDA. Prior to submission to the FDA of our NDA for ESTORRA, the FDA raised issues regarding completeness of the NDA. In response to these issues, prior to submitting the NDA, we
completed additional preclinical studies to support our use of Rhone-Poulenc Rorer's preclinical data package. However, we cannot assure you that we adequately responded to the FDA's concerns or that
the eszopiclone NDA will be approved. In addition, on November 12, 2003, the FDA notified us that it had extended the PDUFA date for the ESTORRA NDA by three months. If the FDA delays or denies
approval of our NDA for ESTORRA, or delays or denies acceptance or approval of any other NDA that we file in the future, then commercialization of ESTORRA 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, 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:



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.

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We have limited sales and marketing experience and expect to incur significant expenses in developing a sales force. Our limited sales and marketing experience
may restrict our success in commercializing our 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 license some of them to large pharmaceutical companies and market and sell through our direct sales forces or through other arrangements, including co-promotion arrangements. We
have established a direct sales force to market XOPENEX. We also expect to rely primarily on a direct sales force to market ESTORRA and SOLTARA, if either is approved by the FDA, which would require
us to expand our sales force. If we enter into co-promotion arrangements or market and sell additional products directly, we will need to significantly expand our sales force. We have
incurred significant expense in expanding our direct sales force and expect to incur additional expense as we further expand. With respect to products under development, including ESTORRA, we expect
to incur significant costs in expanding our sales force before the products have been approved for marketing.

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 direct 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 direct 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 regulations. The failure by us,
our collaborative development partners or third-party manufacturers to maintain current Good Manufacturing Practices 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.

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. (formerly known as Automatic Liquid Packaging, Inc.) is currently the sole finished goods manufacturer of our product,
XOPENEX. 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

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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.

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 healthcare 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 healthcare 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 healthcare, 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 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.

We have significant long-term debt and we may not be able to make interest or principal payments when due. Our exchanges of debt into shares of common
stock would result in additional dilution.

As of September 30, 2003, our total long-term debt (excluding current portion) was approximately $870.7 million and our stockholders'
equity (deficit) was ($477.7) million. Neither the 5% convertible subordinated debentures due 2007 nor the 5.75% convertible subordinated notes due 2006 restricts our ability or our subsidiaries'
ability to incur additional indebtedness, including debt that ranks senior to the 5% debentures and the 5.75% notes. Additional indebtedness that we incur may rank senior to or on parity with these
debentures and notes in certain circumstances. 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 price for the 5% debentures is $92.38 and the conversion price for the 5.75% notes is $60.00. The current market price for shares of our common stock is significantly below the
conversion price of our convertible subordinated debt. If the market price for our common stock does not exceed the conversion price, the holders of the debentures and notes may not convert their
securities into common stock.

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Historically,
we have had negative cash flow from operations. For the nine months ended September 30, 2003, net cash used in operating activities was approximately
$96.2 million. The annual debt service through 2006 on our debentures and notes, assuming no additional securities are converted, redeemed, repurchased or exchanged, is approximately
$46.7 million. Unless we are able to generate sufficient operating cash flow to service the debentures and notes, we will be required to raise additional funds or default on our obligations
under the debentures and notes. Based on our current operating plan, we believe that we will not be required to raise additional capital to fund the repayment of our outstanding convertible debt when
due. However, if we are not able to commercialize our current late-stage product candidates, or if such product candidates, if approved, do not achieve expected sales levels, we may be
required to raise additional funds in order to repay our outstanding convertible debt and there can be no assurance that, if required, we would be able to raise the funds on favorable terms, if at
all.

Our
5% debentures and 5.75% notes are currently trading at discounts to their respective face amounts. Accordingly, in order to reduce future cash interest payments, as well as future
payments due at maturity, we may, from time to time, depending on market conditions, repurchase additional outstanding convertible debt for cash; exchange debt for shares of Sepracor 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, 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 these
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

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develop
or commercialize ourselves. Our cash requirements may vary materially from those now planned because of factors including:



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 companies, biotechnology firms, universities and other research institutions, 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.

Generally,
our principal competitors are generic drug companies that seek to market the racemic mixture of a compound following expiration of the innovator's
composition-of-matter patent and pharmaceutical companies that develop new therapies to treat the disease indications that we are targeting. We expect that these companies will
seek to compete against our products with lower pricing, which could adversely affect the prices we charge.

In
the asthma market, XOPENEX faces competition from generic albuterol. 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
ESTORRA brand 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. In
the antihistamine market, if SOLTARA brand tecastemizole is approved, we will face intense competition from established products such as CLARINEX, ALLEGRA and ZYRTEC®. These products are
established and currently dominate the market share for prescription antihistamines.

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 allegedly 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

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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 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. Sepracor filed a motion to dismiss both consolidated
amended complaints on May 27, 2003. The plaintiffs opposed the motion and a hearing has been scheduled on the matter for November 24, 2003.

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. 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.

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:



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

The Securities and Exchange Commission is conducting an investigation into the trading in the securities of Sepracor, 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

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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.

Provisions of our charter documents, rights plan and Delaware law may have anti-takeover effects that could prevent a change in control even if the
change in control would be beneficial to our stockholders.

Provisions of our restated certificate of incorporation, bylaws, and Delaware law could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. In addition, in June 2002, our board of directors adopted a shareholder rights plan, the provision of which could make it more difficult for a potential
acquirer of Sepracor to consummate an acquisition transaction.

If we are unable to comply with the continued listing requirements of the NASDAQ National Market, our common stock could be delisted from the NASDAQ National
Market.

Our common stock trades on the NASDAQ National Market. In order to continue trading on the NASDAQ National Market, we must satisfy the continued listing
requirements for that market. Last year, the NASDAQ National Market enacted changes to its continued listing requirements. The changes became effective for Sepracor on November 1, 2002. While
we are presently in compliance with the new continued listing requirements applicable to us as of November 1, 2002, we may not be able to maintain compliance with them.

Under
the continued listing requirement standard previously utilized by Sepracor, we were required to have minimum net tangible assets of $4.0 million and a minimum bid price of
$1.00 for our common
stock. Under the new continued listing requirements, the minimum net tangible asset requirement was replaced with a minimum stockholders' equity requirement of $10.0 million and, if a company
does not have $10.0 million of stockholders' equity, it is required, among other things, to maintain a minimum bid price of $3.00. At September 30, 2003, we had a stockholders' deficit
and, therefore, to continue trading on the NASDAQ National Market we will be required to maintain a minimum bid price of $3.00 for our common stock. If the minimum bid price for our common stock
remained below $3.00 for 30 consecutive trading days, we would have 90 calendar days to regain compliance. If we fail to comply with this or the other applicable continued listing requirements, our
common stock may be delisted from the NASDAQ National Market.

A
delisting of our common stock from the NASDAQ National Market would materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of
our common stock. In addition, any such delisting would materially adversely affect our ability to raise capital through alternative financing sources on terms acceptable to us, or at all.

Our stock price could be highly 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 to or disproportionate to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common
stock. Prices for our common stock will be determined in the market place and may be influenced by many factors, including variations in our financial results and investors' perceptions of us, changes
in recommendations by securities analysts as well as their perceptions of 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, 2002. As of November 13, 2003, 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, 2002. 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.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2003. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of September 30, 2003, 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 Chief Executive Officer and Chief Financial Officer 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 the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

No
change in our internal control over financial reporting (as defined in 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the
fiscal quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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.

Since
November 15, 2002, eight purported class action lawsuits have been filed in the United States District Court for the District of Massachusetts against us and several of our
current and former officers and directors. The complaints were filed allegedly on behalf of persons who purchased our common stock and/or debt securities during different time periods, beginning on
various dates, the earliest of which is May 17, 1999, and all ending on March 6, 2002. The complaints are similar and allege violations of the Securities Exchange Act of 1934 and the
rules and regulations promulgated thereunder by the Securities and Exchange Commission. Primarily the complaints allege that the defendants disseminated to the investing public false and misleading
statements relating to the testing, safety and likelihood of FDA approval of SOLTARA, our nonsedating antihistamine drug candidate. On April 11, 2003, two consolidated amended complaints were
filed, one on behalf of the purchasers of our common stock, the other on behalf of the purchasers of our debt securities. The 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

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consolidated
amended complaints on May 27, 2003. The plaintiffs opposed the motion and a hearing has been scheduled on the matter for November 24, 2003.

ITEMS 25. NONE

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

| |  | 31.1 |  | Certificate of Sepracor's Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
| |  | ---- |  | -----------------------------------------------------------------------------------------------------------
| |  | 31.2 |  | Certificate of Sepracor's Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
| |  | 32.1 |  | Certificate of Sepracor's Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| |  | 32.2 |  | Certificate of Sepracor's Chief Financial Officer 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 13, 2003 |  | By:          

|Date: November 13, 2003 |  | By: | /s/ROBERT F. SCUMACIRobert F. Scumaci Executive Vice President, Finance and Administration, and
Treasurer (Principal Accounting Officer)
|----------------------- |  | --- | ----------------------------------------------------------------------------------------------------------------------------------------

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Exhibit Index

|Exhibit No. |  | Description                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------
|31.1        |  | Certificate of Sepracor's Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|31.2        |  | Certificate of Sepracor's Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|32.1        |  | Certificate of Sepracor's Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|32.2        |  | Certificate of Sepracor's Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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