Use these links to rapidly review the documentTABLE OF CONTENTS

---

---

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-Q

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

---

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)

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 August 1, 2003 was: 84,711,138 shares.

---

---

---

SEPRACOR INC.
INDEX



|Part IFinancial Information |  |                                                                                                            
|---------------------------- |  | -----------------------------------------------------------------------------------------------------------
|Item 1.                      |  | Consolidated Financial Statements (Unaudited)                                                              
|                             |  | Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 (Unaudited)                          
|                             |  | Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002 (Unaudited)
|                             |  | Consolidated Statements of Cash Flows for the Six Months Ended June 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 4.                      |  | Submission of Matters to a Vote of Security Holders                                                        
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                                           
|                             |  | Signatures                                                                                                 
|                             |  | Exhibit Index                                                                                              

i

---



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

|                                                                                                                                                                           |  | June 30, 2003 |            | December 31, 2002 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ----------------- | -
|Assets                                                                                                                                                                     |  |               |            |                   |  
|Current assets:                                                                                                                                                            |  |               |            |                   |  
|Cash and cash equivalents                                                                                                                                                  |  | $             | 310,389    |                   | $
|Restricted cash                                                                                                                                                            |  |               | 1,500      |                   |  
|Short-term investments                                                                                                                                                     |  |               | 79,924     |                   |  
|Accounts receivable, net                                                                                                                                                   |  |               | 28,049     |                   |  
|Inventories                                                                                                                                                                |  |               | 6,219      |                   |  
|Other assets                                                                                                                                                               |  |               | 17,668     |                   |  
|                                                                                                                                                                           |  |               |            |                   |  
|Total current assets                                                                                                                                                       |  |               | 443,749    |                   |  
|Long-term investments                                                                                                                                                      |  |               | 108,173    |                   |  
|Property and equipment, net                                                                                                                                                |  |               | 69,605     |                   |  
|Investment in affiliate                                                                                                                                                    |  |               | 4,098      |                   |  
|Patents and intangible assets, net                                                                                                                                         |  |               | 25,432     |                   |  
|Other assets                                                                                                                                                               |  |               | 17,182     |                   |  
|                                                                                                                                                                           |  |               |            |                   |  
|Total assets                                                                                                                                                               |  | $             | 668,239    |                   | $
|                                                                                                                                                                           |  |               |            |                   |  
|Liabilities and Stockholders' Equity (Deficit)                                                                                                                             |  |               |            |                   |  
|Current liabilities:                                                                                                                                                       |  |               |            |                   |  
|Accounts payable                                                                                                                                                           |  | $             | 4,444      |                   | $
|Accrued expenses                                                                                                                                                           |  |               | 106,974    |                   |  
|Notes payable and current portion of capital lease obligation and
long-term debt                                                                                           |  |               | 664        |                   |  
|Current portion of convertible subordinated debt                                                                                                                           |  |               | 111,870    |                   |  
|Other current liabilities                                                                                                                                                  |  |               | 18,878     |                   |  
|                                                                                                                                                                           |  |               |            |                   |  
|Total current liabilities                                                                                                                                                  |  |               | 242,830    |                   |  
|Long-term debt and capital lease obligation                                                                                                                                |  |               | 773        |                   |  
|Convertible subordinated debt                                                                                                                                              |  |               | 870,000    |                   |  
|Other liabilities                                                                                                                                                          |  |               | 656        |                   |  
|                                                                                                                                                                           |  |               |            |                   |  
|Total liabilities                                                                                                                                                          |  |               | 1,114,259  |                   |  
|Stockholders' equity (deficit):                                                                                                                                            |  |               |            |                   |  
|Preferred stock $1.00 par value, 1,000 shares authorized, none outstanding at June 30, 2003 and December 31, 2002, respectively                                            |  |               |           |                   |  
|Common stock, $.10 par value, 240,000 and 240,000 shares authorized; 84,651 and 84,356 shares issued and outstanding, at June 30, 2003 and December 31, 2002, respectively |  |               | 8,465      |                   |  
|Additional paid-in capital                                                                                                                                                 |  |               | 779,715    |                   |  
|Unearned compensation, net                                                                                                                                                 |  |               | (18        | )                 |  
|Accumulated deficit                                                                                                                                                        |  |               | (1,257,442 | )                 |  
|Accumulated other comprehensive income                                                                                                                                     |  |               | 23,260     |                   |  
|Total stockholders' equity (deficit)                                                                                                                                       |  |               | (446,020   | )                 |  
|                                                                                                                                                                           |  |               |            |                   |  
|Total liabilities and stockholders' equity (deficit)                                                                                                                       |  | $             | 668,239    |                   | $
|                                                                                                                                                                           |  |               |            |                   |  

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

1

---



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

|                                                                      |                                             | Three Months Ended       |   | Six Months Ended |       
|--------------------------------------------------------------------- | ------------------------------------------- | ------------------------ | - | ---------------- | ------
|
|Revenues:                                                             |                                             |                          |   |                  |       
|                                                                      | Product sales                               |                          | $ | 61,350           |       
|                                                                      | Royalties and other                         |                          |   | 15,105           |       
|                                                                      |                                             |                          |   |                  |       
|                                                                      |                                             | Total revenues           |   |                  | 76,455
|Costs and expenses:                                                   |                                             |                          |   |                  |       
|                                                                      | Cost of product sold                        |                          |   | 6,964            |       
|                                                                      | Cost of royalties and other                 |                          |   | 444              |       
|                                                                      | Research and development                    |                          |   | 48,255           |       
|                                                                      | Selling, marketing and distribution         |                          |   | 36,817           |       
|                                                                      | General and administrative and patent costs |                          |   | 5,763            |       
|                                                                      |                                             |                          |   |                  |       
|                                                                      |                                             | Total costs and expenses |   |                  | 98,243
|                                                                      | Loss from operations                        |                          |   | (21,788          | )     
|Other income (expense):                                               |                                             |                          |   |                  |       
|                                                                      | Interest income                             |                          |   | 1,874            |       
|                                                                      | Interest expense                            |                          |   | (13,654          | )     
|                                                                      | Debt conversion expense                     |                          |   |                 |       
|                                                                      | Equity in investee (losses)                 |                          |   | (217             | )     
|                                                                      | Other income (expense), net                 |                          |   | (6               | )     
|                                                                      |                                             |                          |   |                  |       
|                                                                      | Net loss                                    |                          | $ | (33,791          | )     
|                                                                      |                                             |                          |   |                  |       
|                                                                      | Basic and diluted net loss per common share |                          | $ | (0.40            | )     
|                                                                      |                                             |                          |   |                  |       
|Shares used in computing basic and diluted net loss per common share: |                                             |                          |   |                  |       
|                                                                      | Basic and diluted                           |                          |   | 84,469           |       
|                                                                      |                                             |                          |   |                  |       

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

2

---



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

|                                                                            |                                                                                     | Six 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                                                             |                  |  
|                                                                            | 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                                                 |                  |  
|                                                                            | Changes in other assets                                                             |                  |  
|                                                                            |                                                                                     |                  |  
|                                                                            | Net cash used in investing activities                                               |                  |  
|Cash flows from financing activities:                                       |                                                                                     |                  |  
|                                                                            | 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 provided by 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

3

---



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 Sepracor's 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 management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for the interim periods ended
June 30, 2003 and 2002. Certain prior amounts have been reclassified to conform with current year presentation.

The
consolidated financial statements include the accounts of Sepracor Inc. ("Sepracor" or the "Company") and its wholly-owned subsidiaries, including Sepracor Canada Limited.
Sepracor also has an investment in BioSphere Medical, Inc. ("BioSphere"), which it records 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 Sepracor's 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 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, 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 ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). The standard 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. The Company's adoption of SFAS No. 146, effective January 1, 2003, has had no material impact on the financial statements through June 30, 2003.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," ("SFAS No. 148") 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 the

4

---

Company
has not elected to adopt fair value accounting for its stock-based compensation, it has 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 Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("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. The Company has no history of any claims or losses under FIN 45 and therefore has
no liabilities recorded for guarantees at June 30, 2003. Therefore, the adoption of FIN 45 has not had a material impact on the Company's 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" ("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 through 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. The Company is required to apply FIN 46 to all new variable interest entities created or acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the Company is required to apply FIN 46 on July 1, 2003. The adoption of FIN 46 did not have a material effect on the Company's financial
statements.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). This Statement
(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 the Company for contracts entered into or modified after June 30, 2003. The Company does not expect
SFAS No. 149 will have a material effect on its 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"). This
Statement 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 its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does
not expect SFAS No. 150 will have a material effect on its financial statements.

5

---

3. Basic and Diluted Net Loss Per Common Share

Basic earnings (loss) per share ("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 six months ended June 30, 2003 and 2002, basic and diluted net loss per common share is computed based on the weighted-average number of common shares
outstanding during the period because the effect of common stock equivalents would be anti-dilutive. Certain securities were not included in the computation of diluted earnings per share
for the three and six months ended June 30, 2003 and 2002 because they would have an anti-dilutive effect due to net losses for such periods. These securities include the following:

Options
to purchase shares of common stock:

(in thousands, except price per share data)

June 30, 2003

June 30, 2002Number of options


12,698


11,991Price range per share

$
2.50 to $87.50

$
2.50 to $125.44


Shares
of common stock reserved for issuance upon conversion of convertible subordinated debt:

(in thousands)

June 30, 2003

June 30, 20027% convertible subordinated debentures due 2005

1,792

3,8915% convertible subordinated debentures due 2007

4,763

4,7635.75% convertible subordinated notes due 2006

7,166

7,16713,721

15,821


4. Accounting for Stock-Based Compensation

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

6

---

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

|                                                                                                        |  | Three Months Ended
June 30, |         | Six Months Ended
June 30, |  
|------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | ------------------------- | -
|
|
|Net loss attributable to common stockholders                                                            |  | $                           | (33,791 | )                         | $
|Total stock-based employee compensation expense determined under fair value based method for all awards |  |                             | (14,977 | )                         |  
|                                                                                                        |  |                             |         |                           |  
|Pro forma net loss                                                                                      |  | $                           | (48,768 | )                         | $
|                                                                                                        |  |                             |         |                           |  
|Amounts per common share:                                                                               |  |                             |         |                           |  
|Basic and dilutedas reported                                                                           |  | $                           | (0.40   | )                         | $
|                                                                                                        |  |                             |         |                           |  
|Basic and dilutedpro forma                                                                             |  | $                           | (0.58   | )                         | $
|                                                                                                        |  |                             |         |                           |  

5. Inventories

Inventories consist of the following:

(in thousands)

June 30, 2003

December 31, 2002Raw materials

$
956

$
1,828Work in progress


1,121


1,509Finished goods


4,142


4,623$
6,219

$
7,960


6. Patents and Intangible Assets

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

(in thousands)

June 30, 2003

December 31, 2002Gross patents and intangible assets

$
42,194

$
42,050Accumulated amortizationPatents and intangible assets


(16,762
)

(14,933
)Total patents and intangible assets

$
25,432

$
27,117


Amortization
expense was $943,000 and $980,000 for the three months ended June 30, 2003 and 2002, respectively, and $1.8 million and $1.9 million for the six months
ended June 30, 2003 and 2002, respectively. Current estimated amortization expense is expected to be $1.9 million, $3.8 million, $3.8 million, $3.8 million and
$3.8 million for the remainder of 2003 and for the years ended December 31, 2004, 2005, 2006 and 2007, respectively.

7

---

7. Convertible Subordinated Debt

Convertible subordinated debt consists of the following:

(in thousands)

June 30, 2003

December 31, 20027% convertible subordinated debentures due 2005

$
111,870

$
111,8705% convertible subordinated debentures due 2007


440,000


440,0005.75% convertible subordinated notes due 2006


430,000


430,000$
981,870

$
981,870


In
connection with each convertible subordinated debt offering, the Company incurred deferred finance costs that were recorded as other assets on the balance sheet and are being
amortized over the respective term of each convertible debt offering. Amortization of deferred finance costs was $1.2 million and $1.4 million for the three months ended June 30,
2003 and 2002, respectively, and $2.4 million and $3.0 million for the six months ended June 30, 2003 and 2002, respectively.

8. Comprehensive Income (Loss)

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

|                                                        |  | Three Months Ended |         | Six Months Ended |  
|------------------------------------------------------- |  | ------------------ | ------- | ---------------- | -
|
|Comprehensive income (loss):                            |  |                    |         |                  |  
|Net loss                                                |  | $                  | (33,791 | )                | $
|Cumulative foreign currency translation adjustment      |  |                    | (96     | )                |  
|Unrealized gain (loss) on available-for-sale securities |  |                    | 6,724   |                  |  
|                                                        |  |                    |         |                  |  
|Total comprehensive income (loss)                       |  | $                  | (27,163 | )                | $
|                                                        |  |                    |         |                  |  

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 Sepracor and several of its current and former officers and directors. The complaints were filed allegedly on behalf of persons who purchased Sepracor's 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 approval of SOLTARA, the Company's nonsedating antihistamine drug candidate. On
April 11, 2003, two consolidated amended complaints were filed, one on behalf of the purchasers of Sepracor's common stock, the other on behalf of the purchasers of Sepracor's debt securities.
The consolidated amended complaints reiterate the allegations contained in the previously

8

---

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 but there has not yet been a hearing on the matter.

As
permitted under Delaware Law, the Company's Restated Certificate of Incorporation, as amended, provides that the Company will indemnify its officers and directors for certain claims
asserted against them in connection with their service as an officer or director of the Company. 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 the best interests of the Company. The indemnification obligation survives termination of the indemnified persons's role as an officer or director.
The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has Director and Officer insurance
policies that, in most cases, would limit its exposure and enable it 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, the Company has no liabilities recorded for these agreements as of June 30, 2003.

The
Company enters into indemnification provisions under its agreements with other companies in its ordinary course of business, typically with business partners, contractors, clinical
sites and customers. Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the
Company's activities. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make
under these indemnification provisions is generally unlimited. The Company has no history of any claims or losses related to these agreements and therefore has no liabilities recorded for these
agreements as of June 30, 2003.

10. Subsequent Events

On July 10, 2003, Sepracor redeemed the remaining outstanding $111.9 million face value of its 7% convertible subordinated debentures due 2005 for
aggregate cash consideration of $115.2 million, excluding accrued interest. This redemption resulted in the recording of 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.

9

---



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. Sepracor's actual
results could differ significantly from the results discussed in such forward-looking statements. See "Factors Affecting Future Operating Results" below.

OVERVIEW

Sepracor is a research-based pharmaceutical company dedicated to treating and preventing human disease through the discovery, development and commercialization of
innovative pharmaceutical compounds. Sepracor's 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. Sepracor's corporate headquarters are located in Marlborough, Massachusetts.

The
consolidated financial statements include the accounts of Sepracor Inc. ("Sepracor" or the "Company") and its wholly-owned subsidiaries, including Sepracor Canada Limited.
Sepracor also has an investment in BioSphere Medical, Inc. ("BioSphere"), which it records under the equity method.

On
January 31, 2003, Sepracor submitted a New Drug Application (an "NDA") to the United States Food and Drug Administration (the "FDA") seeking clearance to market ESTORRA brand
eszopiclone 2mg and 3mg tablets for the treatment of transient and chronic insomnia. On April 2, 2003, Sepracor announced that the FDA accepted for filing the NDA for ESTORRA. If the FDA issues
an approvable letter for ESTORRA, Sepracor expects to expand its primary care sales force in anticipation of marketing ESTORRA to primary care physicians and psychiatrists, the principal prescribers
of sleep medications. On April 17, 2003, Sepracor announced that it had been notified by the FDA that the Prescription Drug User Fee Act date for ESTORRA is November 30, 2003. This is
the date by which the FDA is expected to have completed its review and act by making a decision on a drug application.

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

In
August 2002, Sepracor signed an agreement with MedPointe, Inc. for the co-promotion of ASTELIN® (azelastine HCl), a nasal-spray antihistamine
(the "ASTELIN Agreement"). On June 2, 2003, Sepracor signed an amendment to the ASTELIN Agreement (the "ASTELIN Amendment"). Under the terms of the two-year amendment, Sepracor's
sales force will continue to market ASTELIN, Sepracor will continue to receive a percentage of ASTELIN net sales above an agreed upon annual baseline sales level, and Sepracor will continue to be
reimbursed for certain promotional and training expenses. Sepracor will record all cash received under the ASTELIN Amendment as revenue and all related costs as cost of revenue. Upon signing this
amendment, Sepracor received an upfront, nonrefundable payment of $1,750,000. Sepracor will recognize this upfront payment as revenue ratably over the two-year term of the amendment. In
the quarter ended June 30, 2003, Sepracor recorded $219,000 as revenue related to this upfront payment.

10

---

In
June 2003, Sepracor revised its previously estimated cumulative future minimum lease obligation under its facility leases at 33 and 111 Locke Drive, Marlborough, Massachusetts,
and recorded an additional $1,405,000 related to changes in the estimated future sublease income. During 2002, Sepracor had accrued $2,263,000 as its estimated cumulative future minimum lease
obligation under these leases, net of estimated future sublease rental income through the term of the leases. In aggregate, Sepracor has recorded $3,668,000 as future minimum lease obligations under
these leases and at June 30, 2003 the remaining accrual was $2,117,000.

On
July 10, 2003, Sepracor redeemed the remaining outstanding $111,870,000 face value of its 7% convertible subordinated debentures due 2005 for aggregate cash consideration of
$115,226,000, excluding accrued interest. This redemption resulted in the recording of 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.

Critical Accounting Policies

The Company identified critical accounting policies in its 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 the Company to make estimates in the preparation of its financial statements as of a given date. Because of the uncertainty
inherent in these matters, actual results could differ from the estimates used in applying the critical accounting policies. Within the context of these critical accounting policies, the Company is
not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. Additionally, no changes to these critical policies have taken
place in the six-month period ended June 30, 2003.

Three Month Periods ended June 30, 2003 and 2002

Product revenues were $61,350,000 and $35,350,000 for the three months ended June 30, 2003 and 2002, respectively, an increase of approximately 74%. The
increase for the three-month period ended June 30, 2003 as compared with the same period in 2002 is due primarily to an increase in unit volume sales of XOPENEX® of approximately
70%. Additionally the net selling price per unit of XOPENEX increased by approximately 2% as a result of a gross unit price increase of approximately 9%, offset by increased sales rebates and
allowances which are accounted for as a reduction to product sales. The Company believes that the increase in XOPENEX unit volume is due to market share increases which can be attributed to increased
demand for XOPENEX as a result of positive experiences reported by patients and physicians, targeted marketing to high volume prescribers and an increased number of sales representatives.

Royalties
and other revenues were $15,105,000 and $12,786,000 for the three months ended June 30, 2003 and 2002, respectively, an increase of approximately 18%. The increase for
the three months ended June 30, 2003 as compared with the same period in 2002 is due primarily to increased royalties earned on sales of CLARINEX® under an agreement with
Schering-Plough Corporation. The increase in these royalties resulted from an increase in the volume of sales of CLARINEX which was commercially launched in January 2002.

Cost
of product sold, as a percentage of product sales, was approximately 11% and 13% for the three months ended June 30, 2003 and 2002, respectively. The decrease for the three
months ended June 30, 2003 as compared with the same period in 2002 is due primarily to lower per unit manufacturing costs resulting from an increase in the number of units produced and also
due to an approximately 2% higher average net selling price per unit of XOPENEX.

11

---

Research
and development expenses were $48,255,000 and $60,915,000 for the three months ended June 30, 2003 and 2002, respectively, a decrease of approximately 21%. The decrease
for the three months ended June 30, 2003 as compared with the same period in 2002 is partially due to a decrease in spending on ESTORRA brand eszopiclone for which Sepracor submitted an NDA to
the FDA in January 2003. The decrease is also due to lower spending on our programs for (S)-oxybutynin and SOLTARA brand tecastemizole. The decrease in spending in these programs was partially
offset by increases in spending on the XOPENEX metered-dose inhaler (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
("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, Sepracor currently has
three product candidates 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 the Company's 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 the Company to obtain, or delay in obtaining, regulatory approvals could materially adversely affect the Company's business. The Company cannot assure you that
any approval required by the FDA will be obtained 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 Sepracor's 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
June 30, 2003, and the five product candidates listed accounted for approximately 87% of the Company's 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                            | *  
|(S)-Oxybutynin          |  | UrologyIncontinence  |  | Phase III            |  | **                              |    
|ESTORRA (eszopiclone)   |  | Insomnia              |  | NDA                  |  | 2003                            | ***

---

*
SOLTARA received a "not-approvable" letter from the FDA in March 2002. The Company is currently conducting additional clinical tests and, if successful, may be in a
position to amend the SOLTARA NDA. The Company does not expect the SOLTARA NDA to receive FDA approval, if at all, before 2005.

12

---

**
Future studies related to (S)-oxybutynin are on hold pending further analysis of the program. The Company is unable to estimate completion of phase.

***
Sepracor submitted the ESTORRA NDA to the FDA in January 2003 and the FDA accepted the NDA for filing in April 2003.

Selling,
marketing and distribution expenses were $36,817,000 and $35,190,000 for the three months ended June 30, 2003 and 2002, respectively, an increase of approximately 5%. The
increase for the three months ended June 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 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 $5,763,000 and $5,502,000 for the three months ended June 30, 2003 and 2002, respectively, an increase of approximately 5%. The
increase for the three months ended June 30, 2003 as compared with the same period in 2002 is primarily due to an increase in directors and officers insurance costs offset by a slight decrease
in amortization of deferred financing costs as a result of the repurchase of $131,090,000 of convertible subordinated debt for Sepracor common stock in September and October 2002.

Interest
income was $1,874,000 for the three months ended June 30, 2003 as compared to $3,788,000 for the three months ended June 30, 2002. The decrease for the three
months ended June 30, 2003 as compared to June 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 $13,654,000 for the three months ended June 30, 2003 as compared to $16,131,000 for the three months ended June 30, 2002. The decrease for the three
months ended June 30, 2003 is due to lower outstanding average balances on all of Sepracor's convertible debentures, particularly on the 7% convertible subordinated debentures due 2005. The
average outstanding balance on the 7% convertible subordinated debentures in the second quarter of 2003 was $111,870,000 as compared to the average outstanding balance in the second quarter of 2002 of
approximately $250,460,000. This decrease in the outstanding balance on the 7% convertible subordinated debentures comprises approximately $2,425,000, or 98%, of the decrease in interest expense for
the three months ended June 30, 2003 as compared to the same period in 2002.

Debt
conversion expense was $0 for the three months ended June 30, 2003 as compared to $22,302,000 for the three months ended June 30, 2002. During April 2002,
Sepracor exchanged approximately $50,000,000 of its convertible subordinated debt in privately negotiated transactions, for approximately 2,170,000 shares of its common stock. The debt conversion
expense represents the inducement costs of the fair market value of the 1,346,584 shares of Sepracor common stock issued as a conversion inducement to the holders.

Equity
in investee (losses) were ($217,000) and ($585,000) for the three months ended June 30, 2003 and 2002, respectively. The loss for the three-month periods ended
June 30, 2003 and 2002 represents the Company's portion of BioSphere losses.

Six Month Periods ended June 30, 2003 and 2002

Product revenues were $133,506,000 and $82,127,000 for the six months ended June 30, 2003 and 2002, respectively, an increase of approximately 63%. The
increase for the six-month period ended June 30, 2003 as compared with the same period in 2002 is due primarily to an increase in unit volume sales of XOPENEX of approximately 56%.
Additionally the net selling price per unit of XOPENEX increased by approximately 4% as a result of two gross unit price increases, aggregating approximately 10%, offset by increased sales rebates and
allowances which are accounted for as a reduction to

13

---

product
sales. The Company believes the increase in XOPENEX unit volume is due to market share increases which can be attributed to increased demand for XOPENEX as a result of positive experiences
reported by patients and physicians, targeted marketing to high volume prescribers and an increased number of sales representatives.

Royalties
and other revenues were $27,455,000 and $22,857,000 for the six months ended June 30, 2003 and 2002, respectively, an increase of approximately 20%. The increase for the
six months ended June 30, 2003 as compared with the same period in 2002 is due primarily to increased royalties 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.

Cost
of product sold, as a percentage of product sales, was approximately 10% and 12% for the six months ended June 30, 2003 and 2002, respectively. The decrease for the six
months ended June 30, 2003 as compared with the same period in 2002 is due primarily to lower per unit manufacturing costs resulting from an increase in the number of units produced and also
due to an approximately 4% higher average net selling price per unit of XOPENEX.

Research
and development expenses were $101,438,000 and $122,436,000 for the six months ended June 30, 2003 and 2002, respectively, a decrease of approximately 17%. The decrease
for the six months ended June 30, 2003 as compared with the same period in 2002 is partially due to a decrease in spending on ESTORRA brand eszopiclone for which Sepracor submitted an NDA to
the FDA in January 2003 and also due to decreases in spending on programs for (S)-oxybutynin and SOLTARA brand tecastemizole. The decrease in spending in these programs was partially offset by
increases in spending on the XOPENEX MDI and Arformoterol programs.

Below
is a summary of Sepracor's 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 six months ended
June 30, 2003, and the five product candidates listed accounted for approximately 84% of the Company's 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                            | *  
|(S)-Oxybutynin          |  | UrologyIncontinence  |  | Phase III            |  | **                              |    
|ESTORRA (eszopiclone)   |  | Insomnia              |  | NDA                  |  | 2003                            | ***

---

*
SOLTARA received a "not-approvable" letter from the FDA in March 2002. The Company is currently conducting additional clinical tests and, if successful, may be in a
position to amend the SOLTARA NDA. The Company does not expect the SOLTARA NDA to receive FDA approval, if at all, before 2005.

**
Future studies related to (S)-oxybutynin are on hold pending further analysis of the program. The Company is unable to estimate completion of phase.

***
Sepracor submitted the ESTORRA NDA to the FDA in January 2003 and the FDA accepted the NDA for filing in April 2003.

14

---

Selling,
marketing and distribution expenses were $72,498,000 and $78,518,000 for the six months ended June 30, 2003 and 2002, respectively, a decrease of approximately 8%. The
decrease for the six months ended June 30, 2003 as compared with the same period in 2002 is primarily due to significant decreases in recruiting costs in 2003. In the first quarter of 2002,
Sepracor's direct sales force was expanded by approximately 225 people resulting in significant recruiting costs. Marketing, advertising and promotional costs also decreased materially in the six
months ended June 30, 2003 as compared to the same period in 2002. The costs in the 2002 period related to XOPENEX and also to the anticipated launch and commercialization of SOLTARA, for which
the Company received a "not approvable" letter from the FDA in March 2002. Offsetting the decreases in recruiting, marketing, advertising and promotional costs was an increase in XOPENEX sales
commission expense paid to internal sales representatives and a third-party sales contractor for the six months ended June 30, 2003.

General
and administrative and patent expenses were $11,605,000 and $11,678,000 for the six months ended June 30, 2003 and 2002, respectively, a decrease of approximately 1%. The
decrease for the six months ended June 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 Sepracor common stock in March and April 2002 offset by an increase in directors and officers insurance costs.

Interest
income was $3,805,000 for the six months ended June 30, 2003 as compared to $8,922,000 for the six months ended June 30, 2002. The decrease for the six months
ended June 30, 2003 as compared to June 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 $27,311,000 for the six months ended June 30, 2003 as compared to $34,346,000 for the six months ended June 30, 2002. The decrease for the six months
ended June 30, 2003 is due to lower outstanding average balances on all of Sepracor's convertible debentures, particularly on the 7% convertible subordinated debentures due 2005. The average
outstanding balance on the 7% convertible subordinated debentures in the first six months of 2003 was $111,870,000 as compared to the average outstanding balance in the first six months of 2002 of
approximately $271,460,000. This decrease in the outstanding balance on the 7% convertible subordinated debentures comprises approximately $5,586,000, or 79%, of the decrease in interest expense for
the six months ended June 30, 2003 as compared to the same period in 2002.

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

Equity
in investee (losses) were ($842,000) and ($1,197,000) for the six months ended June 30, 2003 and 2002, respectively. The loss for the six-month periods ended
June 30, 2003 and 2002 represents the Company's 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." The standard 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

15

---

activities
initiated after December 31, 2002. The Company's adoption of SFAS No. 146 effective January 1, 2003, has had no material impact on the financial statements through
June 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 the Company has not elected to adopt fair value accounting for its stock-based compensation, it has 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, 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. The Company has no history of any claims or losses under FIN 45 and therefore has no liabilities recorded for guarantees at
June 30, 2003. Therefore, the adoption of FIN 45 has not had a material impact on the Company's 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 through 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. The Company is required to apply FIN 46 to all new
variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the Company is required to apply FIN
46 on July 1, 2003. The adoption of FIN 46 did not have a material effect on the Company's financial statements.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement (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 the Company for contracts entered into or modified after June 30, 2003. The Company does not expect SFAS No. 149 will have a material
effect on its financial statements.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This Statement 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 its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is

16

---

effective
for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.
The Company does not expect SFAS No. 150 will have a material effect on its financial statements.

Liquidity and Capital Resources

Cash, cash equivalents and short and long-term investments totaled $499,986,000 at June 30, 2003, compared to $556,434,000 at
December 31, 2002.

The
net cash used in operating activities for the six months ended June 30, 2003 was $63,089,000. The net cash used in operating activities includes a net loss of $63,550,000
adjusted by non-cash charges of $10,596,000. Accounts receivable increased by $6,663,000 due to the timing of customer orders in the second quarter of 2003 as compared to the fourth
quarter of 2002. Inventory decreased by $1,757,000 due to actual second quarter 2003 sales of XOPENEX exceeding forecast. Accrued expenses decreased by $9,079,000 primarily due to lower research and
development costs. Other current liabilities increased by $4,449,000 primarily due to additional accruals for product revenue rebates and return reserves related to XOPENEX revenues and deferred
revenue related to the ASTELIN Amendment.

The
net cash used in investing activities for the six months ended June 30, 2003 was $4,319,000. Cash was used in net sales and maturities of short and long-term
investments of $1,959,000. The Company also made purchases of property and equipment of $2,360,000.

The
net cash provided by financing activities for the six months ended June 30, 2003 was $2,537,000. Repayments of capital lease obligations and long-term debt were
$503,000, offset by proceeds from the issuance of Sepracor common stock of $3,040,000.

The
Company currently generates cash from the sale of XOPENEX and from royalties on sales generated by the Company's license agreements, primarily the agreements related to
ALLEGRA® and CLARINEX. The Company believes its existing cash and the anticipated cash flow from its current strategic alliances and operations will be sufficient to support
existing operations at least through 2004. Sepracor's actual future cash requirements, however, will depend on many factors, including the progress of its preclinical, clinical, and research programs,
the number and breadth of these programs, achievement of milestones under these strategic alliance arrangements, sales of its products, acquisitions, its ability to establish and maintain additional
strategic alliances and licensing arrangements, and the progress of the Company's development efforts and the development efforts of its strategic partners. Based on its current operating plan, the
Company believes that it will not be required to raise additional capital to fund the repayment of its outstanding convertible debt when due or to complete any future redemptions, repurchases or
conversions of its convertible debt. However, if the Company is not able to commercialize its current late-stage products, including both ESTORRA and XOPENEX MDI, or if such products do
not achieve expected sales levels, Sepracor may be required to raise additional funds in order to repay its outstanding convertible debt and there can be no assurance that, if required, Sepracor would
be able to raise such funds on favorable terms, if at all.

Sepracor
does not have any off-balance sheet financing arrangements, nor does the Company have any transactions, arrangements or other relationships with any variable
interest entities.

The
Company's contractual obligations disclosure in its Annual Report on Form 10-K for the year ended December 31, 2002 has not materially changed since that
report was filed, except for the redemption of the remaining outstanding $111,870,000 face value on July 10, 2003 of its 7% convertible subordinated debentures due 2005.

17

---

Factors Affecting Future Operating Results

Certain of the information contained in this Report consists of forward-looking statements, including information with respect to the expected timing of
completion of phases of development of the Company's drugs under development, the safety, efficacy and potential benefits of the Company's 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 the Company's business and the
business of the subsidiaries and certain affiliates of the Company. 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 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
$63.6 million for the six months ended June 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 can 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 conditions 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 generate 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 candidates 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 NDA that we submit in the future, then commercialization of our products under development may be delayed or
terminated, which could have a material adverse effect on our business.

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



18

---



The
FDA is currently reviewing our NDA for ESTORRA brand eszopiclone. We cannot be certain that this NDA will be approved by the FDA. In March 2002, the FDA issued a
"not-approvable" letter for our NDA for SOLTARA brand tecastemizole 15 mg and 30 mg capsules. If we successfully complete additional preclinical and clinical studies, we may submit an
amended NDA for SOLTARA to the FDA. There can be no assurance that any amended NDA for SOLTARA would be approved or the timing of any such approval.

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
arrangements 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 a MDI formulation of XOPENEX. Sepracor is responsible for conducting clinical
trials using the 3M manufactured formulation. If the trials are successful, Sepracor 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
April 2001, Janssen announced that it had suspended clinical trials of ticalopride for the treatment of gastroesophageal reflux disease, or GERD, which it had been developing
under a license agreement between Sepracor and Janssen dated July 1998 (the "Janssen Agreement"). Janssen may not plan to resume development of ticalopride, in which case Sepracor 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 with 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, 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, 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

19

---

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 the sale of CLARITIN, an allergy medication, 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:



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 six months ended June 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. In addition, if the FDA
approves ESTORRA, 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

20

---

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. Furthermore,
the patent position of companies in the pharmaceutical industry generally involves complex legal and factual questions, and recently has been the subject of much litigation. Legal standards relating
to the scope and validity of patent claims are evolving. Any patents we have obtained, or obtain in the future, may be challenged, invalidated or circumvented. Moreover, the United States Patent and
Trademark Office, which we refer to as the PTO, may commence interference proceedings involving our patents or patent applications. Any challenge to, or invalidation or circumvention of, our patents
or patent applications would be costly, would require significant time and attention of our management and could have a material adverse effect on our business.

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

21

---

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 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. 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 successful commercialization of our 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.

22

---

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

We have limited sales and marketing experience and 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 use a direct sales force to market ESTORRA and SOLTARA, if either is approved by the FDA. As we begin to 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, we expect to incur significant costs in developing a 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 which may be approved for sale, and developing and obtaining this capability will be time consuming and expensive.

23

---

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
that 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 which 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 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.

24

---

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 June 30, 2003, our total long-term debt was approximately $982.6 million and our stockholders' equity (deficit) was ($446.0) million. None of the 7%
convertible subordinated debentures due 2005, the 5% convertible subordinated debentures due 2007, or 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 7% debentures, 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 7% debentures is $62.4375, 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.

Historically,
we have had negative cash flow from operations. For the six months ended June 30, 2003, net cash used in operating activities was approximately $63.1 million.
The annual debt service through 2006 on our debentures and notes, assuming no additional securities are converted or redeemed, is approximately $54.6 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 such funds on favorable terms, if at all.

Our
7% debentures, 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

25

---

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 estimates of 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 license third parties to commercialize products or technologies that we would otherwise develop or commercialize
ourselves. Our cash requirements may vary materially from those now planned because of factors including:



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.

26

---

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 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 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 but there has not yet been a hearing on the matter.

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:



27

---



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 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 June 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 is 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 that became effective on November 1, 2002, 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

28

---

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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

The Company is exposed to market risk from changes in interest rates and equity prices, which could affect its future results of operations and financial
condition. These risks are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. As of August 8, 2003, there have been no
material changes to the market risks described in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Additionally, the Company does not anticipate
any near-term changes in the nature of its market risk exposures or in management's objectives and strategies with respect to managing such exposures.

ITEM 4.  CONTROLS AND PROCEDURES

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2003. Based on this evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of June 30, 2003, the Company's disclosure controls and procedures were (1) designed to ensure that material information
relating to the Company, including its consolidated subsidiaries, is made known to the Company's 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 the Company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

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

29

---

PART II
OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

The Securities and Exchange Commission is conducting an investigation into trading in the securities of Sepracor, including trading by 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 Sepracor and several
of its current and former officers and directors. The complaints were filed allegedly on behalf of persons who purchased Sepracor's 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 approval of SOLTARA, the Company's nonsedating antihistamine drug candidate. On April 11, 2003, two consolidated amended
complaints were filed, one on behalf of the purchasers of Sepracor's common stock, the other on behalf of the purchasers of Sepracor's 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. Sepracor filed a motion to dismiss both
consolidated amended complaints on May 27, 2003 but there has not yet been a hearing on the matter.

ITEMS 2-3.    NONE

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

The Company's Annual Meeting of Stockholders was held on May 22, 2003 (the "Annual Meeting"). The following represents the results of the voting on
proposals submitted to a vote of stockholders at the Annual Meeting:

For

Withheld AuthorityJames G. Andress

60,906,668

16,640,627Robert J. Cresci

67,522,659

10,024,636James F. Mrazek

60,753,934

16,793,361


The
terms of office of the following directors continued after the Annual Meeting:

Timothy
J. Barberich

Digby
W. Barrios

Keith
Mansford

Alan
A. Steigrod

For

Against

Abstain41,926,929

35,502,554

117,811


30

---

For

Against

Abstain75,967,963

1,464,585

114,746


For

Against

Abstain76,388,609

1,098,295

60,390


ITEM 5. NONE

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

|a.) |  | Exhibits                                                                                           
|--- |  | ---------------------------------------------------------------------------------------------------
|    |  | 31.1                                                                                               
|    |  | 31.2                                                                                               
|    |  | 32.1                                                                                               
|    |  | 32.2                                                                                               
|b.) |  | The following reports on Form 8-K were filed by the Company during the quarter ended June 30, 2003:
|    |  | 1.                                                                                                 
|    |  | 2.                                                                                                 
|    |  | 3.                                                                                                 

31

---



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:  August 12, 2003 |  | By:          
|Date:  August 12, 2003 |  | By:          

32

---



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

33

---